How to unlock the finance needed to decarbonize heavy industries
Heavy industry needs to slash greenhouse gas emissions by 90% by 2050. But there is an annual funding gap of US$26 billion to reach this goal. No single funding source will be sufficient to close this gap, so how do we get there?
Heavy industry accounts for around one-third of global energy use and one-quarter of global emissions. This makes it the next frontier of the energy transition. And with the largest growth in industrial emissions occurring in developing and emerging markets, the financing question will be critical in determining the scale and pace of industrial decarbonization.
At the UN Climate Ambition Summit in New York last week [20 September 2023], a Ministerial/CEO high-level roundtable discussed how to unlock the climate finance needed to decarbonize the heavy-emitting industries of steel, cement and concrete. Part of the session centred on an innovative ‘chain reaction’ that can be brought about by building on the strengths of multilateral institutions in the UN and international finance institutions to address the investment bottlenecks that hamper progress on creating the enabling policy and financial environment needed to achieve financing at scale.
“Together we can accelerate the progress needed in low- and middle-income countries and create a bigger impact at a global scale,” said Gerd Mueller, the Director General of UNIDO, in his opening remarks.
Delivering the session’s keynote speech, HE Majid Al Suwaidi, Director-General of COP28, said: “Science calls for a strong mitigation advance to get us on track in this crucial decade and keep 1.5C within reach. To get there we must prioritize decarbonization of heavy-emitting industries, and we need to do this through robust, cross-sector collaboration that includes businesses, industry, governments, investors and technical providers…Conversations like this are the ones that will help us get there.”
The need for urgency
Technologies exist that make it possible to produce low- and near-zero steel, cement and concrete, such as green hydrogen and carbon capture, while initiatives like the Industrial Deep Decarbonisation Initiative (IDDI) are working to agree global standards to define what low carbon steel, cement and concrete is and create clear demand-signals for these products through the use of green public procurement.
But unless the financing is there, developing and emerging markets will be unable to adopt the scale of technological and systemic change needed at the pace required. This threatens global climate goals and means low and middle-income countries could struggle to compete in an increasingly green global economy. The long lead-in time for the production cycles of steel, cement and concrete means there is an urgent need to secure finance now, or years of avoidable emissions will be locked into developing countries’ industrial processes.
Rodrigo Rollemberg, Secretary for Green Economy, Decarbonization and Bio Industry at the Ministry of Industry, Development and Trade in Brazil – the latest country to join IDDI – said the challenge is to “accelerate the energy transition of the entire planet at the lowest cost while doing so in a fair, inclusive, secure way.”
Creating a chain reaction
The roundtable focused on three new initiatives, all due to launch at COP28, that together can produce the “chain reaction” needed to scale-up the production of low- and near-zero emissions steel, cement and concrete in emerging markets and unlock the billions needed to support industrial transformation.
The first link in the chain is a proposed UNIDO Industrial Decarbonization Technical Facility.
Rana Ghoneim, Chief of UNIDO’s Energy Systems and Industrial Decarbonization Unit, said the facility’s main focus “will be on developing enabling policies – be that the roadmaps that help countries to identify the technology pathways to get towards net zero, or the set of standards that are needed by banks to actually finance those investments.
“It will also focus on getting projects towards feasibility, by moving from a feasibility phase zero, say, to a feasibility phase three, where the work will then continue with our partners.”
The second link in the chain is the Climate Investment Funds’ (CIF) new Industry Decarbonization Programme. This will use concessional resources to catalyse additional investments from the private sector, multilateral development banks and other development finance institutions in decarbonization technologies that work. CIF has used a version of this financing model for the past 15 years in the energy and clean technology sector to great success.
Daniel Morris, Clean Energy Lead at CIF, said: “What we can do in CIF is align our model and use the groundwork done by UNIDO in a really informative and powerful way.
“…This is concessional money that can be used for first-of-its-kind projects. We look at taking things from phase three, to phase four or five in terms of preparedness. That’s where we look to multilateral development banks to help us achieve scale and really liberate the power of international finance and development financing onto these issues.”
Bringing projects to scale
The third link in the chain comes via the International Finance Corporation’s (IFC) Industrial Decarbonization Programme. The IFC is part of the World Bank Group and the largest global development institution to focus exclusively on the private sector.
Femi Akinrebiyo, Manager of Global Manufacturing and Trade Supplier Finance at IFC, described the “three pronged approach” it takes to unlock the different types of large-scale financing needed. Decarbonization technologies that are currently less commercially viable need venture capital, for example, while tried-and-tested technologies that are safer bets for investors are much faster to bring to scale.
He added: “When it comes to cement, for instance, the bulk of the emissions is in the process…[so] the only solution is carbon capture. But carbon capture today requires a lot of money, and it requires a lot of things to be in place in terms of infrastructure.” Bridging this gap, comes back to the existence of an enabling environment which can “support the private sector in mobilizing the financing to do it and to do it in a way that’s commercially viable”.
The need for unity to create market certainty
Anja Hajduk, State Secretary of the Federal Ministry for Economic Affairs and Climate Action in Germany, described the new UNIDO Technical Facility as a “really important instrument” that will “support members of the Climate Club in their efforts to decarbonize”. The 27-member strong Climate Club was established by Germany as part of its G7 Presidency, and includes a matchmaking fund to unlock finance from the private sector to support industrial decarbonization.
Ms Hajduk warned against the “fragmentation of efforts”, echoing the goals of the Breakthrough Agenda, launched in Glasgow at COP26 in 2021, which aims to ensure coordinated efforts among the various industrial decarbonization initiatives.
Andrew Noseworthy, Assistant Deputy Minister, Clean Technologies and Clean Growth Branch at Innovation, Science and Economic Development Canada, said that collaboration between initiatives is key to creating market certainty: “It’s the degree to which the international community can come together to create clarity in terms of standards and expectations of industry going forward, which will be extremely important to ensure this is a meaningful process…”
Matt Toombs, Director of International Climate Strategy and Finance at the Department for Energy Security and Net Zero in the United Kingdom, agreed on the “critical need” to build market certainty. He said: “How can we build the signal to provide that very strong certainty for investors to make those investments in critical sectors? We need to use these vehicles to increase the number of countries and organizations to get the strongest signals possible.”
Thomas Guillot, CEO of the Global Cement and Concrete Association, pointed to the work being done with IDDI to create these demand signals. He said: “This is a very important development to give confidence to the market that things are changing, and that the decarbonized products and the low carbon solutions will be developed in the near future.”