Complementing recovery funding with a set of policies that ensure a robust business case for green investments can kick-start the transition of EU heavy industry to climate neutrality
Basic materials, like steel, cement, chemicals, and aluminum, are central to our economies, as they form the basis for the majority of other industrial processes and products. Yet, their production is responsible for 16 percent of EU emissions.
Thus, achieving climate neutrality by 2050, as envisaged by the EU Green Deal, requires that substantial emissions reduction comes from the basic materials sector. This can be achieved with a shift from conventional production processes to innovative climate-friendly ones (e.g. based on green hydrogen) combined with a reduction of demand for primary production e.g. through enhanced material efficiency and recycling. However, existing investments in these options are very limited (Bataille et al. 2018).
Chiappinelli et al. (2021) investigate whether, and to what extent, recovery plans launched by the European Union and its member states in response to the economic crisis caused by the COVID-19 pandemic offers a window of opportunity to kick start the transition of the EU materials sector, setting it on track to achieve the climate targets.
Based on interviews with industrial stakeholders and a techno-economic literature review, the paper identifies a number of technology options for climate-friendly basic material production, sorting, and recycling that are “shovel-ready;” i.e., in advanced development stage and, thus, could be implemented within the COVID-19 recovery period. It is estimated that, with an investment of about 30 billion Euro, up to 20% of EU basic materials production could be switched to these climate-friendly alternatives by 2025. Supporting these investments could not only kick-start the decarbonization of the sector, but also trigger an economic multiplier effect, thereby contributing to recovery objectives.
Nevertheless, the paper finds that there is currently no business case for such climate-friendly options. Besides elevated investment costs, the main barriers are linked to highly uncertain operational costs, demand uncertainty, and dependency on yet-to-be developed infrastructure, e.g., for hydrogen.
Thus, recovery funding by itself will be insufficient to trigger these investments: it should be complemented by a set of policies that address these barriers and that ensure a robust business case extending beyond the recovery period. Such policies could include revising the EU Emission Trading System by integrating a Climate Contribution to enhance the effectiveness of the carbon pricing mechanism, integrating project-based Carbon Contracts for Differences to hedge against carbon price uncertainty, provide auctions for publicly backed Contracts for Difference to guarantee price-stability of low-emission electricity, as well as implementing Green Public Procurement and public-private partnerships to provide strategic infrastructure while creating demand for climate-friendly materials.
Olga Chiapinelli (DIW)
This text is jointly published by BSE Insights and BCCP.
Link to BCCP News Version of this Insight
References
Bataille, C., Åhman, M., Neuhoff, K., Nilsson, L. J., Fischedick, M., Lechtenböhmer, S., Solano-Rodriquez, B., Denis-Ryan, A., Stiebert, S., Waisman, H., Sartor, O., & Rahbar, S. (2018), “A review of technology and policy deep decarbonization pathway options for making energy-intensive industry production consistent with the Paris Agreement”, Journal of Cleaner Production, 187, 960–973. https://doi.org/10.1016/j.jclepro.2018.03.107
Chiappinelli, O., Gerres, T., Neuhoff, K., Lettow, F., de Coninck, H., Felsmann, B., Joltreau, E., Khandekar, G., Linares, P., Richstein, J., Śniegocki, A., Stede, J., Wyns, T., Zandt, C. and Zetterberg, L. (2021), "A Green COVID-19 Recovery of the EU Basic Materials Sector: Identifying Potentials, Barriers and Policy Solutions", Climate Policy, forthcoming Special Issue: COVID-19 recovery. DOI: 10.1080/14693062.2021.1922340
