A public-private path to decarbonizing industry and achieving net-zero emissions

In Sweden, industry accounts for almost one third of its greenhouse gas (GHG) emissions. The same holds true on a global level, with industry emissions at 30 percent.

Achieving net-zero emissions by 2050 – as outlined in the Paris Agreement – will thus require the decarbonization of industry. And technologically speaking, it is absolutely possible. Carbon capture and storage, electrified industrial processes, biomass, hydrogen and synthetic fuels from renewable electricity – all are possible today and, taken together, would mitigate all emissions.

But beyond the technological, barriers remain. Some sectors are more difficult to decarbonize than others, and major technological developments need to take place as part of the process of scaling technologies. Engineers will have to re-think numerous industrial processes, figuring out how renewable fuels, or renewable electricity, can be used instead of fossil fuels. On the whole, however, decarbonizing heavy industry is feasible – and necessary to meet climate goals.

To finance decarbonization, risks and costs must be shared

In absolute numbers globally, the costs associated with decarbonizing industry and heavy traffic are staggering. But the amount of needed investments would have only a small impact on the overall economy, with cost estimates in the range of 0.5% to 1% of global GDP.

However, for the individual company looking to decarbonize, production costs may actually double. Passing these costs on to buyers can look very challenging, especially for sectors exposed to international competition and markets. When companies do not clearly see how they can charge their customers for the costs of decarbonization, they will not make the needed investments – even if the additional cost on final products at the end of the supply chain is small.

The key nut to crack, then, is how to distribute that cost and how to share the risk among the private and the public sectors. Research that is ongoing at the Stockholm Sustainable Finance Centre indicates that actors in the financial sector are very willing to take concrete steps towards supporting sustainable finance. For example, green bonds always find investors, and investors actually demand more than what is available.

The problem is that these actors continue to assess risks and rewards in traditional ways. Long-term climate risks are not factored in unless policies are in sight to raising carbon prices or banning fossil fuels. Also, innovative solutions that have not yet been developed at scale are assessed as inherently riskier. The result: Investors cannot move ahead at the necessary pace.

How governments can accelerate decarbonization

In other words, governments need to provide incentives for companies to decarbonize, and decarbonize quickly. Sufficiently high carbon taxes that covered most regions and sectors would change the competitive landscape, not only creating an incentive to invest in decarbonization but also ensuring low-carbon technologies are not at a price disadvantage. But carbon prices are currently not strong enough or widespread enough to speed up the decarbonization process, and the outlook for stronger international momentum is dim.

With no higher carbon price in sight, any company that wants to decarbonize has to invest large amounts of capital over a very long time, while still being exposed to international competition. While the state already plays a role in helping during the early phases of technological development, it is in the later phases of demonstration and deployment that investment costs become significant. Governments may therefore need to start playing a bigger role in providing financing to companies that are ready to pilot and demonstrate carbon-neutral solutions.

This would be an expansion of industry policy already natural to many countries. In Sweden, for example, the state already plays a role in many industrial sectors; it is also working with companies and researchers (including SEI) in the so-called Hybrit project to develop and implement a novel process for fossil-fuel-free steel production. The hope is that this partnership – and others – can incentivize change.

Steel is only one sector, and Sweden only one country. But such partnerships are possible in the many other countries where governments own mines or infrastructure or electricity grids. In all those areas, it is inevitable that the state is part of the process of decarbonization. Governments could aid this process further by guaranteeing markets. Setting rules for public procurement that require low-carbon cement or low-carbon steel in publicly funded infrastructure is one example of how governments could help to guarantee future demand.

Thinking out of the box to create new partnerships

Of course, we should not only look to the state to create conditions favourable to the decarbonization of industry. Private sector players can also do their part: If a large player like IKEA committed to buying low-carbon steel, that would be a powerful signal.

Under textbook conditions, of course, it would be enough to rely on markets to set the pace for progress. The private sector tends to move fast as soon as the economic incentive is there. But it has limited room to experiment with solutions that are more expensive than the standard one.

As long as global carbon prices remain low, relying on market forces alone is not sufficient. Emissions have to be reduced quickly to meet climate goals, and while no-one wants to undermine the benefits of liberal markets, research indicates that the state has to play an active role in decarbonizing industry.