Climate Solutions Series: Decarbonizing Heavy Industry

The Issue

This brief is the fourth in a series on achieving net-zero global greenhouse gas emissions by 2050. The CSIS Energy Security and Climate Change Program is hosting six events that will be followed by resource briefs related to each event. For more information on the series, see our website.

The Challenge

Industrialization has been and continues to be key to the growth of economies around the world. These industries, however, emit greenhouse gas (GHG) emissions. In 2017, heavy industry emitted more GHG emissions than agriculture, buildings, power and heat, and transportation.¹ To avoid the worst impacts of climate change, science dictates we must reach net-zero GHG emissions around 2050, which requires deep decarbonization from all sectors including industry.

The industrial sector includes heavy industry and manufacturing in several categories. These industries include cement, chemicals, steel, aluminum, paper, mining, manufacturing, food processing, waste processing, and other manufacturing and processing industries. These industries are diverse, and so there is no one solution for reducing emissions in all heavy industries. Many, however, are energy-intensive, consuming about 40 percent of global energy demand.²

Industrial activities emit carbon dioxide (CO₂), nitrous oxide, methane, and fluorinated gases—all potent GHGs. Direct emissions from heavy industry make up between one-fifth and a quarter of global greenhouse gas emissions.³ Approximately 76 percent of industrial GHG emissions is CO₂.⁴ As shown in figure 1, iron and steel production and cement production each contribute about 27 percent of the sector’s direct CO₂ emissions.⁵ Chemicals production emits 15 percent, and aluminum, pulp and paper, and other industries collectively make up the remaining 31 percent.
Excluding the emissions from purchased electricity, the two main sources of GHG emissions in the industrial sector are energy used for heat and conversion processes. Many heavy industries require high-temperature heat, which is usually generated by the combustion of fossil fuels and is more difficult to generate using electricity. Some alternative sources, such as hydrogen made from renewable electricity or electric resistance heating from renewable sources, are nascent but will require further research and development (R&D) and/or rapid deployment and quick scaling to decarbonize the sector on a timeline relevant to the 2050 deep decarbonization goal. Some processes, such as iron and steel production or ammonia production, also generate emissions in the production process, so decarbonizing them will require new processes rather than simply substituting a different energy source.⁶

Heavy industries also face economic and political headwinds. Access to capital is difficult in these industries because they operate on thin margins, making large investments in new technology potentially very risky. Also, industries like steel and chemicals are typically trade-exposed, so there are concerns that if some countries take action to reduce emissions but others do not, it may affect the competitive position in the countries that do act. There is a potential for this to be mitigated by import rules or pricing schemes that account for carbon content, but they are as yet untested and could exacerbate international trade tensions.

Getting from Here to There

Technology

Technological solutions are one part of the puzzle in decarbonizing industry. These could include using zero-carbon energy sources, utilizing new industrial processes, capturing and using or storing CO₂ from electricity and heat sources or from processes, and efficiency improvements.

Low-carbon energy sources like biomass, hydrogen, or electricity could substitute for fossil fuels in providing process heat for industry. Many industries currently rely on coal- and natural gas-fired boilers for heat, which contribute about 42 percent of the sector’s total GHG emissions.⁷ Various industries already use hydrogen made from natural gas for processes such as refining, ammonia production, or steel production.⁸ Hydrogen made from natural gas with carbon capture equipment or made through electrolysis with renewable energy could provide an opportunity for low- or zero-emissions hydrogen to play a larger role in industry—it could continue to be used as a feedstock and could potentially be combusted for heat. Under current conditions, however, creating hydrogen through electrolysis is an expensive process and it is more expensive than other low-carbon heat sources and significantly more expensive than using fossil fuels.⁹

Biomass may have some application as a heat source in industry but can also serve as a feedstock for chemicals.¹⁰ The economic feasibility of biomass as a fuel or as a feedstock varies based on the availability and carbon content of the biomass feedstock. Some industries already use biomass, including to produce biofuels, to use in pulp mills, or to co-fire with coal in boilers to generate power or heat.¹¹

Electricity is also likely to play a role in industrial process heat, as electric resistance heating could reach 1,800 degrees Celsius, which meets the temperature needs of many industries including paper, steel, and cement production.¹² As with electrification in other sectors, decarbonization through electrification would require the electricity to be produced from zero-carbon sources.

Novel processes, including ones that incorporate electricity, could be another piece of the puzzle. These would be aimed at lowering process emissions, which come from the conversion of raw materials into intermediate or final products. Startup Boston Metal is marketing its metal oxide electrolysis process, for example, which it says converts iron ore to iron and oxygen with electricity instead of coking coal. This would avoid the CO₂ emissions from the coking coal, the limestone, or any of the various processing facilities involved in the steelmaking process. Similarly, in the aluminum industry, Alcoa and Rio Tinto have partnered to develop a carbon-free aluminum smelting process that replaces the traditional carbon anode with a ceramic one, eliminating the resulting CO₂ emissions.¹³ Both of these companies have secured customers for their zero-carbon products, but it will take time to bring their platforms to scale and to eventually replace conventional facilities with their zero-emissions technology.

Carbon capture, use, and sequestration (CCUS) is another option that could allow industry to continue using the energy sources they rely on while reducing or eliminating the CO₂ they emit. This could also reduce or eliminate the CO₂ emissions that are a byproduct of materials conversion processes. Once captured, the CO₂ could be sequestered in geologic formations or could be used in products. It is worth noting, however, that not all uses for CO₂ avoid emissions—soda carbonation, for example, simply defers emissions as the gas is ultimately released into the atmosphere from the soda.¹⁴ At present, natural gas with CCS is generally cheaper than other low-carbon options for producing heat for industrial processes, though this may change if other options mature or as market conditions change.¹⁵

The most common uses for CO₂ are currently to inject it into oil wells for enhanced oil recovery or to inject it into soda for carbonation, but several new opportunities exist for using captured CO₂ in products. A few examples include storing CO₂ in concrete, using it to create synthetic liquid fuels, turning it into polymers for plastics, using it to grow algae that will in turn capture more CO₂, and making it into lightweight materials that could substitute for metals.¹⁶ Many of these solutions are nascent and would require more R&D as well as commercialization, but they could emerge as viable options in the future.

Efficiency is likely to be key to reducing emissions from industrial processes. By one estimate, efficiency improvements can save 15 to 20 percent of the fuel used to generate energy across some of the highest-emitting industries.¹⁷ Efficiency measures alone will not decarbonize the sector but can move emissions in the right direction. However, energy efficiency measures can have unintended consequences. Energy efficiency improvements can lead to the rebound effect, where the ability to do more with the same amount of energy leads to an increase in production and, thus, less savings than anticipated (though it still means a net reduction of energy use).¹⁸ In addition, investments in energy efficiency upgrades may delay the conversion to zero-emissions technology because of the additional capital costs on top of those that went into the efficiency upgrades.

Companies have secured customers for their zero-carbon products, but it will take time to bring their platforms to scale and to eventually replace conventional facilities with their zero-emissions technology.

Policy

Many of the technology options for industrial decarbonization require time and effort and are not currently economic. Policy, therefore, will necessarily play a role in driving their adoption and additional behavior change. Policy options may include encouraging or mandating the increased use of the technology solutions presented above, but they may also include options like reuse and recycling programs, carbon pricing, material substitution, or direct support for R&D.

Given the increased costs of alternative heat options in industry, countries wishing to incentivize their industries to decarbonize are likely to institute policies to drive innovation and scale to reduce their prices. Australia, for example, released its national hydrogen strategy in 2019.¹⁹ Germany released its own national hydrogen strategy in June 2020.²⁰ Both countries’ plans seek to make their respective governments leaders in the hydrogen supply chain for domestic use and export. They both commit to support the research, development, and scale-up of low-cost hydrogen produced from renewable energy or natural gas with CCS; establish economic incentives for industries to switch to hydrogen for heat and use in industrial processes; and develop the workforce needed for their industries. To scale hydrogen and establish markets, Australia’s plan includes establishing hydrogen hubs where many users are located, allowing infrastructure to be strategically placed to serve several consumers. Germany’s plan includes helping to develop roadmaps for individual subsectors and references hydrogen’s suitability as an industrial feedstock. While Australia’s plan dismisses the idea of setting quotas or targets for use in individual sectors in the near future, Germany’s plan leaves open the door to implementing demand-side measures like quotas for low-carbon steel. These are not the only possible policy interventions to promote new decarbonization options but serve as examples of prominent government strategies currently being pursued.

Reuse and recycling programs can help reduce the need for virgin materials, but chemical and economic barriers may require new solutions. In this context, reuse refers to taking final products out of one use and putting it to another use while recycling refers to the breaking down of a product back to raw materials and converting it to something else. In the metals industry, many metals have recoverable materials but they may not ultimately be recycled due to low prices or technical difficulty in breaking them down to their component parts.²¹ Governments could design policies to increase the economic attractiveness of recycling and increase penalties for disposal. In the chemicals industry, there are opportunities to recycle chemicals such as solvents and even reuse some byproducts of industrial processes as feedstocks in others.²² Governments can implement policies to encourage recycling or reuse of chemicals by helping to establish the necessary facilities for recycling, setting “circular economy” guidelines that minimize waste in the industry, or by penalizing companies that failed to meet certain thresholds for recycling and reuse.

Given the increased costs of alternative heat options in industry, countries wishing to incentivize their industries to decarbonize are likely to institute policies to drive innovation and scale to reduce their prices.

Governments could also incentivize a move away from fossil fuels in their processes with carbon pricing. Carbon pricing has been discussed previously in this series, but in the industrial sector, it could potentially incentivize the innovations needed to drive down the costs of alternative heat sources and inputs to industrial processes. It would also be simpler than regulating by subsector; it would set a price across industries and allow operators to make the investments or changes that are most appropriate for their particular facilities. It would, however, lead to higher costs for some industries than others, particularly petrochemicals and cement.²³ In addition, a carbon price that would be politically acceptable could be set at a level that addresses the “low-hanging fruit” but does not drive deep decarbonization because the technology needed for that is more expensive. For example, hydrogen production from natural gas without any emissions mitigation has a levelized cost of $1-1.5 per kilogram.²⁴ Adding CCS with an 89 percent capture rate would bring the cost up to $1.7-2.15 per kilogram. Producing hydrogen with grid-powered electrolysis would cost $4.5-6 per kilogram. Ultimately, carbon pricing would need to be complemented by other measures, such as investments and R&D policies, to drive the level of change necessary to achieve net-zero emissions.²⁵

Another potential policy solution would be to incentivize industries to substitute the raw materials they use for lower-carbon alternatives. For example, part of the cement production process involves transforming limestone into lime, which is a carbon-intensive process. Some cement producers have begun substituting waste materials and other industrial byproducts for limestone to avoid the emissions from this process.²⁶ Implementing a policy to require substitution for low-carbon inputs would require expertise in these processes and the raw materials needed for them, so collaboration with industry experts would likely be necessary.

In addition to changing private sector behavior, governments can choose to take a more direct approach to R&D funding. In the 2020 fiscal year, the U.S. Department of Energy budgeted approximately $5.9 billion for applied energy R&D, including $395 million for advanced manufacturing R&D.²⁷ Demonstration projects are an essential part of the technology development and commercialization process, but because they often require large capital investments and are high-risk, they do not always attract private investment. This could be an area where federal investment would be useful, though investment from governments around the world in this area is currently low.²⁸

In the U.S. Congress, a bipartisan bill called the Sustainable Chemistry Research and Development Act would direct the federal government to incorporate “sustainable chemistry” into its R&D efforts and identify opportunities to partner with private sector organizations to advance new chemical breakthroughs.²⁹ The United States spent $205 million on R&D in chemicals manufacturing in 2017.³⁰ Notably, the bill requests that executive branch agencies form a consensus view on what “sustainable chemistry” means, so the impact this particular bill could have on decarbonization, if passed, would not be immediately clear. However, this serves as an example of a federal government potentially taking a more direct role in developing new innovations in the industrial sector.

The Role of Private Sector Engagement

Much like in the power and transportation sectors, many but not all heavy industries are privately-owned entities. Some industries, such as the manufacturing of paper products or food products, have few if any state-owned enterprises, while others such as chemicals, refining, and metals production see between 5 and 15 percent market share owned by state-owned firms.³¹ Therefore, the private sector will be a crucial actor in decarbonizing heavy industry. Many private sector companies are investing labor and capital in R&D of new processes and substitutes for carbon-intensive materials. For example, the German Federal Ministry of Education and Research is funding an effort by chemical giant BASF to develop a methane pyrolysis that uses electricity to separate natural gas into hydrogen and solid carbon, the former of which can be used in chemical processes and the latter of which can be used or sequestered.³²

Private sector companies face two major barriers that need to be overcome. First, the industrial sector is price sensitive, and some of the alternatives discussed in this brief are not cost competitive with their high-carbon counterparts. In addition, carbon pricing would have a noticeable impact on the cost of industrial outputs like steel and cement—a carbon price of $100 per ton, for example, would double the cost of a ton of cement and would increase the cost of a ton of steel by 50 percent.³³ From the consumer or end user’s perspective, however, the impact on the costs of finished goods or infrastructure would be much smaller because the costs of the intermediate materials are small compared to other costs like labor.³⁴

Second, the International Energy Agency estimates that to keep global temperature rise below 2 degrees Celsius above preindustrial times, the global industrial sector will need $7-8.7 trillion of investment between 2017 and 2060.³⁵ Furthermore, 34 percent of this investment would be necessary before 2030 due to capital replacement and opportunities to avoid lock-in of high-emitting infrastructure. This will require significant international coordination as well as policy regimes that incentivize and enable this investment.

Fortunately, there are international industry collaborations to establish more climate-friendly practices. Stakeholders in the global steel industry have formed Responsible Steel, an attempt to establish standards and certification protocols for environmentally friendly and ethically produced steel.³⁶ In the chemicals industry, several producers and consumers have formed the Green Chemistry and Commerce Council, which aims to promote more environmentally-friendly chemical processes and products.³⁷

To keep global temperature rise below 2 degrees Celsius above preindustrial times, the global industrial sector will need $7-8.7 trillion of investment between 2017 and 2060.

Conclusion

The industrial sector is made up of several subsectors that collectively use significant energy and emit about a quarter of GHG emissions. Decarbonizing these industries will be difficult and will require efforts to develop new materials and new processes, ensure they are economically competitive with carbon-intensive options, and bring them to scale in time to avoid the worst effects of climate change. However, there are many options available to the various subsectors from metals to chemicals, including electrification of heat sources, carbon capture, and zero-carbon material conversion processes. Policies will likely play a large role in guiding how the industries decarbonize. This document does not contain an exhaustive list of all technology or policy options but provides an overview of the potential to reduce GHG emissions from the sector. The private sector, which is a major player in heavy industry, will have a major role in identifying new ways to develop its products and continue to support the growth of nations around the world.

Stephen Naimoli is a research associate with the Energy Security and Climate Change Program at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Sarah Ladislaw is senior vice president and director of the CSIS Energy Security and Climate Change Program.

The authors would like to thank John Larsen for his input on this brief and Rebecca Dell, Andreas Bode, and Adam Rauwerdink for participating in the event that informed this brief.

This brief is made possible by support from JPMorgan Chase & Co.

CSIS Briefs are produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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