New report published: Building blocks for a climate-neutral European industrial sector

Policies to create markets for climate-friendly materials to boost EU global competitiveness and jobs

The science is clear: global warming must be limited to 1.5 degrees Celsius to avoid catastrophic impacts. The Paris Agreement recognises the 1.5C-limit as well. The production of basic materials –cement, iron and steel, paper, aluminium, as well as chemicals and petrochemicals – is one of the main contributors to climate change, accounting for approximately 25% of global CO₂ emissions, and around 16% of EU GHG emissions.

The evolution of European industry toward climate neutrality is at the centre of current EU-level policy discussions. It is part of the European Green Deal proposed by incoming European Commission President Ursula von der Leyen, and appears in similar industrial strategy discussions in Member States such as Sweden, Netherlands, Spain, UK, Germany and France. Scenarios from climate scientists, governments and industry consistently show that it is possible: the clean production, efficient use and recycling of basic materials can together contribute to climate neutrality. Meanwhile, companies in the European materials sector are increasingly committed to carbon neutrality by 2050.

However, science, political commitment and even the eagerness of the industry to modernise are not enough to realise European commitments under the Paris Agreement. Nor are innovation funds or a carbon price alone able to transform the materials market with the scale and speed necessary to make a credible business case for climate-friendly options. Today, new, climate friendly production technologies are significantly more expensive than the existing processes. Incentives for efficient material choices and use are lacking. Therefore, industry and investors require and demand an integrated, coherent and comprehensive policy framework to support the creation of markets for climate-friendly materials and discourage greenhouse gas-intensive materials.

 The Climate Friendly Materials Platform suggests to consider the following package to strengthen existing policy and integrate new options:

1. A Climate Contribution as part of the EU Emissions Trading System could be a pragmatic alternative to the Border Tax Adjustments recently proposed by incoming European Commission President von der Leyen, to create incentives for choosing and using climate-friendly materials, facilitating the funding of low-carbon production processes and aligning effective carbon pricing with carbon leakage protection.
2. Project-based Carbon Contracts for Difference (CCfDS) can create lead markets for innovative low-carbon production processes and materials at national and European scale.
3. Contracts for Difference for Renewables (CfDs) will hedge renewable energy investors against regulatory risks such as changes in the power market design and address market failures that limit the role of private long-term contracts for mitigating electricity price risks.
4. Green Public Procurement (GPP) allows local, regional and national authorities to use their spending power when buying infrastructure or buildings to create lead markets for low-carbon practices and design.
5. Product Carbon Requirements can effectively ban products comprising materials produced with carbon-intensive processes from being sold in Europe.

Together these policies will:

• Create markets for the industry to pursue transformative innovation and investments towards climate neutrality production and use of materials. Thus, they accelerate the commercialisation of innovative climate- friendly technologies and create the business case for climate-neutral industrial technologies and processes.
  
  
• Contribute to a just industrial transition by preventing relocation of production and jobs to other regions that may currently implement less stringent climate policies. Thus, they provide a pragmatic alternative to border carbon adjustments currently discussed at EU level.
  
  

The climate-neutral production and use of basic materials will create opportunities for innovation and investment in an industry currently haunted by uncertainties relating to global economic development and trade wars. A smart transition to climate neutrality needs to ensure the long-term competitiveness of the sector, a long-term business case for each industrial sub-sector, and the creation of local jobs, contributing to a social, clean and competitive European economy.

The Climate Friendly Materials (CFM) Platform, which brings together leading researchers and policy advisors in Spain, France, Netherlands, Belgium, Sweden, Germany, Poland and Hungary convened by the research network Climate Strategies, presents a concrete package of policy instruments that creates economic incentives for private actors to pursue transformative investments aligned with Europe’s climate-neutral objectives for 2050 while keeping them in business. The underlying report offers explanation as to why such a package allows heavy industry to shift to climate-friendly materials while European industrial competitiveness in a global market is supported, through stimulation of global emission reductions and prevention of relocation of carbon-intensive production to less stringent regions.

Authors:  Karsten Neuhoff, Olga Chiappinelli, Timo Gerres, Manuel Haussner, Roland Ismer, Nils May, Alice Pirlot, Jörn Richstein