Industries and the products they make can play a considerable role in the global effort to tackle climate change. Making them part of the solution while helping them stay competitive is a key challenge for policy makers, according to a new report from the World Bank Group, CLASP and Carbon Trust.

The danger of inaction on climate change is real. In 2015, 195 countries signed the Paris Agreement, the first ever universal, legally binding global climate deal. But without urgently changing the path of global industrial growth, it will be impossible to meet the targets set in the agreement – specifically keeping the increase in global average temperatures to below 2°C above pre-industrial levels. The world has a very small window to stabilize greenhouse gas (GHG) emissions.

The global manufacturing industry is responsible for almost one-third of total GHG emissions and includes the highest carbon-emitting sectors in the world’s economy: the production of iron and steel, aluminum, chemicals and cement.

Although industry’s threat to climate and the environment is clear, the business case for decarbonizing manufacturing – making it greener – is not. A new report from The World Bank Group, CLASP, and Carbon Trust, A Greener Path to Competitiveness offers recommendations and guidance on how companies and countries can stay competitive while implementing more climate-friendly technologies and strategies. The report finds that making climate-critical changes in manufacturing is not solely the task of industry stakeholders or the private sector; governments and consumers also have important roles to play.

“There is currently a gap between global climate targets and the carbon reduction actions that businesses are willing to implement,” explains Etienne Kechichian, Senior Private Sector Specialist at the World Bank Group who led the project with Alexios Pantelias. “To date, there has been a good level of GHG emission reduction across industry, but there is a danger that targets set in Paris will be missed without action by government, industry, and consumers.”

“The unprecedented task presented at COP 21 in Paris to decarbonize globally introduces challenges but also enormous opportunities for industries as they seek a greener path to production while remaining globally competitive. Now is the time for companies and countries to act,” said Cecile Fruman, Director of the Trade & Competitiveness Global Practice at the World Bank Group.

Industries contribute more than one-third of direct and indirect global greenhouse gas (GHG) emissions. Certain sectors, including iron and steel, cement, chemical, and aluminum manufacturing, are the primary contributors to climate change due to their inherent requirement for large amounts of energy.

New technologies can be critical to industry efforts to reduce GHGs, but aren’t always cost effective. Technology solutions must be complemented by institutional frameworks and policies that counter competitive disadvantages.

“If we are to meet our global ambitions on climate change then we need a clean revolution in industrial production. Taking the long view, there is an incredibly strong business case for the transition to a low carbon economy. Many of the technologies we need to achieve this already exist today. But to capture this value, it is imperative that governments and energy intensive sectors work together to put in place a market framework that will help to maintain competitiveness at the same time as delivering the step change in carbon emissions from industrial output which is both possible and necessary,” said Michael Rea, Chief Operating Officer at the Carbon Trust.

A Greener Path to Competitiveness recommends that industries continue to focus on cost-effective energy efficient options that have short payback periods, low transaction costs, and easy-to-access finance. While many of these options have been implemented by leading companies already, it is estimated that significant economic potential, around 60 percent, for future energy efficiency savings still remains.

To decrease GHG emissions while remaining competitive, the report calls on industry, government and consumers to also focus on technologies and interventions that are on the cusp of cost-effectiveness. Energy efficiency standards and labeling are one solution to reduce energy usage and GHG emissions. According to the report, adopting the most stringent minimum energy performance standard could reduce 9% of the global total energy consumption.

The report also suggests that governments should pursue policies such as removing distorting production subsidies or trade tariffs and putting a comprehensive price on carbon. Technology incentive programs can also be developed to find solutions that currently have a weak business case, for example, in the adoption of large-scale and capital-intensive carbon abatement technologies.

“The report shows that appliance energy efficiency policies can simultaneously reduce energy use and improve competition,” said Christine Egan, Executive Director and CEO at CLASP. “CLASP knows from years of experience that these policies are powerful tools for reducing energy use and greenhouse gas emissions and, therefore, are an essential part of any climate change mitigation strategy.”

The Challenge

One of the most pressing climate challenges is for industries and governments to decarbonize production while still remaining globally competitive. A Greener Path to Competitiveness finds that there are climate-friendly solutions to industrial production, but uptake has been slow. Overall there is a perception that decarbonizing industry can harm competitiveness. Several barriers prevent industries from adopting greener production at scale:

• Cost. Traditional fossil fuels are currently relatively inexpensive, while using alternate sources of energy would imply capital costs. Decarbonizing industry requires high costs now for an uncertain amount of savings later. It can also be difficult to place a value on noneconomic benefits related to low-carbon options.

• Institutional and Market Barriers. Some of the most polluting manufacturing industries are highly sensitive to fuel and energy prices and energy subsidies distort competitiveness. In addition, there is a lack of consistent regulations that ultimately deter investment in new industry technologies.

• Technical Barriers. Industrial plants have long life spans, and as a result, older plants may not be compatible with new technologies – some of which are unproven. For some solutions, there is a lack of readily available experienced staff or raw materials that make using new technologies possible.

In order to be implemented at scale, greener industrial production must minimize its impact on competitiveness.

The Solution

There are well-understood business and societal benefits to being front runners in decarbonizing, ranging from increased energy security to less local pollution. Further, as traditional fuels become scarcer, transforming industry to be more sustainable will become a requirement of doing business. The good news is that, according to A Greener Path to Competitiveness, remaining competitive and implementing green strategies are not necessarily mutually exclusive.

“Energy efficiency interventions can reduce greenhouse gas emissions while enhancing the competitiveness of a company and reducing exposure to energy price risks,” notes Pantelias. “Best practice solutions already exist; some may become mainstream and others may not.”            

For green solutions to successfully be implemented industry-wide, they should:

• Offer quick returns on investment;

• cause minimal operational disruption;

• offer a cost savings after implementation; and

• have easily accessible sources of financing.

Retrofitting existing plants with low-cost, quick-payback energy efficiency solutions is one of the most obvious solutions. Using the best available technology in the construction of new plants is another. Global policies that require competitors around the world to simultaneously implement green measures can help level the playing field and reduce any potential risks to competitiveness.

The aluminum industry is an example of a sector that has incorporated energy savings and GHG reductions while still increasing production. Recycling is at the core of this solution. About 70% of aluminum’s total cost is linked to energy. Producing recycled aluminum uses as little as 5% energy making it an attractive option for producers. In addition, recycled aluminum emits just 5% of the GHG missions compared to primarily produced aluminum. This makes it an attractive solution for cities, governments, and consumers. Since 1990, emission savings from aluminum have doubled while production continues to increase.

Although industry is at the crux of the climate change imperative, the private sector is not the only area with a role to play in preventing irreversible climate change. The path to greener competitiveness, according to the new report, requires action from industry, government and consumers:

• Industry should focus on cost-effective energy efficiency options that can be deployed today with short payback periods, low transaction costs, and easy-to-access finance.

• Industry, governments and consumers should focus on enabling technologies and interventions that are on the cusp of cost-effectiveness. Regulation or procurement policies can direct demand for low-carbon products. Making consumer demands more visible can encourage solutions that are not yet fully viable. Energy efficiency standards and labeling are both examples of solutions in this area.

• Governments should pursue framework policies such as removing subsidies and putting a comprehensive price on carbon. They can also make policies that are clear, credible, and long-term so that business have time to act effectively. Finally, they should also adopt technology-incentive programs for solutions that currently have a weak business case.

“Dialogue is also a critical component of maintaining momentum after Paris and achieving global climate change targets,” according to Pantelias. “Public-private partnerships, regional dialogues and long-term support for local energy and industrial entrepreneurs are all necessary to achieving successful outcomes at the Marrakech Climate Change Conference in November 2016 and beyond.”