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What’s So Hard About Emission Abatement? It’s the Incentives

29 / 04 / 2022

Author:  Reka Sulyok

  • Deep decarbonization can only be attained by significant cuts in demand and overhaul of the product ranges of heavy industries.
  • The energy intensive industries are well aware of their carbon risks but effective mitigation and adaptation strategies are still some ways off.
  • Barring effective market incentives, government sponsored programs can buttress the commercialization of new technologies.
  • Policies can go a long way in reinforcing material efficiency, reduce risks of investment and make new market segments for greener products.

Heavy industries’ emissions are deemed hard to abate. Not only are they energy intensive but steel, cement and chemical production also bring hefty carbon emissions from the processes used. And we can’t say that the carbon problem was not exposed until now: the risks stemming from the immense carbon footprint has been on the industry leaders’ minds since the 90’s. But those risks did not catch up with them until recently. Simply put: the incentives to change were not there.

Public perception of climate inaction has been shifting rather slowly. ESG (Environmental-Social-Governance) factors emerged as the most important new trend to change the ways we look at and assess economic activity: Looking past the profitability perspectives, investors now prey more forward-looking information than what the financial disclosures reveal. Sustainability and ESG impacts are factored into the decisions and can make or break new deals.

Why so hard to abate?

In the face of more stringent approach by investors we see that heavy industries can’t stay unfazed. But it is understandable why their response time has been longer than of other manufacturing sectors. For one, markets for greener products have been practically nil. The climate-friendly niche in building sector is still in a nascent stage. And the chemical sector’s product landscape is so fragmented that it is even more difficult to come up with meaningful greening. Lacking competitive green markets, commercially viable options for decarbonizing the product range has been flagging.

The other key difficulty is related to the carbon pricing. Markets don’t price in the negative externalities of emissions. The heavy industries benefit from generous allowances so that they can operate at the same cost levels and keep their product prices lower. For instance, cement is relatively cheap therefore it is widely used in the building sector. Simply at the current price levels there is no economic reason to shift away from using concrete and seek more sustainable substitutes. And the elevated demand for cement leaves emissions stuck at high levels. We can’t just wait for carbon price pressures begin to broaden and solve the carbon problem but we need a concerted effort to tackle bottlenecks to change.

Where do we go from here?

The broad consensus related to the hard-to-abate sectors is that their decarbonization requires both demand and supply forces. We need significant demand reductions as well as material efficiency, recycling efforts and deployment of new technologies at the supply side.

Material efficiency in the building sector alone can go a long way. The International Energy Agency [IEA] found that about 24% cut in steel use and 15% reduction of cement from their Reference Technology Scenario would help to attain the Paris 1.5C goals indicating that the demand-side forces may have a substantial contribution to the climate objectives.

Supply side adjustments, while much needed, have been some ways off even though there are some low hanging fruits pointed out by decarbonization feasibility studies. A good case in point is the steel beams used in the building sector. Beams typically come at one size however there is ample evidence that in higher buildings smaller beams can withstand the stress as the height of a building is inversely proportional to the beam size required. Flexibility in the steel beam offering could reduce the material needed and lead to significant reduction in carbon footprint. Same is true to the concrete used in the buildings. A more differentiated product offering could lead to significant reduction in emissions as different grade of concrete could be used at different parts of the structure.

There has been some happy reading for the world’s policy makers. Large-scale public-sector programs such as the EU Ultra Low Carbon Steel program also dubbed as UCLOS (continued by a consortium is led by ArcelorMittal) and the Swedish HYBRIT hydrogen project provided convincing evidence that public finance projects can yield pilotable new technologies and provide more than just a little nudge to reduce emissions.

The view that decarbonization effort is best driven by policy creating incentives has a merit. From market-making efforts to the carbon contracts for difference there are innovative new policies creating opportunities for the heavy industry to step up and avoid choking off carbon-heavy production abruptly.

Promoting the public policy involvement in industry decarbonization our project will set out to tackle the most urgent questions policy-makers face:

  • How to credibly anchor the industries’ expectations when it comes to decarbonization?
  • How to buttress the public-private partnership in development and research activities?
  • What to do with the information fragmentation across the key actors and decision makers in the private sector?
  • What is the minimum level of regulation and new standards to foster the markets for green products?

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