Five ways to finance the industry transition

Written by: Zoha Shawoo

The Energy Transitions Commission Mission Possible report estimates that an industry transition to a low-carbon pathway by mid-century would cost the economy less than 0.5% of global GDP. But financing the industry transition is about more than just finance. It is also about the policy levers necessary to overcome barriers to financing the transition.

Analysis of 30 industry transition roadmaps in 10 countries, carried out by the Leadership Group for Industry Transition (LeadIT) secretariat, reveals five common finance needs to deliver the transition.

1. Incentives, security and competitiveness

The majority of roadmaps highlight the threat of uneven competition and loss of profitability as key barriers to implementing decarbonization measures for heavy industry. For example, the UK’s iron and steel roadmap states that investment in decarbonization efforts should not affect the competitiveness of the UK’s iron and steel sector compared to businesses operating in Europe and the rest of the world.

Roadmaps therefore argue for government interventions to ensure profitability of low-carbon industries. This could take the form of financial incentives for investment in more climate-friendly technologies. For example, governments could implement subsidies to lower the capital costs of major new investments, or offer below-market interest rates to reduce the risk of investment.

2. Investment in research and development

Roadmaps also highlight the need for investments in research and development (R&D), particularly for new technologies such as Carbon Capture and Storage (CCS). The Netherlands National Climate Agreement, for example, estimates government investments of up to €100 million a year for innovation, covering both pilot and demonstration projects of emerging technologies and for exploration of unknown, alternative technologies.

Overall, roadmaps highlight the importance of R&D finance for testing, upscaling and bringing to market mitigation measures such as sustainable building products, climate-friendly cement and concrete, and energy efficiency. This contributes to reducing the risk associated with developing new processes and technologies, and increases the feasibility of wider market deployment.

3. Investment in hydrogen and carbon capture and storage technologies

Beyond R&D, industry transition roadmaps emphasise the need for financing for deploying hydrogen, CCS and carbon capture and utilisation (CCU) technologies to decarbonise key industries such as cement and steel. Investment in CCS could include initial support to pipeline companies to allow them to establish network infrastructure. For hydrogen, investments are needed to develop storage technologies.

According to the UK’s cement roadmap, CCS is essential for the sector to become carbon neutral, but would double the capital and operating costs of a typical cement plant. As such, CCS investments need to be paired with the incentives and financial risk sharing mechanisms highlighted above.

4. Carbon pricing

An additional policy instrument for financing industry transition roadmaps is a carbon price to promote the competitiveness of low-carbon technologies. According to Ireland’s Climate Action Plan, for example, a carbon price of €80 per tonne is needed to meet carbon reduction targets by 2030.

Carbon pricing can take several different forms. For instance, a special surcharge can be levied on carbon-intensive materials such as steel or cement, irrespective of the emissions associated with their production. Alternatively, a carbon price can be applied to end products, based on their carbon content, at the point of sale. This would also generate revenue to finance other instruments, for example to support the emergence and commercialisation of new technologies. The standard EU emissions trading model could also be adopted, perhaps complemented by a carbon levy on imports.

5. Private sector investment

Finally, a number of roadmaps highlight the need to mobilize private sector investment to finance industry transitions. For example, India’s cement roadmap calls for governments to unlock private finance in areas with low likelihood of independent private investment, thereby generating public-private investments to support the sustainable transition of the cement industry.

However, several roadmaps highlight that companies are unlikely to invest in decarbonization if it is linked to long payback periods. As such, mobilizing private sector investment is also linked to government measures to promote competitiveness and profitability, such as through carbon pricing and creating incentives.

Conclusion: collaboration and legitimacy

Our analysis demonstrates that the availability of financial capital alone is insufficient for financing industry transitions. Policy measures and interventions, in the form of carbon pricing, lowered interest rates and subsidies, are also needed to increase the competitiveness of low-carbon technologies and create incentives for public and private sector investment. These measures need to be combined with investments in R&D and new technologies such as CCS and hydrogen to ensure scalability, feasibility and profitability of decarbonizing technologies.

Several roadmaps highlight very similar financial needs and barriers to implementation, demonstrating the potential for joint learning and collaboration. For example, half of the roadmaps we analysed call for governments to support financial incentives through policies and measures that reduce the risk of investment. Dialogue between countries on this topic could help to create a level playing field for competition in international markets. The Indian roadmap emphasises the role of technology transfer and climate finance for facilitating industry transition. International collaboration can therefore also play a role in promoting industry transition in developing countries.

Finally, it is not just finance and policy that will deliver the industry transition. Legitimacy is fundamental to achieving a net zero emission society by the middle of this century. Currently, industry transition roadmaps in the countries assessed do not include any information on how the creation and distribution of financial incentives would affect different sectors of society, or how carbon pricing measures would affect small enterprises compared to large corporations. There is real scope for roadmaps to incorporate principles of a just transition such as avoiding carbon lock-in, supporting workers and affected regions, addressing existing inequalities and promoting inclusive and transparent planning processes. The industry transition must be just and equitable if it is to succeed – and finance needs to play its part too.

Ministers from 8 countries call for ambitious action to accelerate the low-carbon transition of industry

In a joint ministerial statement to be released on 7 July, Finland, Germany, India, Ireland, Luxembourg, the Netherlands, Sweden and the United Kingdom call for continued momentum and ambitious action to ensure an industry transition that tackles the climate crisis, creates decent jobs and delivers prosperity for all.

The statement will be announced by Eva Svedling, State Secretary for Climate Policy and Agenda 2030, at the Industry Transition Day.

Download the statement

“The disruption caused by the COVID-19 pandemic must not divert attention from reaching the goals of the Paris Agreement and delivering low-carbon emissions from heavy industry,” says Isabella Lövin, Minister for Environment and Climate, and Deputy Prime Minister of Sweden. “The green recovery can and must be a motor for the industry and energy transitions and for resilient economic growth.”

“In this statement, we reaffirm our commitment to accelerating the transition of all industry sectors to low carbon pathways in line with the goals of Paris Agreement, while pursuing efforts to reach net-zero carbon emissions by 2050, and to working in partnership with industry to make this happen,” says Babul Supriyo, Honourable Minister of State for Environment, Forest and Climate Change, Government of India.

The statement calls for partnership and action in three areas: policy, technology, and finance.

On policy, the ministers highlight the importance of using public procurement and standards to create markets for the climate neutral and circular products of the industry transition.

On technology, the statement calls on the UN to strengthen the use of existing structures to facilitate sharing of technology, know-how and infrastructure for the industry transition.

On finance, the signatories call on the private finance sector and multilateral development banks to develop risk sharing business models, and on the parties of UNFCCC to honour the commitment of financial flows to developing countries to ensure required support for the transition.

“The industrial transition will result from innovation and investments, which highlights the role of enabling environment and competitiveness of the industry. Sectoral low carbon road maps are an essential tool to pave the way for industrial transition. Finland´s recently completed road mapping exercise has proven that the industry is ready to take an ever more active role in climate action,” says Mika Lintilä, Minister of Economic Affairs of Finland.

“The UK is a proud member of the LeadIT initiative. In the run-up to COP26, we look forward to working closely with all member countries to build back better, pursue a green recovery and accelerate the decarbonisation of industry,” says Kwasi Kwarteng, Minister for Business, Energy and Clean Growth, United Kingdom.

What are industry transition roadmaps?

LeadIT brief, June 2020.

Written by: Sara Talebian, Oliver Johnson

Key messages

• Reducing greenhouse gas emissions from harder-to-abate industries is crucial to achieving the goals of the Paris Agreement and pursuing efforts to reach net-zero carbon emissions by 2050.
• One way to achieve industrial decarbonization targets is through industry transition roadmaps, which are long-range strategic plans that set out actionable measures on innovation, policy, public-private partnerships and the finance required to transform industries.
• Roadmaps are developed not to forecast the future, but to serve as a platform for discussion of future challenges by the actors involved.

In pursuit of a future vision: net-zero carbon emissions

In order to meet the 1.5°C global warming target in the Paris Agreement, global carbon emissions should reach net zero by around mid-century. This will require significant action across all sectors of the economy, not least from industrial sectors. On current trends, global CO2 emissions from industrial sectors will constitute 60% of global emissions by 2050. Reducing greenhouse gas emissions to net-zero is a particular challenge for heavy industries such as steel, cement and petrochemicals, and heavy-duty transport such as aviation, shipping and heavy road transport.

Several states have already made a commitment to reach net-zero emissions on timescales compatible with the Paris Agreement goals. Many of these states have developed public-private partnerships between government and industry to propose and implement action plans for industry transition to carbon neutrality. It is becoming increasingly common for ‘roadmaps’ and ‘pathways’ to be developed as plans and processes that guide the pursuit of decarbonization goals.

Roadmaps and pathways are both tools of futures thinking. While road mapping is a normative approach in which attempts are made to sketch out detailed plans and processes for achieving a desired future state of development, pathways have different meanings and different implications for different studies and research communities. Below, we look at futures thinking, examine the connections between roadmaps and pathways, and explore how these tools have been used to encourage and strategize decarbonization activities in industry and beyond.

Thinking about the future

Roadmaps and pathways are both tools of futures thinking. Futures thinking offers various ways to anticipate, explore and address future challenges and possibilities. Different approaches to and methods of futures thinking are usually classified according to the main goal of the future-oriented exercise – whether the goal is to explore probable, possible, plausible or preferable futures (see Figure 1).

A similar way of conceptualizing the different ways of futures thinking is based on three fundamental questions that can be posed about the future:

1. What will happen? (probable future)

   Predictions and forecasts seek to answer the question of what will happen by determining the most probable future alternative. Weather forecasts and quantitative simulation models and projections are obvious examples of predictions.

2. What could happen? (possible and plausible futures)

   Exploratory futures approaches seek to answer the question of what could happen. Exploratory scenarios are widely used to understand plausible future developments and explore the entire space of future possibilities.

3. What should happen? And how can a specific target be reached? (preferable future)

   Normative and goal-oriented approaches to futures thinking are used to determine the most preferable futures and design strategic paths and plans to achieve the determined preferable goals. These approaches answer the question of what should happen and/or how. They are often used to support policy processes and decision making. Future visions, backcasting and road mapping are examples of the normative approaches used in futures studies and strategic foresight processes.

Roadmaps and pathways

Visions are elaborations of desirable plausible futures. In this sense, all decarbonization targets and goals are future visions that societies seek to achieve within a certain time horizon. Once a specific vision has been elaborated, the next question usually concerns how to reach it. The typical answer is by developing a roadmap or pathway. Decarbonization roadmaps nearly always start with a predetermined end point – a desirable decarbonization target – and investigate the possible plans, actions and policies required to reach that point. Decarbonization pathways, on the other hand, are used in a variety of ways.

Roadmaps

Road mapping was first implemented as a futures thinking approach in technology forecasting processes. The first (technology) roadmap was published by Motorola in 1987, as a means for aligning technology with product strategy. Since then, the method has been adopted and adapted by different sectors in support of strategy and innovation, with applications for private and public sector initiatives.

Road mapping is now a powerful planning technique that is integral to the creation and delivery of strategic thinking and innovation in many different areas. The graphic and collaborative nature of roadmaps supports strategic alignment and dialogue in a context or sector, both across organizations and between a range of actors and stakeholders. As an integrative approach, the method draws on a range of theoretical perspectives on strategy and innovation, systems and industry dynamics, visual science, decision support and psychosocial processes. Roadmaps provide essential understanding of proximity and direction, as well as some degree of certainty in planning and strategic processes.

As a goal-oriented method, road mapping has been increasingly used to develop detailed plans and strategies in pursuit of industry transition. Industry transition roadmaps are actionable plans for achieving decarbonization targets. They are associated with the timelines, strategic processes, actionable measures, decision processes and policies required to transform industries in order to curb greenhouse gas emissions and contribute to global action on adaptation resilience.

As a practical definition, industry transition roadmaps translate global, regional and national climate visions, decarbonization targets and ambitions into a sequence of actions plotted on a certain timeline. For every step and action towards the agreed decarbonization target, industry transition roadmaps provide measures on the innovations, policymaking and decision-making processes, public-private partnerships, technology and finance required to operationalize those actions. In this sense, any strategic plan for decarbonizing industry sectors that sets out timelines, measures and actions towards an end-point target could be considered an industry transition roadmap, regardless of whether this terminology is used.

Pathways as roadmaps to desired futures

In the literature on decarbonization and industry transition, the terms roadmap and pathway are sometimes used interchangeably. In such cases, both refer to long-range paths and plans for decarbonization and a sequence of measures designed to meet a range of desirable targets.

• EU Roadmap 2050: A project that aims to draw up and analyse pathways to achieving a low-carbon economy in Europe. It uses roadmaps and pathways interchangeably as paths from now to achieving decarbonization targets in 2050.
• The Science-based Targets Initiative Sector Decarbonization Pathways introduced the Sectoral Decarbonization Approach (SDA), whereby roadmap and pathway are used interchangeably to show how emissions from a sector must decrease over time to achieve the net-zero target.
• Deep Decarbonization Pathway Project (DDPP) aims to develop a national blueprint of the changes in physical infrastructure, deployment of technologies, sectoral investment and associated behaviour patterns required to achieve decarbonization; clearly states that pathways in this initiative ‘are best seen as roadmaps of options and enabling conditions’.

Pathways as normative scenarios : multiple ways to reach a desired future

In other cases, pathways depict a range of alternative routes to a desirable vision while a roadmap indicates a preferred direction to guide a society or sector to the desired end-point. In this sense, pathways show all the possible ways in which a target could be achieved but the roadmap is the preferred way.

There might, for instance, be different roads or paths to reaching net-zero emissions. One might be to immediately shut down all fossil fuel-based power plants while another might suggest an incremental approach that phases out fossil fuels over a specific time period. Each pathway would present different practical challenges and have its own implications and requirements. Having chosen one of the envisaged pathways, a roadmap would determine a precise timeline and the appropriate mix of regulatory push, demand pull, long-term strategies and industry reorientation, among other things.

• The International Energy Agency technology roadmaps and Exponential Roadmap 2030 projects are examples of this approach, whereby each roadmap contains a clear statement of the desired outcome followed by a specific route to achieving it that sketches out goals, milestones, gaps and barriers, action items, priorities and timelines.

Pathways as exploratory scenarios: multiple ways to reach a plausible future

In a third approach, pathways refer to explorative scenarios that demonstrate a range of plausible future directions without any normative indication or predetermined goal.

• In the United Kingdom’s industrial decarbonization and energy efficiency roadmaps to 2050, pathways represent three alternative future scenarios:
  1. no decarbonization interventions;
  2. incremental improvements to existing decarbonization processes and technologies; and
  3. maximum possible technical potential for decarbonization.

In this initiative, the roadmap is an umbrella strategic plan that identifies the next steps in terms of technology needs, policy levers, leadership and finance requirements for each alternative pathway in order to make progress on decarbonization and energy efficiency.

• The climate research community defines pathways in a similar way, where global scenarios on future developments are known as ‘shared socioeconomic pathways’.

Industry transition roadmaps: actionable plans to reach decarbonization targets

Industrial transition requires action on the part of both industry and government. Such action should be complementary, which requires joined-up thinking. Industry transition roadmaps are developed not to forecast the future, but to serve as a platform for discussion among the relevant actors involved – notably governments and industry sectors – of the future challenges facing industrial decarbonization.

It is important to emphasize that achieving industrial decarbonization targets will require public-private sector partnerships. Industry sectors must take game-changing decisions and implement new strategies for transformation. At the same time, governments must incentivize industry transition by reinforcing positive policies through regulation and legislative processes.

Industry transition roadmaps must be produced by implementing participatory processes and dialogues between all key actors. For industry roadmaps to be legitimate, feasible and successful, the road-mapping process must be the product of government-industry collaborations that are owned by all the stakeholders involved and framed at the level of national or regional jurisdiction.

Shaping a sustainable and low-carbon recovery that spurs industry transition

LeadIT brief, May 2020.

Written by: Oliver Johnson, Zoha Shawoo, Sara Talebian, Eric Kemp-Benedict, Andrea Lindblom

Key messages

• The disruptive force of the COVID-19 pandemic opens a narrow policy window to steer economic development onto a more sustainable, equitable and net-zero emissions path.
• Many carbon-intensive industries are clamouring for support to avoid job losses and maintain business as usual.
• A carbon-intensive recovery risks locking countries onto long-term carbon-intensive pathways.
• History shows that post-crisis recovery measures can lead to positive change, but not without sustained effort and policy coherence.
• Policy levers for a sustainable, just and resilient recovery include: conditional bailouts; targeted tax relief; green public procurement, green bonds, tax credits and government-backed loans to catalyse green investment; and social welfare support and just transition measures.
• There is also a need for “shovel-ready” industry transition projects in sectors able to employ and upskill large numbers of workers, while delivering medium-term returns in line with existing policy commitments.

The COVID-19 pandemic and opportunities for transformation

The global economy is expected to shrink by up to 3% in 2020 due to the COVID-19 pandemic response, leading to “the worst economic fallout since the Great Depression” according to the International Monetary Fund. The International Labor Organization warns that the pandemic will have a devastating impact on employment, “wiping out 6.7% of working hours globally in the second quarter of 2020 – equivalent to 195 million full-time workers.” Already in the US, 22 million people have registered for unemployment benefit out of a workforce of 167 million. Around the world, the pandemic has upended people’s lives and made more visible stark structural inequalities in society.

Such social and economic instability and disruption is not exclusive to this pandemic – it was seen in previous major global crises from the Spanish influenza and World War I to the 2008 financial crisis. And as before, many governments have now developed rescue and recovery stimulus packages.

Short-term health and relief measures are critical, to minimize the spread of the disease, reduce the immediate impact of the crisis and alleviate suffering. At the same time, many governments are starting to consider longer-term recovery measures and stimulus packages to help boost their economies and avoid lasting damage.

From the UN and the Organization for Economic Co-operation and Development to civil society, organizations are calling on governments to ensure that these recovery efforts are used to shape economies so they are better able to meet the climate and sustainability commitments that countries have made under the Paris Agreement and the 2030 Agenda for Sustainable Development – and do not dismantle progress made to date. And in the EU, there are strong calls to ensure the the European Green Deal delivers for a green recovery.

The current disruption affecting power dynamics, institutional structures and daily behaviour has opened a policy window for greater action on climate change, based on the following:

• A common problem has been identified, in this case the economic risk resulting from the COVID-19 pandemic.
• Policy solutions to achieve a sustainable and low-carbon recovery exist.
• Political will to take action is there, and public expectations area high that action of some sort will be taken.
• Underlying systemic inequalities are more visible, amplifying the need for societal transformation.

A narrow window

The policy window is, however, narrow. This was to be a critical year for addressing climate change, for protecting biodiversity, and for the Sustainable Development Goals. And 2020 is also the year in which the first phase of the Paris Agreement, on pre-2020 climate action, concludes. It is the year in which countries must submit new or revised national climate action plans, or NDCs. And it kicks off a decade in which global greenhouse gas emissions have to decrease by 45% Celsius if global warming is to be limited to 1.5 degrees celsius.

In particular, industry, energy, infrastructure, and agriculture systems must soon be transformed if 1.5°C scenarios are to remain feasible. Societal transformations are also needed to ensure that low-carbon pathways “leave no-one behind”, as is building the resilience and adaptive capacity of vulnerable populations.

Some momentum on the above had already been building, particularly with regard to industrial transition, with Sweden and India launching the Leadership Group for Industry Transition in late 2019. Industry big hitters from Scania in Sweden to Dalmia Cement in India and ThyssenKrupp in Germany, all with targets to reach net-zero greenhouse gas emissions by 2050, have joined the the Leadership Group. Commitment is also growing within the finance sector, not least through the Net Zero Asset Owner Alliance, a group of pension funds and insurance companies dedicated to transitioning their investment portfolios to net-zero greenhouse gas emissions by 2050.

However, if the economic disruption wrought by the COVID-19 pandemic reduces or even stops investment in renewable energies, green hydrogen technologies, or carbon capture and storage, it may be impossible to implement the available solutions before the window of opportunity closes.

The risks of carbon-intensive lock-in

The current policy window is also a contested space: voices calling for sustainable, just and resilient recovery are not the only ones being heard. Many politically powerful carbon-intensive industries are lobbying for economic recovery measures that protect their businesses and employees and help the world return to a pre-pandemic status quo. Already many smaller, non-diversified crude oil companies for have filed bankruptcy due to plummeting demand for oil, and the plight of these fossil fuel-based interest groups is not to easy for politicians to ignore.

There is therefore a significant risk that economic recovery measures might lock economies and societies into carbon-intensive, fossil fuel-dependent pathways. Many countries were already facing such carbon lock-in.

Carbon-intensive investments – and the technical, economic, and institutional factors supporting those investments – have created a path dependency that makes switching to low-carbon solutions and pathways much more difficult and costly.

The threat of carbon lock-in from carbon-intensive recovery measures has three dimensions:

Technological lock-in

Once technologies become popular and competitive, the structures that support them – for example, infrastructure, supply chains, market mechanisms, and policies and regulations – tend to keep them alive. The lifespan of existing carbon-intensive technologies will only increase if economic recovery measures fail to redirect financial flows towards resource and energy efficiency, renewable energy sources, electrification of transport, and research and development on ways to make steel and cement without releasing CO₂.

Some examples of response and recovery measures being implemented or advocated that risk further entrenching technological carbon lock-in are:

• The Canadian province of Alberta has indicated it will invest over $1bn in the Keystone XL pipeline.
• The airline industry in the US has asked for $50 billion in federal aid for bailouts; President Trump has indicated his intention to heed this request.
• In China, evidence shows that carbon emissions are already rising as demand begins to return to normal levels, and the Politburo has called for “active” stimulus to speed up large-scale construction projects, which will require steel, cement and other materials that is currently produced in carbon-intensive processes.

Political lock-in

When political parties, trade unions or large businesses, and the informal ties and norms that bind them together, serve to preserve existing industrial structures, it can be very hard to implement any aspect of industry transition. If the current pandemic causes attention to shift too far away from the climate crisis, political lock-in is likely, as vested interests may argue that “now is not the time” for climate action and “righting the ship” should be first priority.

There are already a range of response and recovery measures being implemented that might lead to political lock-in:

• In the US, the Environmental Protection Agency has suspended enforcement of environmental laws during the COVID-19 outbreak.
• There has been a wave of new US state laws criminalizing protest.
• Canadian oil producers are calling for suspension of lobbying transparency rules.
• Czech Prime Minister Andre Babiš has publicly urged the EU to “forget about” its Green Deal initiative for now and instead focus on the pandemic response – an attitude echoed by Poland's Deputy Minister of State Assets Janusz Kowalski.

Societal lock-in

As technologies and their supporting architecture become more and more embedded in society they begin to reflect – and often reinforce – prevailing norms, power dynamics and social stratification. The current pandemic shines a light on existing inequalities in many societies around the world. For example, we know that certain sections of the population are more vulnerable to its impacts than others. And there is growing recognition that the gendered implications of the pandemic are universal. Government measures to protect the current global economic system could lead to societal lock-in that preserves these inequalities and prevents transitions and transformations that are necessary to build a just, equitable and sustainable society.

Recovery measures and responses that might lead to societal lock-in include:

• Framings of recovery that focus on individual preparedness and responses (instead of systemic change) and around “getting back to normal”.
• Demonization of public transport, which may trigger greater preference for car use after lock-downs ease.
• Surveillance measures that might be difficult to roll back after the pandemic ends. Potential lock-in from these measures is also technological: precedents in surveillance technology use that are being set now, will have impacts on future technology development and use.

Recovery measures can catalyse industry transition activities

Despite concerns over carbon lock-in, people across the world are coming together through online platforms as never before and rebuilding notions of community. Innovation is rife as people seek ways to boost their resilience to unprecedented change. And many governments – aware of the disastrous economic consequences of the pandemic – are using recovery packages and measures to push forward with their low-carbon development plans, thereby preventing political carbon lock-in that could arise through delaying climate action.

For example, South Korea became the first country in East Asia to announce a Green New Deal Manifesto in March 2020, and did so within the context of the unfolding pandemic. Meanwhile, European Union leaders have agreed that the EU’s economic recovery plan will take into account its mission to fight climate change, and will be consistent with “green transition”. In other cases, though, the danger of carbon lock in appears more imminent.

History suggests that such initial post-crisis support measures can catalyse a raft of subsequent economic and social changes, which is just what the industry transition needs.

For example, increased use of social security systems in the wake of World War I and the 1918 influenza pandemic led governments in Western Europe to reinforce the view that all citizens should be treated equally, with a focus on income and wealth redistribution. Indeed, the social policies put in place by many governments (Germany, Austria, UK, US, Canada, etc.) in the 1920s marked an essential transition phase in the development of many universal welfare state systems in later decades, where issues of social justice were central to the development of social legislations.

With these points in mind, here are five policy levers for a sustainable, just and resilient recovery that continues to catalyse the industry transition:

• Conditional bailouts. Bail out programmes are costly and can last a long time, as demonstrated by the US’s Troubled Asset Relief Program and the UK’s bail out of the Royal Bank of Scotland during the 2008-2009 financial crisis. Where bailouts are provided to industries such as aviation and shipping, governments should attach conditions – for example, attaching a requirement to reduce carbon emissions to financial assistance, as is the case for Austrian Airlines.
• Tax relief geared towards environmental tax reform. Tax relief can be designed so that it excludes firms which pay out dividents or are registered in tax havens and facilitates a shift to a carbon fee and dividend.
• Green public procurement, fossil fuel subsidy reform, tax credits and government-backed loans. Through various measures governments could reform fossil fuel subsidies and redirect and catalyse new financial flows towards greener investments, including investments in renewable energy sources as opposed to oil and gas; battery-powered cars and electrification of transport; and research and development for ways of making steel and cement without releasing CO₂.
• Social welfare support. It is imperative that green recovery measures go beyond technological and political solutions to also incorporate societal solutions that address the inequalities that the pandemic has shed light on. This could include widespread socialized healthcare and ways of measuring wellbeing that go beyond GDP, and shifting national priorities away from endless economic growth and mass consumerism. Importantly, recovery measures need to move away from bailing out large corporations and companies, particularly oil and gas giants, and instead redirect debt relief and financial capital toward individuals and small enterprises suffering from income losses. Of course, the ways and means of doing this will differ considerably across the world.
• Just transition measures. Moreover, the imperative of “just transitions” remains important: rather than bail out industries to save jobs, governments should look to create green jobs for those workers with relevant skillsets, reskill those who need it and support those that lose their livelihoods. Post-pandemic planning should also be an inclusive processes, engaging with labour unions and other worker and citizen representatives. For EU member states, it makes sense to anchor recovery efforts within the EU Green Deal and financial mechanisms such as the EU’s Just Transition Fund.

Final thoughts

The current pandemic presents a unique opportunity to governments and policymakers to enhance the resilience of political and financial systems to the climate crisis. They can achieve this in particular through implementing green deals and legislation that requires banks and financial institutions to phase-out fossil fuel investments and transition to a greener economy.

Yet the future in a post-pandemic world is deeply uncertain, which is manifesting itself in stock market fluctuations, consumption patterns, and delayed policy decisions. The current crisis has changed many aspects of our societies in profound ways, and how far-reaching and long-lived these changes will be is unclear. Already the current social contract between governments, citizens and private enterprise appears to be shifting, with significant ramifications for governance models, labour markets, consumer behaviour, trade flows and policy ambitions.

On one hand, lack of information and increased ambiguity about the post-pandemic world – especially after the disruptive and negative impacts of the crisis on socioeconomic structures and people’s livelihoods – can be alarming and paralyzing, leading to an understandable desire for a return to “normality”.

On the other hand, uncertainty is an opportunity for progressive change. Uncertainty opens up a wide spectrum of possibilities to move away from old dysfunctional structures and practices and transform societies in order to reach sustainable development goals, reduce structural inequalities, and enable just and green industry transitions. To take advantage of this opportunity for change in the face of pressure to return to normality rests on building trust between governments and the citizens and private enterprises they govern. Trust and collaboration also needs to be built across geographies, so that industry transition and economic transformation is rooted not only in advanced industrial nations of today, but also the emerging industrial nations of the future.

Industry transitions: a critical gap in national climate commitments

An SEI analysis reveals a lack of detail about how countries plan to cut emissions from industry in the nationally determined contributions (NDCs) they have submitted under the Paris Agreement.

Written by: Zoha Shawoo, Oliver Johnson

Controlling greenhouse gas emissions from industry will be critical if the world is to meet the Paris Agreement target of keeping global heating “well below” 2°C by 2100. On current trajectories, global CO₂ emissions from hard-to-abate industry sectors – such as aluminium, chemicals and petrochemicals, iron and steel, cement, shipping, aviation and heavy road transport – are expected to rise from 10.3Gt in 2014 to 15.7Gt (or c. 60% of global emissions) by 2050.

To avert this, a far-reaching transition of industry onto a low-carbon pathway is needed, across the world’s leading economies. But a study we carried out early this year suggests that most of the the mitigation proposals countries have submitted under the Paris Agreement are woefully short on detail when it comes to industrial transition plans.

The study

Earlier this year, we set out to search the current batch of nationally determined contributions (NDCs) countries have proposed under the Paris Agreement to see what mitigation measures were planned to support low-carbon industrial transitions.

We screened all 134 of the NDCs submitted in English currently available (including the European Union’s regional NDC), in three steps:

• Step 1: Does the NDC include industry within the scope of its mitigation targets?
• Step 2: Does the NDC mention specific industries?
• Step 3: Does the NDC include any industry transition measures? If so, how far does it go?

To answer the last question we devised a rating system, which we dubbed the “NDC Industry Scorecard”, based on the degree of specificity and broad sectoral coverage of the proposed measures. (We did not attempt to evaluate their likely impact on emissions.) The figure below shows these steps in more detail.

Results

We found that around 69% of the NDCs included industry, or specific industries, within the scope of their mitigation targets. Most of the NDCs that didn’t include industry were from countries with very low emissions from industry, such as small-island developing states (SIDS).

However, nearly two-thirds of those 92 NDCs only mentioned industry in a general sense and did not specify which industries were targeted. When NDCs did mention a specific industry it was most often cement production, followed by building and manufacturing more broadly.

When it comes to concrete action, 43 NDCs (32% of the total we looked at) included specific mitigation measures for industry – less than half the number that included industry within their scope.

Using the scorecard, we gave 21 NDCs a “low” score and 16 NDCs a “medium” score. Only 6 of the 43 NDCs specifying any transition measures for industry were detailed and comprehensive enough to constitute something akin to an industrial transition roadmap (and thus achieve a “high” score).

On a more positive note, these high scoring NDCs included the world’s top greenhouse gas emitter, China, and its third-biggest and fifth-biggest emitters, India and Japan. The others were Indonesia, Morocco and Uruguay. We’ve listed the measures proposed by each of these countries.

Bridging the gap

From our findings we can say that a sizeable majority of countries – nearly 70% – that have submitted an NDC in English acknowledge the importance of industry in climate mitigation. However, in most cases the NDCs themselves offer scant evidence of concrete transition plans.

There is an urgent need for countries to draw up transparent industry transition roadmaps that can support the implementation of the Paris Agreement. This presents a clear opportunity for the Leadership Group for Industry Transitions – which meets in Madrid on Monday 9 December – to realize a key part of its mission.

Launched by the Swedish and Indian governments at the UN Climate Action Summit in New York in September 2019, the Leadership Group comprises countries, companies and other actors who believe that all sectors of industry can and must progress on low-carbon pathways, while pursuing efforts to reach net-zero carbon emissions by mid-century.

Initiatives like the Leadership Group are vital to demonstrate the feasibility of net-zero pathways and to spur others to accelerated action and increasing ambition. We hope that more countries will step up to the challenge and set out clear, viable industrial transition plans in the next round of NDCs.