We Need Immediate Policy Intervention to Begin Decarbonizing the Industrial Sector

As the COP28 Climate Summit got underway in Dubai last week, the independent Rhodium Group issued a sobering report on the climate outlook for the remainder of the century.  Unsurprisingly, the authors project that the world remains on track to exceed the Paris Agreement goal of limiting global temperature rise to 2 degrees Celsius above pre-industrial levels before 2100.  The slightly good news is that we have made some progress on decarbonizing the electricity generation and transportation sectors, although that positive momentum may plateau by mid-century.

But the bad news overshadows any modest recent progress.  Most troubling, the report predicts that greenhouse gas (GHG) emissions from the industrial sector – including from the production of iron, steel, cement, oil and gas, and chemicals – will likely continue to rise over the next decades and soon become our single greatest unmet climate mitigation challenge.  Indeed, the Rhodium Group’s probabilistic modeling predicts that by 2050, GHG emissions from the industrial sector will exceed all emissions from the power, transportation, and building sectors combined.  Because policymakers have not even begun to meaningfully address industrial GHG emissions, that’s truly distressing news.

Why do we find ourselves here?  In significant part, policymakers have focused on the electric power generation and transportation sectors because they are more susceptible to homogenous solutions.  Case in point:  Innovators develop photovoltaic cells and government actors then adopt incremental policies to incentivize the switch from coal and natural gas generation to solar.  California, for instance, enacted an upward inclining Renewable Portfolio Standard requirement for investor-owned utilities, a net-metering program that financially encouraged solar investment by individual electricity consumers, and a cap-and-trade regime intended to tax emissions from traditional fossil fuel power plants.  Collectively, these policies incentivized the rapid growth of utility-scale and rooftop solar and propelled a three-fold increase in the percentage of power generation from renewables over a period of less than 15 years.  Indeed, on a mild, sunny afternoon in the spring of 2022, California briefly, and for the first time, produced enough power from renewable energy sources to meet more than 100 percent of its instantaneous demand.

Likewise, Tesla’s technological success in bringing desirable electric vehicles to market has interacted positively with California’s increasingly ambitious efforts to decarbonize the mobile source fleet.  As Tesla made electric vehicles more attractive and more available to consumers over the last decade, the state was emboldened to expand its clean car program.  Today, over a quarter of new passenger car sales in California are electric vehicles, and the state has even grander plans as many other manufacturers jump into the market:  In 2020, Governor Newsom announced the goal of reaching 100 percent zero-emission vehicle sales by 2035.  Like solar cells, electric vehicle technology has become increasingly cost-effective as its adoption has become more widespread.  In both cases, California focused on a particular solution and enacted policies to incentivize adoption.

That is not to say that we have eliminated all of the obstacles to decarbonizing the power and transportation sectors.  To the contrary.  In the electricity sector, we need to solve the intermittency problems associated with renewables like solar and wind and the current bottlenecks on access to the electricity transmission grid.  But government policies encouraging long-duration storage and attempts to streamline the interconnection queue are already underway.  In the transportation sector, we will continued to be dogged by technological challenges to decarbonizing planes, trains, and ships, yet even there, some progress is on the horizon.  We are a long way from done, but government intervention has allowed us to overcome some of the critical early barriers.

Decarbonizing the industrial sector will likely prove much more challenging, in part due to its heterogeneity and in part due to the much higher heat demands of many industrial processes.  What it takes to significantly reduce GHG emissions from iron and steel manufacturing is different than what it takes to significantly reduce emissions from the production of cement or plastics or ammonia fertilizer, for example.  A single technology innovation will not get us where we need to go.  And the high temperature heat requirements for many manufacturing processes make electrification very challenging.  So-called green hydrogen and carbon capture and sequestration may well be pieces of the larger puzzle, but the science for these solutions is still in its infancy and perfecting those technologies at competitive costs will take significant time.  Thus, we cannot expect that a “one size fits all” government policy will move us very far down the road.

That reality is extremely worrisome.  Not only is the demand for hard-to-electrify industrial products likely to accelerate as the Global South continues to develop, but inputs from heavy industries like steel and cement manufacturing will be critical to deploying renewable technologies like solar cells and wind turbines at scale.  Since the turn of the century, the global demand for steel and cement has more than doubled and the production of plastics has increased by 90 percent.  Along with electrifying some parts of the production process, increasing energy efficiency across these industries, and reducing methane emissions from the oil and gas production sector (as the Environmental Protection Agency hopes to do with its new methane rule announced this week), we still need to move expeditiously to commercialize greener production process solutions for steel, cement, and plastics.

History has taught us that in a fragmented market scenario, we are not likely to experience rapid development and deployment of technological innovation without policy incentives that reduce uncertainty.  One approach is for the government to set performance standards and implementation deadlines.  If consequences for non-compliance are credible and sufficiently large, such command-and-control regulations can drive innovation and market adoption.  But where there are numerous touch points affecting emissions from any particular process or where some aspects of the solution are still at a nascent stage, additional policy drivers will be necessary.

Take, for example, Portland cement, which is produced by baking limestone at very high temperatures.  The process typically burns coal (or natural gas) to fuel a kiln, and the baking process then unbinds carbon dioxide from the limestone, releasing it to the air.  Thus, the standard cement production process produces atmospheric carbon in two ways – by burning fossil fuel to run the extremely hot kiln and through the thermal reaction that separates calcium oxide (the so-called “clinker” that is then mixed with silicates to form cement) from carbon dioxide contained in the limestone, which is then vented.  Alternative industrial heating in the form of green hydrogen or the capture and sequestration of carbon dioxide from the kiln might be employed to “green” the baking process, while the use of clinker substitutes could theoretically decarbonize the backend of cement production.

But without more certainty, individual cement manufacturers may be reluctant to take the necessary steps toward decarbonization.  In addition to concern about the cost competitiveness of green(er) cement in an undifferentiated commodity marketplace, producers are likely wary about their ability to satisfy stringent regulatory standards for product strength, hardness, elasticity, and workability.  Government policies targeted at the cement industry can help reduce these uncertainties in a variety of ways.  They can, for instance, establish energy efficiency performance standards based on best available technologies to drive fuel and material switching.

California’s experience with setting climate-oriented standards and deadlines provides a cautionary note, however.  Some, like the Renewable Portfolio Standard, have worked quite well.  Others, like the controversial cap-and-trade program, have not been nearly as successful.  Interestingly, the former is a regulatory mandate imposed on a small set of utilities where the state has a credible enforcement threat for non-compliance – i.e., constraining a regulated utility’s ability to recover the costs of electricity generation from its ratepayers.  The latter relies on a market-based approach, where the state has failed to convince buyers that it will enact draconian consequences, where alternative compliance mechanisms (in the form of carbon offsets) are often of questionable value, and where out-of-state carbon leakage through resource shuffling has been an issue.

These lessons suggest that policymakers need to go the extra mile in designing and implementing policies that can effectively drive down GHG emissions from challenging heavy industries like steel, cement, plastics, and fertilizer production.  With the world’s fifth largest economy, California is well-positioned, once again, to assume a leadership role.  In the cement manufacturing space, for instance, the state could work with producers to develop new material standards that satisfy performance and reliability concerns and also commit to a public procurement program that provides future market certainty for greener products.  Green product certification requirements and legally sustainable border adjustment mechanisms to ensure the integrity of the state policy may be necessary components of any such policy intervention.  As the rapid expansion of the electric vehicle market shows, a combination of policy incentives by a large state like California can directly affect manufacturer decisions and encourage similar policy efforts elsewhere.

The Rhodium Group’s modeling warns us that, without aggressive policy intervention in the developed market economies of the U.S. and Europe, we will not be able to decarbonize the expanding industrial sector this century.  Quite the opposite; we risk entrenching old carbon-intensive technologies for many decades to come.  While technological solutions are slowly emerging across the industrial sector, innovation alone will not get us to scale.  We need bold public policies that nudge new solutions from the lab bench into the real world.  In some key infrastructure-related markets, like those for steel and cement, public procurement commitments could advance the ball considerably.  In others, like chemicals or fossil fuel production, a different mix of thoughtful strategies will be necessary.

To be sure, designing policy interventions that address GHG emissions from a variety of different heavy industries will require hard work and firm resolution in the face of initial industry resistance or consumer cost concerns.  But we need to get started.  Quite literally, the future of life on Earth may depend on it.

Deborah A. Sivas is the Luke W. Cole Professor of Law at Stanford Law School and directs the Environmental and Natural Resources Law and Policy Program and the Environmental Law Clinic.