Decarbonizing without De-industrializing: Placing Equality at the Heart of Climate Action
With Mike Bloomberg serving as UN Special Envoy on Climate Ambition and Solutions, Bloomberg New Economy and our entire global organization are committed to accelerating the path to net zero. Our Bloomberg New Economy Climate Council, formally launched in April 2021, builds on this institutional priority by convening invitation-only working groups that serve as a year-round braintrust, fostering knowledge- and ideas-exchange, producing actionable insights and recommendations for business and government, and identifying emerging climate issues that shape our annual forum agenda.
The pandemic has unraveled the deep inequities that separate the world’s richest and poorest economies. While the G7 discuss plans for a Build Back Better World (B3W) with the pandemic in the rearview mirror, the emerging world is initiating new lockdowns; while they revive their economies with trillion-dollar proposals to invest in green infrastructure, they’ve fallen short of their promise to raise $100 billion in climate financing for developing countries; and while they’re missing milestones necessary to meet their own 2050 net-zero targets, they’re asking the rest of the world to boost climate ambitions. No doubt a global crisis requires a global effort, but lower-middle-income countries must have an equal opportunity to reach higher-income status, and increasing emissions is an inherent part of that process, as the Paris Agreement clearly recognizes among its principles of equity and common but differentiated responsibility (CBDR). The task at hand is, then: how to decouple economic growth from carbon emissions. And the answer starts with greening the industrial sector.
As G20 environment and climate ministers gather in Naples, Italy on July 22–23, we make the case for pursuing pathways to decarbonization that take into account the income gap, one of the key themes that emerged from the first convening of the New Economy Climate Council in April 2021. In particular, the Climate Council stresses the need to make a concerted effort to 1) help developing countries finance net-zero commitments and 2) design demand mechanisms for green products.
A one-two step to decarbonizing industry
1. Help developing countries finance net-zero commitments
“How do you balance ambition with reality and not penalize those in poverty?” said one of our Council members, noting how large swaths of the population in developing countries still lack access to energy. Decarbonization in these parts of the world that are still undergoing the necessary process of industrialization is a double-edged sword, requiring huge upfront costs for long-term returns, a massive undertaking from the very sectors driving local economic development and global growth overall.
As the power sector switches to renewable energy over the coming decades, the industrial sector is set to account for a growing share of carbon emissions and is on track to be the primary emitter by 2040 (taking into account emissions from chemical processes).
Industrial emissions will overtake the power sector before 2040.
(Source: BloombergNEF New Energy Outlook 2020)
Decoupling economic growth and carbon emissions is as old a concept as climate change itself. But the roadmap to achieving it is finally coming into focus as industry titans begin to take seriously their role in the climate change puzzle—and as society and government begin to hold them to account.
“Managing the transition in a socio-political environment is not going to be easy. That’s where funding support from G7 countries becomes fundamental,” said Tata Steel CEO and New Economy Climate Council member T V Narendran as a panelist in the virtual BloombergNEF event Confronting the next frontier in the race to net zero: Industrial decarbonization on June 15.
The balancing of political, economic, and technology risk is the tightrope to net-zero. Business executives and politicians alike are rightfully concerned about the impact the green transition will have on some of the largest employers in emerging economies. But understanding, developing, and implementing the technology needed to retrofit these industries also necessitates vast amounts of human capital and thus creates new jobs.
Financial capital, likewise, will be invaluable in speeding up that transition and making it as painless as possible, though it cannot be the singular focus. Without a clear path for rolling out the necessary technology, much of which already exists, throwing money at the problem will only fuel inflation concerns—real or imagined. On the contrary, one of the most surefire methods for reducing inflation is maximizing the productivity of available resources with investments in the right technologies.
2. Design demand mechanisms for green products
Unlike other economic sectors, replacing fossil fuels with renewable energy sources to meet the electricity needs of industry only solves part of the problem. A much greater proportion of industry emissions come from high-heat chemical processes, particularly in cement and steel, that are harder to decarbonize. Hydrogen has emerged as the principal alternative to coal for delivering 800+ degree Celsius temperatures, but the technology so far lacks the scale to drive the necessary cost reductions. Battery storage will also be key for meeting peak load demand while carbon capture and storage (CCS) can help offset emissions.
Nonetheless, all pathways to net-zero rely on a switch to renewable energy to fulfill electricity needs, and these proven technologies can already be used to flat-line — if not immediately reduce — the carbon intensity of all sectors of the economy.
Policy is likely the bridge between technology supply and market demand. Mechanisms to simultaneously reduce the cost of new technology and increase the demand for green products are central to this. Whilst much attention has been paid to higher carbon prices and carbon border adjustment mechanisms (CBAMs) for addressing carbon leakage and motivating companies to innovate, striking the right balance between incentives and penalties is complicated. Unilateral moves on a CBAM, for instance, may alienate rather than inspire emerging economies, such as India, to join the effort. “It will be very difficult [for the EU] to move forward with Carbon Border Adjustment policy in a consensus manner,” said one business executive on the Council. Though the percentage of trade a unilateral EU CBAM would cover is likely to be small, geopolitical tensions could be such that “the impact on global trade is enormous.”
To meet growing export opportunities as well as domestic demand, emerging economies are expected to ramp up production of cement, aluminum, and steel.
(Source: BloombergNEF New Energy Outlook 2020)
By 2030, China’s share of cement, aluminum, and steel production will either plateau or taper off at approximately a third of global output. Production from India will grow in all three sub-industries, as will South East Asia’s production of cement and steel. Unless manufacturers make strides now to reduce the emissions intensity of their production processes, the bind between further industrialization and more carbon emissions becomes increasingly locked in.
De-industrializing, on the other hand, is not an alternative these economies can afford, especially in the wake of a pandemic. Despite China’s announcement that it will reach net-zero by 2060, “to hedge against uncertainty, many local regions unfortunately tried to relax environmental controls, which resulted in a rather big rebound of our carbon emissions,” related Climate Council member and Founding Director for the Institute of Public and Environmental Affairs Ma Jun during the Bloomberg New Economy Catalyst event on June 30. “Now the challenge is how to bring this national ambition down to where those more than 10 billion tons of carbon are actually emitted.”
The moral imperative is also an economic one
In sum, if emerging economies rely on industry to develop, and the global economy in turn counts on these countries to drive growth, decarbonizing that industrial development is a moral imperative for a world uniting on climate action. That said, “There is not one single bullet,” Narendran noted on June 15. “Each country has to decide what is the solution it wants to support.” A multifaceted, and at times multilateral, approach is then our best bet for fighting climate change without exacerbating poverty, beginning with helping developing countries finance the green transition and incentivizing the right market forces to speed up the decarbonization of much-needed economic development.
Thank you to BloombergNEF, the expert research partner for the New Economy Climate Council. BloombergNEF (BNEF) is a strategic research provider covering global commodity markets and the disruptive technologies driving the transition to a low-carbon economy. Our expert coverage assesses pathways for the power, transport, industry, buildings and agriculture sectors to adapt to the energy transition. We help commodity trading, corporate strategy, finance and policy professionals navigate change and generate opportunities.