Results - Energy-Intensive Industries

To achieve the goals of the Paris Agreement the deep decarbonisation of energy intensive industries (EIIs) by mid-century is essential. However, their transition is hampered by several crucial economic and political barriers, such as limited availability of mitigation technologies, high capital investment needs and long lifecycles, and strong global competition. Global governance and sector specific initiatives offer great potential to address current barriers and accelerate the decarbonisation of EIIs globally – a potential that has so far remained underexploited. Here we identify and assess options of global governance for closing governance gaps and advancing the decarbonisation of the main EIIs (i.e., steel, cement and concrete, chemicals, and aluminium).

In the report “Global Governance for the Decarbonisation of Energy-Intensive Industries: Exploring Sectoral Options”, we identified and analysed institutional options to advance the global governance of the decarbonisation of EIIs by addressing remaining global governance gaps. To do so, we first determined the theoretical potential of international cooperation to address barriers and challenges to the decarbonisation of EIIs along six governance functions, i.e. signal and guidance, rule setting, transparency and accountability, means of implementation, knowledge and learning, and orchestration and coordination. We then identify existing gaps in the global governance of decarbonising EIIs, by comparing the theoretical potential of global governance with the existing supply of global governance across the six functions. We then proceed to identify and assess concrete options for enhancing the global climate governance of EIIs to address the gaps identified and drive forward the transition. Finally, the analysis provides priorities and ‘feasible’ steps towards a better exploitation of the potential of global governance for the decarbonisation of EIIs that can drive forward the sector's transition to climate neutrality.

We find that the supply of global governance has increased significantly across all functions with particularly noteworthy developments on demand-side policies (rules function) as well as means of implementation including targeted financing for technology development. Additionally, several new international institutions that focus specifically on the decarbonisation of EIIs have emerged over the past years. 

Significant key governance gaps remain. These include the need to harmonise existing standards and methodologies for near-zero emission basic materials, a lack of international demand side policies and a lack of international policies or rules to address carbon leakage as well as further enhance the supply of means of implementation. Additionally, we observe strong differences across the global governance on the different EIIs, with much focus on steel and cement and little attention on chemicals and aluminium. Reforming existing institutions hold some potential to address these key barriers and advance global governance, in particular regarding the implementation of supply-side policies as well as cooperation on technology development and diffusion. 

However, existing institutions lack the necessary legitimacy and membership to address barriers related to the harmonisation of standards and global competitiveness and carbon leakage. Addressing this issue hence requires the creation of a new institution, which can also help to advance governance on the other gaps. To fully exploit the potential of global governance, we therefore suggest the creation of a new institution focused on advancing international cooperation on decarbonising EIIs. Such an institution could primarily focus on high-level orchestration of existing activities as well as on the harmonisation of standards, demand-side policies, enhancing the provision of means of implementation and addressing competitiveness and carbon leakage. Such a new institution can build on the G7 Climate Club proposal but should go beyond that towards more inclusivity and an initial focus on ‘softer’ governance activities. The provision of finance for the development and diffusion of breakthrough technologies, access to lead markets as well as the ability to drive the global transition of EIIs can comprise the key incentives for countries to join. Given their already strong involvement in the sectoral governance landscape the key (emerging) EII producers India, South Africa, Indonesia and Brazil could potentially be convinced to join the creation of the new institution, next to the G7 members.

Read: “Global Governance for the Decarbonisation of Energy-Intensive Industries: Exploring Sectoral Options”

Achieving the decarbonisation of energy-intensive industries by mid-century is technically possible and essential to achieving the aims of the Paris Agreement. However, decarbonising EIIs, such as steel, cement, chemicals, and aluminium, faces significant economic, political, and structural barriers across all levels of governance. To address these and accelerate industrial decarbonisation, far-reaching and comprehensive public policies and support are needed.

This study systematically analyses national sectoral decarbonisation barriers, enablers and policies for 13 major EII producing countries to assess if their respective national policy frameworks are fit for advancing the decarbonisation of EIIs in line with Paris-compatible pathways. The analysis is based on 13 country studies of national decarbonisation barriers, enablers and policies that were conducted between June 2022 and June 2023 and reviewed by national experts as well as the review of relevant academic literature. The countries studied include China, the European Union (EU), India, Iran, Japan, Morocco, Nigeria, Norway, Russia, Saudi Arabia, South Africa, Turkey, and the United States (US). The analysis also focuses specifically on the iron and steel, cement and concrete, chemicals and aluminium and non-ferrous metals industries as they accounted for up to 50% of direct industrial emissions in 2019 (Bashmakov et al., 2022).

For the analysis, we use the industrial policy framework from Nilsson et al. (2021). The framework comprises several pillars (or topics), each addressing key barriers to the decarbonisation of EIIs:

1. policy commitment and pathways, to provide directionality and certainty to relevant actions;
2. technology innovation and deployment, to accelerate the development and commercialisation of breakthrough technology;
3. (re-)shaping basic materials markets to increase the competitiveness of low-carbon options;
4. policy coherence and integration with other sectors and international coherence; and
5. public capacity and knowledge to enable the proactive governance of the transition.

Several strategies exist to reduce emissions from basic materials production, including demand reduction strategies, material efficiency, energy efficiency, electrification and fuel switching, circular economy measures, and the application of carbon capture, utilisation and storage. To decarbonise EIIs by mid-century a mix of these strategies will be required, tailored to specific country and industry contexts. A collection of these strategies can be seen in the table below.

Major barriers to the deep decarbonisation of EIIs are economic challenges (e.g. high investment costs, long investment cycles), lack of targeted policy and international coherence, the limited commercial availability of deep decarbonisation technologies and lack of clean energy and feedstocks. Common enablers are ambitious national climate policies, the domestic potential for clean energy production, international cooperation, and the economic opportunities of industrial decarbonisation.

However, our analysis shows that national decarbonisation barriers and enablers are highly context specific and differ significantly across income levels. Whereas decarbonisation in high-income industrialised countries is mainly hampered by the lack of breakthrough technologies and clean energy supply, low- and middle-income countries lack policies and political ambition, but also fiscal and governance capacity to proactive steer the sectoral transformation. At the same time, the latter tend to have high renewable energy potential offering significant opportunities for economic development through green EIIs, or long-lasting experience with state-led industrial policy. To address these barriers and exploit these opportunities comprehensive, timely, proactive and context-specific sectoral policies are needed.

A summary of decarbonisation barriers and enablers is given in the following table:

The decarbonisation of EIIs can have positive as well as negative interactions, or co-benefits and trade-offs, for the achievement of the Sustainable Development Goals (SDGs) (Bashmakov et al., 2022: Denton et al, 2022; Roy et al., 2018). Table 4 highlights potential co-benefits and trade-offs across the six mitigation strategies outlined in Section 3 with the SDGs.

Our findings show that no country has a sufficiently coherent and comprehensive policy framework in place that can achieve the sectoral transformations needed for the deep decarbonisation of EIIs. Existing policies instead mainly focus on incremental changes and limited emissions reductions, although some notable exceptions exist. Somewhat unsurprisingly, high-income countries, in particular the US, the EU and Norway, are starting to develop some transformative industrial climate policies, but also here crucial policy gaps remain. Overall, we find a particular lack of, and need to strengthen policies focused on demand reduction, material efficiency and circularity, the build-up of public capacity, and the enhancement of international cooperation.

Our findings show that more ambitious, proactive, and radical industrial climate policies are needed in a timely manner to put the sector on track to achieve a Paris-compatible pathway. This need calls for further political, private sector and academic discussion on the design and implementation of transformative industrial climate policies. Particular attention thereby needs to be given to policies focused on demand reduction, material efficiency and circularity strategies, the build-up of public capacity to steer the industrial transformation as well as the opportunities of international cooperation, as these elements remain particularly underexploited.

Read the full report: Sectoral Analysis of Energy-Intensive Industries