European manufacturing sector needs an urgent transformation in order to dramatically reduce its emissions and do its part to fight climate change. How can we guarantee a prosperous, climate-friendly European industrial base that provides jobs and brings societal benefits?

This week is EU Industry Week, with the future of European manufacturing sector topping the agenda at various events across the EU. The key challenge is how heavy industry can thrive in a climate-safe future and reach net-zero emissions by 2050 – a necessary goal to make the Paris Agreement a reality.

So far, the industry has avoided efforts to transition to carbon-free societies. Industrial emissions in the EU 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.

One of the main problems is that there is only one tool to drive emissions cuts in industrial sectors, the EU Emissions Trading System (EU ETS), which is not doing its job. Instead of incentivising low-carbon transformation by putting a meaningful price on pollution, it has allowed industries to make profits from the system to the tunes of billions.

This poses a problem for innovators who do not see their business models pay off, as pollution is not priced, and low-carbon solutions do not gain a financial advantage over their high-carbon competitors. An example of this is a low-carbon cement producer Ecocem that has developed a cement substitute with potential to reduce the carbon footprint of concrete by over 50%. The company, like many other innovators, struggles to get access to the market dominated by incumbents that are reluctant to change their profitable, and highly polluting, business model.

Support for innovation instead of protecting status quo will pay off

The zero-carbon transition of heavy industry is not only feasible but also beneficial for the companies. By embracing more climate friendly practices they can ensure their long-term competitiveness in a world that is inevitably moving towards a climate-safe future.

However, for sectors such as steel, chemicals, and cement, the low-hanging fruit has already been picked when it comes to reducing emissions. New ways of thinking, from circular economy to a technological shift with break-through solutions are necessary to completely transform the way these sectors work and produce.

The steel industry can use recycled scrap to produce high-quality steel products in electric arc furnaces and shift away from more polluting blast furnaces. In the cement sector, there is still an untapped potential for substituting clinker for low-carbon substitutes, as the example of Ecocem shows. The replacement of fossil fuel-based feedstock with biomass-based alternatives can help achieve deep emission cuts in the chemical sector.

Such a transformation, however, is costly and risk-intense, and will not take place without smart and committed public policies. Governments’ support will be vital to bolster industry innovation: they can reduce the risks and capital costs of low-carbon projects, create markets for new products through public procurement, and they must avoid regulatory misalignment.

The regulatory framework in Europe is currently designed to protect the incumbents and the status quo instead of supporting innovative industry newcomers. This is painfully obvious when looking at the EU ETS: the pollution payouts to the industry in the form of free permits are over 15 times the amount the EU will spend on innovation under the EU ETS reform after 2020. Addressing this imbalance will be crucial to support the industrial decarbonisation, including by looking at alternatives to free allocation such as a carbon border tax as advocated by President Macron.

Last fall, the European Commission launched its renewed EU industrial policy strategy which discussed in length the challenges and opportunities that for example digitisation and connectivity bring to the European industry. What we need now is a Low-Carbon Industrial Strategy, providing strategic orientation on how to scale up the demand for low-carbon products, remove the market barriers of low-carbon industrial innovators, and increase financial resources for innovation.

There is no time to waste: the investment decisions determining where we will be in 2050 will be taken in the next 5-10 years. The urgency is underlined by the climate reality: our carbon budget (the amount of pollution we can still emit) to stay within the Paris Agreement goal to limit global warming to 1.5 degrees is quickly running out.