Decarbonizing heavy industry will require collaboration on an unprecedented scale between companies that have historically been in fierce competition with one another.
That is one headline conclusion of a new report on the state of the net zero transition across energy-intensive industries from the World Economic Forum (WEF). Released last week, the study sets out a number of recommendations for how businesses, investors, and policymakers can work together to accelerate the decarbonization of six key industries — steel, cement, aluminum, ammonia, oil and fossil gas — and collectively mobilize the more than $2.4 trillion of investment required in assets that can slash production emissions.
The report notes technical solutions are available for bringing production in the six sectors in line with a net zero pathway, but that none are "anywhere near" the decarbonization trajectory they need to be on to deliver net zero by 2050. "The gap is considerable," it states.
While conceding the various sectors are at different stages in their decarbonization journey and will require sector-specific recommendations, it also outlines a string of proposals that it claims can be applied across the board to galvanize a new, cleaner chapter in the history of heavy industry.
The WEF has argued these sectors — collectively responsible for 80 percent of industrial production emissions — must go beyond "traditional partnerships" if they want to collectively transition to low carbon production methods. It emphasizes the financial and technological risks inherent in transitioning to new technologies must be shared, and that demand for new low carbon products can only be accelerated if companies work together to promote them.
“The WEF has argued these sectors — collectively responsible for 80% of industrial production emissions — must go beyond 'traditional partnerships.'“”
The Net-Zero Industry Tracker 2022 argues that companies and their suppliers must be prepared to work more closely together than has traditionally been the case on offtake agreements and shared infrastructure, such as CO2 storage and transport infrastructure. These actors must also work together to establish common standards for "low emission" production thresholds for industrial materials, such as steel and cement.
"Investments in low-emission assets are riskier for companies due to their dependencies on new technologies and infrastructure," said Espen Mehlum, head of energy, materials, and infrastructure and the WEF. "Collaboration will be at the heart of making the enablers of policy, fuel demand, technology, capital and infrastructure all pull in the same direction to accelerate progress towards climate goals."
The industries should also coalesce around standards and product certification schemes, it notes, arguing these will spur the establishment of emissions intensity decarbonization trajectories that can deliver progress at a much more granular level than headline climate targets. "Net zero targets are necessary but insufficient to drive the year-on-year progress required," the report states. "Emission intensity trajectories at a product level — steel, cement — are essential to guide consistent and timely progress."
The report forms part of a broader project from WEF and consultancy Accenture to establish a platform that tracks the decarbonization of some of the world's most carbon-intensive and difficult to abate industries.
In the document, the WEF stresses that there needs to be significantly more focus on rolling out the first generation of low emission industrial plants, noting that the current pace of deployment of these crucial projects is too slow and could jeopardize the delivery of net zero goals.
“It calls for companies, governments, financiers and the wider industry to work together to ensure these projects reap worthwhile returns.”
The report acknowledges that investments in the first full-scale commercial projects still hold "significant risks" for companies because they depend on new technologies and infrastructure. As such, it calls for companies, governments, financiers and the wider industry to work together to ensure these projects reap worthwhile returns. Specifically, it recommends that more "first movers coalitions" should be established that can demonstrate that there is significant demand for new low-carbon materials.
Favorable taxonomies and public funding in the form of grants and low-interest and concessional loans are also listed by the report as mechanisms that can reduce companies' risk exposure, alongside public-private partnerships that see a host of actors jointly finance low-emission projects.
It is critical that the risk inherent to the first generation of low carbon plants is minimized and shared, because it is a matter of urgency that businesses and investors back them, the report warns.
Ultimately, the decarbonization of the six industries profiled in the report is technically feasible, but according to WEF it will depend on more than $2.1 trillion in capital expenditures going towards upgrading production capacity, and trillions more being funneled into so-called "enabling infrastructures," such as carbon capture and storage and low carbon hydrogen production.
Elsewhere, the analysis emphasizes that policymakers have significant potential to accelerate industrial decarbonization by ensuring that first movers are not penalized if they invest in low carbon technologies. Stable policy frameworks are particularly important for creating a level playing field for these companies, the report notes. "Potential approaches limiting the risk of carbon leakage include but are not limited to a price on carbon combined with a border-adjustment mechanism, carbon contracts for differences, preferential public procurement — for instance, the California Buy Clean Act — material mandates, or quotas," the report states.
“The analysis emphasizes that policymakers have significant potential to accelerate industrial decarbonization by ensuring that first movers are not penalized if they invest in low carbon technologies.”
Muqsit Ashraf, Accenture's global energy transition lead, said the Net Zero Industry Tracker aimed to provide an "essential tool" that would accelerate the decarbonization of industries that are notoriously difficult to decarbonize, by "bringing transparency to the decarbonization and energy efficiency journey".
Indeed, the report outlines a string of measures that can track industrial sector's progress towards net zero, ranging from the maturity of technology and access to enabling infrastructure to demand for low-emission products and the availability of capital for investments in low-emission assets.
"Accelerating the transformation of industries, and in particular hard-to-abate industries such as cement and steel, is critical to realize net zero ambitions," Ashraf said. "In addition, in today's high energy and material prices environment, reducing the energy intensity of industries will also become a source of competitive advantage."
Unlike power, transportation and buildings, the challenges associated with industrial decarbonization are somewhat less well understood and documented. The WEF's report is the latest to attempt to plug the gaps in data and discrepancies in key terminologies, definitions and industry and emission boundaries that is slowing much-needed progress on industrial decarbonization. The hope is that it will not only guide government, investors and businesses to do better, but shine a light on the firms with credible strategies.
