The driving forces towards a net-zero industrial sector
Published on: May 2, 2024
During the last decade, the industrial sector has gone from slow movers to a green transition, which today can best be described as a race towards net zero. No-one wants to be left behind, neither companies nor countries.
There are a number of reasons why this is happening right now.
“Industry players are starting to notice the rising price of CO2 emissions. A lot of actors and countries have made the commitment to reach net zero, introducing new regulations and carbon dioxide duties, together with increasing demand in the value chain, increasing competition and, last but not least, the arrival of money, both state and private”, says Björn Nykvist, researcher at the Stockholm Environment Institute, SEI.
A continuing wave of regulations
The pressure from new targets and legislation related to the green transition has gradually increased during the last decade. What started with the UN Sustainable Development Goals in 2015 has been followed by a series of overarching goals and new regulations.
The European Commission unveiled the European Green Deal in 2019—a cornerstone initiative striving to render Europe climate-neutral by 2050. This plan includes an ambitious interim target to slash net greenhouse gas emissions by at least 55 per cent by 2030, compared to 1990 levels, an objective known as Fit for 55. The European Climate Law has enshrined these climate neutrality ambitions into binding EU legislation. Additionally, the EU Commission has recently put forward a proposal for another provisional target: achieving a 90 per cent net reduction in greenhouse gas emissions by 2040.
In order to meet the EU’s climate and energy targets for 2030 and reach the objectives set out in the European Green Deal, it is vital that investments are directed towards sustainable projects and activities. The EU Taxonomy classifications system, which entered into force in 2020, aims to achieve this.
The latest addition to the European Green Deal was the Net-Zero Industry Act, which aims to scale up the manufacturing of clean technologies in the EU and make sure that the Union is well equipped for the clean-energy transition.
“We need a regulatory environment that allows us to scale up the clean-energy transition quickly. The Net-Zero Industry Act will do just that. It will create the best conditions for those sectors that are crucial for us to reach net-zero by 2050. Technologies like wind turbines, heat pumps, solar panels, renewable hydrogen, as well as CO2 storage. Demand is growing in Europe and globally, and we are acting now to make sure that we can meet more of this demand with European supply,” said Ursula von der Leyen, President of the European Commission, in connection with the presentation of the Industry Act in March 2023.
The Sustainability Reporting Directive (CSRD) came into force for large and listed companies from January 1, 2024. This directive expands the scope of sustainability reporting, impacting around 50,000 companies throughout Europe, with the goal of standardising the reporting of non-financial data.
Simultaneously, the U.S. is keeping pace with its own legislative measures. The Inflation Reduction Act came into law in August 2022, marking the most significant action Congress has taken on clean energy and climate change in the nation’s history.
A growing number of heavy industrial firms are establishing objectives and strategies to achieve net-zero emissions. For instance, the Global Cement and Concrete Association (GCCA), representing more than 40 prominent cement producers, has committed to manufacturing net-zero concrete by the year 2050.
Source: Hannah Ritchie (2020) – “Sector by sector: where do global greenhouse gas emissions come from?” Published online at OurWorldInData.org. Retrieved from: ’https://ourworldindata.org/ghg-emissions-by-sector’ [Online Resource]
Market forces: competition is intensifying due to increased demand for green product
The green transition is also increasingly customer- and demand-driven. Today, the automotive industry is in dire need of batteries and green steel if they want to be able to market their cars as “green.” They have placed large pre-orders many years in advance with steel companies. Some steel consumers tolerate the so-called “green premium” better than others.
Transport, for example, accounts for around 20 per cent of global steel consumption. However, steel is a relatively small part of the total cost of a vehicle, making it easier for companies to absorb the premium or pass it on to customers. According to BloombergNEF, a 25 per cent increase in the price of steel would raise vehicle production costs by 1 per cent.
Rising customer demand is also intensifying competition among Europe, the U.S., and China, as well as within companies in the same industries. The American Inflation Reduction Act has sparked a heated debate due to its inclusion of green subsidies that appear to disadvantage European industries. These subsidies are seemingly more accessible than European incentives, offering greater certainty and clarity regarding their benefits and application process.
The capital is flowing in – but is it enough?
Investments in the industrial transformation towards sustainability and net-zero emissions are significant and growing, as industries worldwide recognise the need to address climate change. These investments cover a broad range of areas, including renewable energy, energy efficiency, electrification, technological advancements and circular economy practices. The transition of industrial-heavy economies will require large amounts of transformative capital and access to low-emission technologies, along with associated infrastructure such as green energy, hydrogen and carbon sequestration.
According to the European Commission, Europe will require investments of more than EUR 700 billion per year to meet its energy transition goals and combat climate change.
”Overall, additional investments of about EUR 620 billion annually will be needed to meet the objectives of the Green Deal and of our REPowerEU plan, with an additional EUR 92 billion needed to address the objectives of the Net-Zero Industry Act over the 2023-2030 period,” the Commission stated in its 2023 Strategic Foresight Report.
