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Sweden has committed in law to reaching net-zero greenhouse gas emissions by 2045, and overall it is well positioned to achieve its targets. The most pressing challenge that remains is to achieve drastic cuts in emissions in heavy industry, because sectors like steel, cement, oil refining and petrochemicals make up one third of Sweden’s GHG emissions.

A new report by researchers from SEI, which hosts the Stockholm Sustainable Finance Centre, shows that it will not be especially demanding to meet the investment needs for decarbonizing heavy industry in Sweden: around SEK 66 billion of investments additional to those needed to maintain current production levels, using existing technologies, would be required. Capital needs to decarbonize industry through to 2045 are thus a little more than one-tenth of the planned transport infrastructure effort over the coming decade.

Additional sectoral investment costs in the period 2020–2045 for achieving net-zero emissions and annual CO2 reduction potential, by sector. Source: Financing the Decarbonisation of Heavy Industry Sectors in Sweden

If the state were to cover half of the upfront investments identified in the report, as part of stimulus packages following the COVID-19 crises, the level of capital required would be a fraction of what has been and will be invested in, for example, other types of infrastructure. Prior to the pandemic, Sweden planned to spend more than SEK 622 billion on transport infrastructure between 2018 and 2029, or about SEK 60 billion per year.

Big differences in production costs in different sectors

The report shows large differences in how much the production costs increase in each sector as a result of net-zero transition.

Increased production costs must be covered by either higher prices (which would mean that consumers would need to pay a higher price for reduced emissions), or new policy measures that would cover the additional costs, or by increasing the price of emissions.

Increases in production costs above typical costs in Europe for achieving a net-zero transition for different sectors, in terms of operating expenses (OPEX) and capital expenditures (CAPEX). Source: Financing the Decarbonisation of Heavy Industry Sectors in Sweden

The scale of the financing challenge for a particular industry largely depends on whether it has to use an end-of-pipe solution in the form of carbon capture and storage (CCS), as is the case for the cement industry, or whether it can implement changes to the production process itself, as in the case of hydrogen direct reduction in the steel industry.

While CCS tends to increase operational costs, changes to production processes require more capital investment. For example, reducing carbon dioxide levels in the cement industry requires relatively small investments but can double production costs, while the steel industry would have very large investment needs but a more moderate increase in costs.

Policy and regulation are the main challenges for successful transition

That said, the real barriers to decarbonizing heavy industry are not financial; they are linked to policies, regulations and technological development. From a business perspective, uncertainty about long-term policies make investments in transitioning very risky.

The sectors that may have the most difficulty in transitioning to net-zero are petrochemicals and oil refining. While investment needs are high in these sectors (SEK 12 billion and SEK 16 billion, respectively), the main challenges they face are to do with regulations and policies. Will taxes on incineration of plastic waste be increased or will there be bans or limits on the amount of fossil-based waste that can be burned? And there is uncertainty over how policies and technological progress will affect the role of biofuels versus electrification in decarbonizing the transport sector.

In addition, the estimate in the report of total capital needs also includes investment in negative emissions technology, in the form of bioenergy with carbon capture and storage – i.e. bio-CCS or bio-energy with carbon capture and storage (BECCS) – which is included in the report to cover residual emissions from the entire Swedish industrial sector. Negative emissions are achieved through deployment of CCS at large biogenic point sources in the pulp and paper sector. Deployment of bio-CCS would also require new policy incentives to cover operational costs for capturing, transporting and storing this biogenic CO2.

Recommendations to Swedish policymakers to achieve net-zero industrial transitions

The differences between sectors highlighted in the report indicate that policies on industrial decarbonization must be tailored to each sector. Clear and long-term policy frameworks reduce uncertainties and allow actors to better see what investments will be economically viable. While financial support from the Swedish Government would put Sweden on track, it would not on its own make net-zero transitions happen.

The government currently makes SEK 600 million available each year for investment in decarbonizing industry, a figure that will increase to SEK 750 million from 2021. As a rough initial estimate, we suggest that doubling or tripling direct public support from current levels over the coming decade would be enough to meaningfully accelerate larger-scale efforts and put Swedish heavy industry on track to meet climate targets.

However, there is a need for policymakers in Sweden and the EU to complement public investment with policies targeted towards those sectors that might find it more difficult to transition. Clear routes for tackling the waste and transport issues tied to petrochemicals and oil refineries is one example. On a more general level there is also a need for policies that somehow generate revenue to cover the additional expense of adding carbon capture and storage (CCS). Policies such as banning fossil-based raw materials, or the incineration of plastic made from these materials, would provide clear incentives for industries to make changes to manufacturing processes.

Research insights in an international context

The report focuses on the steel, cement, oil refining and petrochemicals sectors because, combined, they produce almost a quarter of Sweden’s CO2 emissions. Other countries might choose to look at different high-emission sectors, such as aluminium and other base metals, or ammonia.

The insights in the report could be considered universal for operations in other countries, largely because the companies involved are global players that operate in global markets. However, there would be differences in terms of electricity systems and prices, the feasibility of green hydrogen, or CCS infrastructure, all of which would vary considerably in different countries and would require country-specific assessments.

Investment needs to make Swedish heavy industry net-zero

From the analysis in the report, we estimate that around SEK 66 billion of net investments, additional to those needed to maintain current production levels, using existing technologies, are needed to make industry net-zero.

SEK 50 billion SEK (approximately €5 billion ) of additional capital would need to be invested from 2020 to 2045 to transform the four largest emission sources in Sweden, which represent around 12 million tonnes of CO2 per year – 70% of industrial emissions.

  • SEK 21 billion for the transition of primary steel production to a process based on hydrogen direct reduction (H-DR)
  • SEK 2 billion for adding CO2 capture (CCS) to cement production
  • SEK 16 billion for converting crackers in the petrochemicals sectors to using recycled plastics as feedstock
  • SEK 12 billion for conversion to electrolysis production of hydrogen and adding CO2 capture to oil refinery operations

The remaining 30% of CO2 emissions stem from many relatively small emission sources but still amount to 5 million tonnes CO2 per year. Research suggests that the cost effective decarbonization option is to use negative emissions through deployment of CCS at large biogenic point sources in the pulp and paper sector, which would require approximately SEK 15 billion in investments.

Source: Financing the Decarbonisation of Heavy Industry Sectors in Sweden