Industry receives less attention in decarbonisation policy than other sectors. [i] However, the decarbonisation of hard-to-abate industries will need significant policy support. These will not see market forces of growing RE competitiveness, given the high cost of their decarbonisation technologies, and their decarbonisation pathways are not clear. Policymakers will need to both set out these pathways and encourage and enable investment in their transition.[ii]
Ensure credible, science-based industrial transitions
To enable industrial transition, governments will need to establish science-based standards and roadmaps for decarbonisation, to ensure transition investments are aligned with necessary carbon trajectories. Following Climate Bonds’ Transition Principles can ensure credibility and ambition of transition roadmaps. Aligning these with international standards will enable trade of green products, and help countries plan cross-border projects, leading to lower costs, faster implementation and security of supply. The International Sustainability Standards Board (ISSB) objective is to develop such global standards with a clear focus on sustainability and ESG issues.[iii]
Net-zero targets must be accompanied by ambitious short-term emissions reduction targets. Alongside clear roadmaps, these can also prevent incremental change and efficiency gains which could create asset stranding risks and increase the cost of transition. For example, incremental fuel switching through gas blending (blending hydrogen into fossil gas supply) results in limited emissions reductions and requires retrofitting of gas infrastructure once hydrogen reaches 10% of supply, increasing transition cost. See Climate Bonds’ ‘Accelerating the fossil gas transition’ for more details.[iv]
It is also crucial that such standards and targets include full lifecycle considerations – this will ensure developers mitigate environmental impacts in the supply chain and address scope 1, 2 and 3 emissions. This can help mitigate the level of resource extraction required for the net zero transition, a growing concern given projected demands on the metals and mining industry, and the environmental impact of mining activities.
Facilitate investment in decarbonisation technologies
Governments will play a crucial role in enabling nascent decarbonisation technologies to scale and reach economic viability. Government R&D programmes can target particular technical challenges. Cooperation and collaboration are crucial to their success. Collaboration with industry allows identification of R&D priorities, strengthening knowledge flows, while international cooperation will also enhance innovation. For example, the EIB’s InnovFin Energy Demo Projects initiative provides loans, loan guarantees or equity-type financing of EUR7.5-75m to innovative demonstration projects in energy transformation.[v] This can help boost private investment in innovation.
Such early-stage technologies are not well-suited to loan and bond financing due to their high risk. Instead, they can be funded by private equity (PE) and venture capital (VC) investments. The government can encourage green PE and VC by incorporating climate impact in their PE and VC support programmes, providing more favourable guarantees and equity on green projects.
Guarantees can de-risk larger scale projects, addressing the investment risk of first-movers and encouraging private sector investment. Guarantees can mobilise massive investments, provide convening support to platforms orchestrating value-chain collaborations and de-risk demonstration funding, for example, the InvestEU Fund, 30% of which must support climate investments. This aims to mobilise over EUR372bn of public and private investment through an EU budget guarantee of EUR26.2bn.[vi] Guarantees can be fiscally efficient as they mobilise additional investment, having a greater impact than direct investment and result in lower balance sheet liability than direct subsidies.
Subsidies also mobilise private investment. In Malaysia, the Green Technology Financing Scheme provides an interest subsidy of up to 2% for financing of green projects and a 60% government guarantee.[vii] Establishing clear phase-out dates for subsidies also ensures that schemes do not stifle competitiveness and innovation – private investment has been proven to step in once subsidies are phased out.[viii]
Green guarantees and subsidies will need alignment with standards or taxonomy to ensure they are supporting robust green investments.
As public procurement represents a large proportion of demand for products such as steel (25%) and cement (40%), green public procurement (GPP) offers an opportunity to boost demand for green steel, cement etc.[ix] For example, the EU has published voluntary GPP criteria so as to facilitate the inclusion of green requirements in public tenders.[x] Such voluntary criteria could be gradually replaced with mandatory criteria, embedding preferential spending across ministerial budgets, by incorporating carbon emissions and circular economy considerations into spending assessments or by allocating a certain portion of budgets to low carbon solutions.
These criteria can also be aligned with Taxonomy criteria, ensuring consistency of green investments. Given the large purchasing power of governments, such policies can not only send a market signal but also make a significant contribution to sustainability targets.
Ensure strategic application of carbon capture and storage
Carbon capture and storage (CCS) will be needed for the decarbonisation of some hard-to-abate activities, such as to tackle process-based emissions in cement production. The IEA NZE scenario envisages 7600 Mt CO2 capture by 2050, compared to 40 Mt CO2 in 2020.[xi] Policymaking can ensure the strategic application of CCS and establish robust standards for infrastructure. This is vital to prevent overreliance as CCS cannot remove all emissions and in particular has a limited impact on supply chain emissions, which account for a significant proportion of carbon emissions from fossil fuel energy.
CCS standards can be developed as part of a national taxonomy. They are key to ensure sufficient level of emissions capture, ensure longevity of storage, prevent CO2 leakage at all stages of the process, and ensure the CCS process uses low-carbon energy. CCS has also primarily been used for enhanced oil recovery – long-term geological storage requirements and robust limitations on the use of captured carbon are essential to ensure CCS does not contribute to increased fossil fuel exploitation.[xii]
Strategic infrastructure development for transporting CO2 to storage sites can be included in infrastructure development prioritisation schemes. For example, CO2 transport infrastructure is eligible for EU PCI status.[xiii] Supportive policies such as the accelerated permitting of PCIs, can favour priority sectors, to ensure CCS is reserved for emissions which cannot be prevented.
[i] REN21, 2022. Renewables 2022: Global Status Report, https://www.ren21.net/reports/global-status-report/
[ii] Passaro, F., 2022. A Green Future for Steel, Climate Bonds Initiative, https://www.climatebonds.net/resources/reports/green-future-steel
[iv] Burge, L., 2022. Accelerating the fossil gas transition to net zero, Climate Bonds Initiative, https://www.climatebonds.net/resources/reports/accelerating-fossil-gas-transition-net-zero
[xii] IEEFA, 2022. The carbno capture crus: Lessons learned, https://ieefa.org/resources/carbon-capture-crux-lessons-learned