OP-ED | Industry: how to plan investments for the ecological transition?
The industrial sector currently accounts for around 20% of French greenhouse gas (GHG) emissions. Progress in emissions reductions has been very limited since 2010, despite ambitious national targets and a strengthening of public action in recent years. As the government began advocating for ‘ecological planning’, Erwann Kerrand and Hadrien Hainaut from the Institute for Climate Economics outlined the conditions for this initiative to achieve decarbonisation of the industrial sector, notably by clarifying investment needs.
The industrial sector needs to decarbonise much faster
Although the French industry emits less than neighbouring countries due to its low-carbon electricity, it still emits too much compared to national targets. The rate of decarbonisation of the French industrial sector in recent years is too low to meet the 2030 climate targets. Between 2013 and 2019, industry reduced its emissions by 1.8 % per year, however, to reach the 2030 target set by the National Low Carbon Strategy (SNBC), emissions would need to drop by 4.4 % per year. In addition, this does not take into account the increase in the overall EU target from −40% to −55% of GHGs by 2030, which will lead to a revision of the target for the industrial sector. Meeting these objectives therefore requires a fundamental rethink of the way in which public authorities conduct and support this transition.
The government has launched several initiatives to support the decarbonisation of French industry
In recent years, public action in favour of decarbonising industry has not remained static. Several consultation initiatives at the subsector level have made the potential decarbonisation pathways clearer, and there has been increased public financial support for the transition.
Several initiatives at the subsector level are aimed at developing decarbonisation trajectories.
Article 301 of the Climate and Resilience Act, which was approved last year, proposes to mobilise the Strategic Sector Committees. These committees already bring together manufacturers and the State around ‘sector contracts’, but this time they will draw up ‘decarbonisation roadmaps’. Some roadmaps have already been published (e.g. for the paper & cardboard or the mining & metallurgy sectors), while the others are expected by the end of the year. In addition to this, the Agency for Ecological Transition (ADEME) is developing sectoral transition plans that propose in-depth scenarios for energy-intensive industries by 2050.
There are now several well identified avenues to decarbonise industrial processes.
These include the use of biomass, carbon capture and sequestration, or electrification and the use of hydrogen. A trend towards the last option even seems evident in several decisions. For example, in France, ArcelorMittal made the recent decision to invest in electric furnaces for its two steel plants. The development of new nuclear production capacities desired by the President of the Republic also seems to be part of this trend.
Electrification and the use of hydrogen can also be seen at the European Union level: the REPowerEU plan, presented last May by the European Commission, has a dedicated section aimed at strengthening the production of renewable electricity and the internal production of renewable hydrogen.
New public funding has been made available since the Covid-19 crisis
Until recently, the main public policies to support the decarbonisation of industry were largely based on the European Carbon Emissions Trading Scheme (ETS), the Fonds Chaleur and ADEME grants for energy efficiency studies. Several new funding envelopes have been made available in the last two years: the Hydrogen Plan, France Relance and France 2030 therefore provide support of approximately 20 billion euros over the period 2020-2030. However, it remains difficult to know whether these actions will allow the decarbonisation of industry to be accelerated sufficiently to meet the climate objectives.
Ecological planning can help trigger investments
Recent progress in public action is not producing sufficient results to reduce emissions, and candidate Emmanuel Macron has proposed to strengthen the action of the State with an ‘ecological planning’ project, described as “a programming of investments with objectives on a territory-by-territory basis, economic sector by economic sector, industry by industry”. This project gives the State a key role in steering industrial investments. This may sound promising, but how can we be sure that this time, public action will be more effective in comparison with recent initiatives?
Successful ecological planning will set the medium and long-term course and it will provide the visibility that is essential to convince industry to invest.
While they need to make long-term investments now, they are hampered by a lack of clear prospects, especially for market opportunities. The role of the new Prime Minister will be to steer this transition path at national level and in a coordinated manner with our European partners, as industry remains one of the economic sectors where the internal market has created the most interdependence.
One of the main challenges of this planning is to characterise the investments required for decarbonisation.
When it comes to choosing between various technological solutions, major trends are emerging. However, when it comes to the production level that an industry is expected to deliver, there is still major uncertainty.
The cement industry transition plan developed by ADEME in France clearly illustrates how the question of volumes significantly influences the range of investment needed to achieve the national targets with two distinct scenarios.
The so called ‘techno-push’ scenario, with the assumption of a moderate drop in demand for cement and a significant use of carbon capture and sequestration, implies an investment requirement of around 8 billion euros.
Alternatively, the so called ‘low-tech sobriety’ scenario, which is based on a significant reduction in industrial production in a society that is more sober in terms of cement, would only require some 240 million euros of investment. For firms, the differences between these two scenarios may lead to inaction: how can industrials take the risk of investing massively in a productive capacity that can end up underused?
Clarification of investment needs is a prerequisite for an effective decarbonisation.
Only once we know exactly what investments are required and how much we need to invest,
can the State calibrate the various tools needed to trigger them, monitor them and correct the course if necessary. With this in mind, the Institute for Climate Economics is working to analyse investment need estimates at the subsector level. Our objective is to understand their coherence, to highlight recent progress and to provide a rough estimate of investment needs for the industrial sector. Once these investment needs have been estimated, the government should be able to put in place public policies that will translate the major industrial orientations into concrete measures and provide a strong signal to trigger the investments necessary for the industry’s transition.