Your forthcoming report finds that decarbonizing Swedish industry between now and 2045 would need “modest” investments of about 65 billion SEK (roughly 6 billion EUR) in total additional capital. Does this mean that finance is no obstacle to decarbonizing industry?A
Though the question of finance surfaces in any decarbonization discussion, our work shows that finance is not a barrier per se. Capital itself is seldom the key problem. Instead, the real barriers are any matters that create uncertainty for investment decision-making – policies, regulations, and questions about technological developments.
Your research looks at the four industrial sectors that together make up almost one quarter of Sweden’s greenhouse gas emissions: steel, cement, refinery, and petrochemicals. How would you rank these industries in terms of ease of transition, with number one the easiest and number four the hardest to change?A
I would say that steel is the number one sector for ease of transition, largely because of recent rapid progress on low-carbon steel-making options in Sweden and elsewhere.
This is a somewhat ironic choice. Steel has the potential to achieve the easiest transition even though the investments needed are actually quite large. Converting blast furnace-based steel production for low-carbon iron reduction requires substantial investments. But at the same time, the move to produce fossil fuel-free steel using hydrogen adds only a fairly limited cost to every tonne of steel that is produced. The bottom line is that while capital requirements are higher, financial challenges are smaller, and the business case improves. That is, as needed technologies mature, and costs decline, the prospects for a viable business case grow.
Next in line?A
Cement. Compared to steel, the cement sector needs a much lower amount of capital to make the transition. And compared to refineries or petrochemicals, cement has a smaller risk of carbon “leakage” – the potential for production to respond by moving to countries where lax constraints on greenhouse gas emissions mean lower production costs. However, operational costs associated with decarbonizing cement production are very high. While the final price increases for infrastructure and houses would be small, production costs of cement would double. It is not yet clear whether buyers of cement are willing to pay a higher price for low-carbon cement.
In terms of technological developments for the cement industry, only two ways forward appear scalable over the coming decade. One would involve using carbon-capture-and-storage (CCS) technology, which adds costs to current processes. The other would involve using existing materials in a more circular economy, and limiting production of cement from limestone.
Decarbonizing the cement sector, therefore, likely hinges on regulations that would force low-carbon cement production. How could that come about? Big public construction projects for, say, bridges or housing could insist upon using carbon-free cement. Public procurement policies could create new markets for low-carbon cement. The European Union could put in place higher carbon prices. All these measures would help.
“Petrochemicals and refinery are sectors that are trickier to transition not only because of high capital costs, but mainly because there is uncertainty around policies on biofuels and waste.”
That brings us to the sectors that are harder to transition – petrochemicals and refinery.A
Both petrochemicals and refinery industries are capital cost intensive. We estimate 16 billion SEK (1.6 billion EUR) will be needed in the petrochemical industry to add a chemical recycling system, and 12 billion SEK (1.2 billion EUR) for the refinery sector. These are the net investments in addition to investments that would anyhow be made in current technology to 2045. So, the total investments needed will be higher.
But capital costs aside, both these sectors are tricky to transition mainly for a range of other reasons. The most important one is political uncertainty. In Sweden, this revolves around the role of biofuels in transitioning the transport sector. Because biomass would be needed for a full transformation to low-carbon liquid fuels, such a transition would also remove the fossil emissions from current fuel production. But there are very large uncertainties on how biofuel regulation will evolve.
The petrochemical sector is very closely linked to the waste sector. A large share of waste comes from plastics – themselves the product of the petrochemicals industry. So, questions arise about whether burning waste might be further taxed or even banned. The situation creates uncertainties for petrochemical companies. The range of technological options creates other uncertainties. These uncertainties make investment decisions riskier, and financial challenges bigger, and all in all result in the largest financial challenges of the four sectors.
What recommendations to Swedish policymakers would emerge from these insights?A
Sweden has already taken good first steps by ramping up for research and development to support pilot projects, such as HYBRIT, which is seeking to replace the coking coal traditionally needed for ore-based steel making, with hydrogen. Continuing to provide – or, better yet, boosting – low-carbon technology support will be important in the context of the COVID-19 economic recovery.
This kind of support has already helped advance low-carbon steel making, and led to tangible, large-scale investment decisions. Further increased support could help scale up pilot and demonstration projects in the other sectors.
It is important to acknowledge, however, that this kind of support is likely not enough to spur the transition of the petrochemicals and refinery sectors. We really have to urge policymakers on national and EU levels to decide on clear pathways for the related waste and transport issues tied to petrochemical and refineries to make a transition.
For refining, that means creating clarity about what the transport transition will look like. Key transport-sector players – including refineries and electric vehicle manufacturers – do not know what the rules of the game will be. This makes it difficult for them to make investment decisions to help their transitions. Furthermore, the Swedish government has yet to decide whether refining of oil for fossil fuels has a future in Sweden. The government will have to make a very crucial decision in that regard now that a court ruling allows for expansion plans of the Preem Lysekil refinery. If this goes forward, CO2 emissions will increase by 1 million tonnes per year, and the plant will become Sweden’s largest polluter.
In the case of petrochemicals, waste regulations in Sweden and throughout Europe need to ramp up ambition. Currently, Sweden incinerates a lot of imported waste, and a majority of the plastics produced in Sweden are exported. These are very large and highly connected systems of production and end-of-life treatments that depend to a great degree on Swedish policy and common EU directives on waste treatment. Any strategy to achieve competitive, low-carbon plastics depends on either a higher carbon price or a firmer policy on waste treatment and material recycling.
“Research in other countries may want to look at other sectors. But for the steel, cement, petrochemical and refinery sectors we looked at, the same insights we had for Sweden would largely apply in other countries as well.”
Your research examines financing decarbonization of industry in Sweden. How might the research and insights differ elsewhere?A
Similar research in other countries might want to look at other industrial sectors. We focused on the steel, cement, refinery and petrochemicals because they make up almost a quarter of Sweden’s CO2 emissions. Other countries might want to look at other high emitters, such industries including ammonia, aluminium or other base metals.
That said, for the sectors we analysed, our insights should largely be universal for operations in other countries, largely because the companies involved are global players that operate in global markets.
Slight differences would come in with regard to electricity systems and prices, the feasibility of green hydrogen, or CCS infrastructure. All that would vary considerably in different countries, and would require country- specific assessments.
Then again, lower costs of solar and wind drive down the price of low carbon electricity globally. Sweden is in a good position for industrial transformation in part because of low electricity prices and almost no emissions from electricity generation. But Sweden’s electricity price is not uniquely low. With regard to hydrogen – that’s also a global market, and capital costs for electrolysis would be about the same for all countries.
One might think that, as a small country with only a few companies emitting high shares of greenhouse gases, Sweden would be different from, say, Germany and other larger countries that have more industry players. But this is not necessarily the case. The companies that dominate Swedish industry are generally multinationals – for instance, the German multinational company HeidelbergCement dominates the Swedish cement sector. The same holds true for other countries. A few multinationals often dominate the market.
What are broad ideas for countries seeking to support inustry transitions? What ideas emerge from your report?
In general, we are calling for countries to develop a concerted effort to establish green industrial policies with a long-term vision about how to transform carbon-intensive sectors. With the transition of electricity sectors now set into motion, industrial decarbonization is growing in importance for reaching the overall goal of net carbon neutrality. It turns out that some industrial transitions, such as low-carbon steel, are much more plausible than previously thought. More support to remove financial challenges and their underlying barriers will likely spur further innovation.
The report, “Financing the decarbonization of hard to abate sectors in Sweden”, by Björn Nykvist, Aaron Maltais and Olle Olsson will be published in September 2020.