European industry must become low-carbon to remain competitive

Low-carbon transition and digitisation are key priorities for the future of the European industrial sector, says the European Commission in a paper released today. However, current policies are inadequate to achieve a low-carbon future: industry’s greenhouse gas emissions have barely reduced in the last five years and this trend is projected to continue without further action. Carbon Market Watch outlines below how to bring industry’s low-carbon transition back on track.

In the renewed EU Industrial Policy Strategy, the Commission lays out its vision for the manufacturing sector’s future in Europe. The future is expected to lie in next generation connectivity, autonomous vehicles, and the Internet of Things. This will require empowerment and upskilling of workers so that they can thrive in the low-carbon and digital era – one of the priorities of the Commission.

While digitisation and connectivity offer great potential for energy efficiency improvements, the transition towards a low-carbon industry requires more than tech genius and investment in batteries.

©Flickr_Paulo GuedesEmissions trading alone will not de-carbonise heavy industry

The EU Emissions Trading System (EU ETS) is currently Europe’s only tool to de-carbonise the manufacturing sector, but it has so far failed at its task. Industrial emissions fell by just 0.2% in 2016 and they have been cut by only 1% since 2012. Projections show that this trend will continue as emissions from the manufacturing sector are not expected to decline up to 2030.

The main reason for the failure of the EU ETS to decarbonise industry is the lack of incentives due to the low carbon price and the over generous allocation of free emission allowances. The carbon market is plagued by a chronic oversupply which has led to a price so low that it doesn’t incentivise a shift towards more climate friendly practices. Over generous allocation of free pollution permits has brought windfall profits to some of the biggest polluters, rather than push them towards a low-emissions business model.

The final talks between the European Parliament and the EU Member States are currently underway on how to reform the EU ETS for the 2021-2030 period. Major improvements are still needed  to correct its flaws, including limiting the number of free emission allowances and removing and permanently cancelling surplus allowances from the market.

But even with these improvements, it could take Europe up to 400 years to bring industry’s emissions down to zero, based on the current trajectories.

Additional policies and financial instruments beyond the EU ETS are hence required to bring Europe’s industry to the forefront of the global low-carbon transition to guarantee its long-term competitiveness.

Europe needs an industrial de-carbonisation strategy

A study last year found that heavy industry can reduce its emissions by over 80% and still remain competitive, but that the current EU policy framework is insufficient to achieve this.

Most energy intensive industries face major challenges regardless of the EU’s climate commitments. These include capacity surpluses and increased competition with other regions that have a competitive advantage through better access to raw materials. These challenges can also become an opportunity to focus on climate friendly solutions that come with co-benefits, which would increase the economic performance of these industries and reduce the reliance on imports.

The necessary transformation of energy intensive industries will not take place in the absence of smart and committed public policies. Government assistance will be vital to support industry innovation through reduction of capital costs for low-carbon projects, market creation for new low-carbon products through public procurement and avoidance of regulatory misalignment.

One of the more challenging elements of the industrial low-carbon transformation will be how to bring promising low-carbon technologies to the commercialisation stage. These new process technologies will need to be market-ready by 2030 to allow for deployment across the EU by 2050. They will be capital intensive, but also, due to their pioneering nature, risk intensive. The proposed Innovation Fund under the EU ETS for the post-2020 period can become an important tool to enable a timely commercialisation of these innovations.

Europe can lead the way to a sustainable and strong industry sector that does its share to reach the global climate goals under the Paris Agreement. Today’s strategy, therefore, needs to be followed by a Low-Carbon Industrial Strategy that provides strategic orientation on how to scale up the demand for low-carbon products, remove the market barriers of low-carbon industrial innovators, increase financial resources for innovation and introduce regulatory approaches to advance the low-carbon transition of the steel, cement and chemical sectors.

Gilles Dufrasne and Femke de Jong

See also: The climate friendly transition of Europe’s energy intensive industries