Climate change is creating a new generation of green technologies on the one hand and on the other it is shrinking investment in fossil fuels due to fears that these assets will be “stranded” (left without value). Squeezed between these two high-profile trends are resource-intensive heavy industries: cement, steel, aluminum, mining and others. What economic prospects await these big users of energy and materials, with their large carbon footprints, in a carbon-constrained world?
If any country can lead in net-zero pathways for heavy industry, surely it’s Canada. A significant part of Canada’s enviable GDP growth is based on natural resources; and when the need arises, this sector shows plenty of capacity to innovate. The partnership between two leading mining companies, Alcoa and Rio Tinto, and the governments of Canada and Quebec to produce very-low-carbon aluminum for Apple and other carbon-conscious customers is just one example of innovation in Canadian heavy industry.
The federal government has reiterated its goal for Canada to become carbon neutral by 2050. A complex set of carbon emissions performance standards has been put in place for Canadian industries, with incremental toughening of stringency over time. This is good — but a more focused national strategy is needed.
Heavy industries — including construction — account for as much as one-fifth of global greenhouse gas emissions. The good news is that achieving very low-carbon or net-zero-carbon outcomes for heavy industry is technologically feasible. However, the OECD recently warned that heavy industries are facing “investment limbo” due to the lack of clear, coherent transition plans to reach net zero by 2050.
A notable exception is the European Union’s new Green Deal, released in late 2019. Its big goal is for the EU to become carbon-neutral in 30 years. Many of the European Green Deal’s policies will be familiar to Canadians, from carbon pricing, greener mobility and energy efficiency to green infrastructure and extended producer responsibility. The plan also includes a comprehensive strategy to make the EU’s heavy industries net-zero by mid-century. Although reducing carbon emissions from heavy industries can be done, it is by no means easy. The various players differ widely in their technologies and their needs for energy and raw materials. At the same time, they all face the same fundamental challenge: how to create more value while using less material and energy.
Europe’s bet is that circular economy strategies offer the best route to net zero. The circular economy aims to boost both supply-side and demand-side innovation: increasing material efficiency, expanding use of secondary materials as opposed to extraction and processing of primary materials, and finding new ways to favour repair, reuse and recycling over trashing waste goods. This approach is all about closing material and energy loops so the economy does more with less. It is nothing new in many ways, but it stands in stark contrast to the linear model that emerged from the industrial revolution.
Action to bring about a circular economy is moving quickly. The Netherlands plans to reduce its use of primary materials by 50 percent by 2030. Finland’s circular economy strategy has measures targeting forestry, mining and energy as central features. The OECD, the World Business Council for Sustainable Development, the Platform for Accelerating the Circular Economy (PACE), the World Economic Forum and others are showing how steel, cement and other heavy industries can reach net-zero emissions through circular economy actions.
Critically, emerging research and applied practices point less to small, incremental changes and more to the need for bold goals and clear policy linkages. The EU Green Deal includes an ambitious proposal for creating the world’s first carbon-neutral steel producer. A facility operated by the Swedish-Finnish steel manufacturer Hybrit shows promise of getting there in less than 15 years.
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Of course, none of this comes cheaply. Some estimates — for example, by the think tank Materials Economics — suggest reaching net zero for heavy industry will increase production costs by 25 to 60 percent. This is why Europe’s net-zero plan for heavy industry includes three big drivers.
First, money. The EU’s Green Deal Investment Plan — announced this January — commits billions of euros to ensure Europe’s heavy industries become carbon neutral by mid-century. In January, the European Investment Bank announced it is ending all fossil fuel financing by 2021 and investing one trillion euros in the green economy in the coming decade. More and more big private investors, including Goldman Sachs and BlackRock, are moving in the same direction.
Second, trade. The EU’s Green Deal includes border carbon adjustment, a taxation mechanism aimed at protecting EU members’ energy-intensive and trade-exposed sectors from cheaper imports coming from jurisdictions that have no carbon pricing. With this mechanism, imports would be taxed to make their prices equivalent to those of the same goods when produced under the EU’s carbon cap-and-trade regime. Europe’s biggest steel and other manufacturers argue that a WTO-consistent border carbon adjustment is a new way to create a level playing field. With a more detailed plan expected in 2021, stay tuned for an acrimonious trade-versus-climate-action debate.
Third, innovation. The Green Deal draws on work by economists like Mariana Mazzucato that demonstrates that governments have a critical role to play in shaping and driving successful innovation. The University College London professor argues that state actors are critical to fostering entrepreneurism in advanced economies. In 2018, she recommended that the billions spent in Europe on innovation move from incremental steps to bold, mission-oriented goals like achieving net-zero economies — in short, proposing the equivalent of a new Apollo moon shot, but this time to address climate change.
The Alcoa-Rio Tinto-Canada-Quebec partnership proves that Canada has the right stuff when it wants to. Canada has a golden opportunity to showcase a comprehensive, low-carbon, circular economy strategy when it hosts the World Circular Economy Forum in September. Such a strategy needs to focus multiple low-carbon innovation policies through a coherent economic lens, with achievable net-zero outcomes from here to 2050. Since capital investments today will set the economic trajectory for the next 30 years, the time for action to ensure Canada’s heavy industries — and the hundreds of thousands of jobs in them — can thrive in quickly emerging low-carbon markets is now.
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