Net Zero Readiness Report: Industry

Industrial manufacturing
 

Industry is historically a major producer of greenhouse gas emissions, meaning that industrial decarbonization is a lever can make a significant impact in efforts to reach net zero. Over the last decade however, industrial manufacturing through new innovations in the field of energy-saving technologies and accelerated shift of manufacturing equipment’s powering from fossil fuels to electricity has decisively repositioned itself as being an essential part of the solution to reach the world’s ambitious net zero targets.

Steel produced through the blast furnace process releases CO2 through the melting of coke and iron ore at high temperatures. It is being radically transformed through the development of so-called ‘green steel’ where carbon is replaced by hydrogen that if produced with low carbon energy can turn iron ore into manufactured steel with far fewer emissions. The challenge being addressed by steel industry leaders as well as low carbon energy providers is to scale up such technologies required to lead to commercially viable steel production. Currently the cost disadvantage still requires massive subsidies that require public-private sector initiatives.

Another option is to replace existing blast furnaces with electric arc furnaces (EAF), a broadly adopted technology that increases circularity by relying on scrap steel as its main input. As an example, supported by the French government, ArcelorMittal is investing EUR1.7 billion (US$1.81 billion) building EAFs at Fos-sur-Mer near Marseille and Dunkirk, as well as a hydrogen-powered unit in Dunkirk. The company says this transformation will cut emissions by 7.8MtCO2 a year, a tenth of the total from French manufacturing industry.¹ German steelmaker Salzgitter is working to power its blast furnaces with green hydrogen produced from renewable energy, which it says could cut 95 percent of the 8MtCO2 annual emissions from its steelworks at a capital cost of EUR2 billion equally shared between by the company and public funding from Germany’s federal government and the state of Lower Saxony.²

Stéphane Souchet, Global Head of Industrial Manufacturing, KPMG International, says what has become increasingly clear since COVID-19 and inflation exacerbated by the war in Ukraine is that government policy interventions to accelerate energy transition are in full swing in most major economies. Governments are now demonstrating a willingness to invest in industrial decarbonization at levels not seen before.

“While there is no silver bullet for achieving net zero in industrial manufacturing, a comprehensive technology portfolio is beginning to take shape. While the cost to achieve this goal adds up to a substantial portion of global GDP, the cost of inaction would far surpass it, given the increasingly tangible and visible impacts of climate change,” he says.

“Policies such as Europe’s Green Deal and Net Zero Industry Act and the US Inflation Reduction Act are showing paths forward but ultimate success will require unwavering collaboration between government, private business and industry players,” Souchet adds.

Home heating
 

In many countries, heating is the residential sector’s main energy requirement, with nearly four-fifths of EU household energy used to heat space and water. Sources of home energy and subsequent emissions vary greatly from country to country. Norwegian homes get three-quarters of their energy from low carbon electricity with almost all the rest coming from renewables and biofuels. Denmark and Sweden get about a third of their domestic energy from derived heat systems such as district heating, with most of the rest from electricity, renewables and biofuels. Natural gas provides 53 percent of the energy used by homes in Italy and 43 percent in Germany,while 42 percent of Irish home energy comes from oil and petroleum products.³ Countries with dispersed populations and colder climates such as Canada, as well as rural areas in many countries, may find it difficult to move away from oil and natural gas for domestic heating unless these can be replaced with similarly energy-dense and transportable fuels.⁴ 

Decarbonizing residential heating that relies on fossil fuels will usually require significant work to be carried out in individual homes, causing political problems over both disruption and who pays for this. It is possible to convert newer natural gas boilers to use green hydrogen produced with renewable electricity, but doing so would involve big increases in hydrogen fuel production. Governments including Germany and the UK, which also relies heavily on natural gas for domestic heating, have proposed electrical heat pumps as the best option to replace gas boilers. Few British homeowners have yet installed a heat pump with only a fraction of the costs met by government subsidies and many properties being unsuitable.⁵ In Germany, public opposition to recent plans to ban the installation of new gas-fired boilers from 2024 forced the government to allow exemptions for boilers that could be converted to hydrogen.⁶

Decarbonizing cities
 

More than half of the world’s population lives in urban areas and this is likely to rise to two-thirds by 2050. Cities are densely populated centers of government and business, making them good locations for innovative work in this area. There are specific reasons for focusing on cities, with renewable energy-based systems such as district heating working better in dense urban areas and large buildings possessing economies of scale for retrofitting new glazing, heating and cooling systems, energy management technology and on-site renewable production. In November 2022 KPMG launched the Net Zero Urban Program10 that aims to help raise capital and apply digital technologies to prototype projects that can support urban decarbonization.11

Infrastructure
 

Infrastructure tends to get much less attention than the products and services directly purchased by individuals and organizations. However, based on a broad definition infrastructure is responsible for 79 percent of all emissions and will take up 88 percent of the costs of adapting to climate change, according a 2021 report produced by the UN Office for Project Services, UN Environment Programme and the University of Oxford. The water sector alone will require 54 percent of all adaptation spending to reduce risks from flooding, sea level rises, storm surges and other impacts.12

A lot of infrastructure requires the use of concrete, with its key ingredient cement accounting for around 7 percent of global emissions, twice as much as aviation’s total contribution.13 This is due to the current need for fossil fuels to generate the very high temperatures required in its production. While there are options to reduce emissions from concrete a little by changing some materials, ‘mineralizing’ or capturing carbon dioxide generated within finished concrete could turn it into a material that removes greenhouse gases from the atmosphere rather than adds to them.14 However, this is at an early stage of development with a US startup mineralizing just 30 kilograms of carbon dioxide in concrete in a test announced in February this year.15

Just as in nature, evolution will take multiple paths as humanitymoves towards net zero, with some that will work and somethat will be dead ends, so it would be foolhardy to stand idle until the perfect solution is found. It makes sense to adopt already proven techniques such as modern methods of construction, which transfer some smaller-scale work to factories that provide units for on-site assembly. This makes construction more efficient, reducing total carbon output through the use of fewer resources as opposed to new materials.

Infrastructure is more likely to make progress towards net zero by taking many small steps rather than a few big ones. Governments can play a role now by supporting pathfinder and demonstration projects and by instructing regulators to take a pragmatic approach, such as considering the damage from global climate change a project could help tackle along with the impacts it would have on the local environment.

Infrastructure projects typically take years or decades to get from inception through planning, approval and construction to completion and delays have always been common. The resulting assets are often used for decades or even centuries, meaning that for example roads change slowly compared with the increasingly electrically powered vehicles that use them.

However, there are trends that look likely to reshape infrastructure in ways that may support decarbonization, although these will vary significantly by country and region. What these changes look like in specific regions and jurisdictions will result from their unique conditions and the ways their societies respond to the need for change. For example, millions of people were forced to work from home during the COVID-19 pandemic and some realized they preferred to do so at least some of the time, with the period also highlighting the potential for remote meetings and collaboration. Increased home working and remote collaboration is likely to change demand for both commuter and business transport and the infrastructure required to support it.16 Some new infrastructure may be needed to support homeworkers who spend more or most of their time in the same town or suburb rather than traveling regularly to a city center. Similarly, moves to shorten supply chains to manufacture goods closer to customers could require changes to the scale and shape of infrastructure at and near ports.

Oil and gas
 

The last two years have seen sharp fluctuations in the cost of oil and natural gas, primarily because of Russia’s invasion of Ukraine in February 2022 and the resulting removal of Russian natural gas from energy markets, along with economic recovery from the COVID-19 pandemic. The months following the invasion saw the highest average crude oil prices since 2013 and the cost of natural gas in Europe tripling to set new records, although these prices have since returned to levels near their long-term averages due to factors including China’s slow economic recovery. While non-hydroelectric renewable generation increased by nearly a percentage point to 7.5 percent in 2022, the world continued to depend on fossil fuels for 82 percent of its primary energy.17 Given overall global demands for energy are widely expected to increase over the next decade, oil and gas production looks likely to play a significant role for some years to come, even as low carbon sources increase.

In addition, an era of volatile and complex geopolitical relationships has caused many countries to look for ways to reduce their dependence on potentially hostile nations. This includes investing in their own energy sectors as a way of increasing their ‘energy sovereignty’ so they are less likely to find themselves in the position of European countries that urgently sought new supplies following the removal of Russian gas. Such investments include securing oil and gas supplies on the grounds of self-reliance and economic development, including some countries with relatively strong records on decarbonization. For example, in July 2023 the UK said it will issue hundreds of new oil and gas licenses for its North Sea waters, arguing that the country will still obtain a quarter of its energy from these sources in 2050 when it reaches net zero and should therefore reduce its reliance on hostile states.18

Higher prices have led to higher income for governments from taxes and royalties and some are investing this in decarbonization. The Australian state of Queensland is using revenues from natural gas and mining to support renewable projects through loans and grants, with a target to increase renewable production by eight times between 2022 and 2035 through new solar, wind, pumped hydro storage and grid upgrades.19 Some countries have introduced significant financial incentives for such work including the Inflation Reduction Act in the US or the EU’s Green Deal while others including Japan and South Korea are strongly encouraging their companies to undertake it.

An evolving license for companies
 

Increased prices have also provided oil and gas companies with much more capital. Several, particularly those headquartered in Europe, are investing some of this in developing ways to decarbonize customer use of their fuels through technologies such as green hydrogen production, carbon capture, utilization and storage, biomass and biogas. Some are also investing in renewable generation.

Jonathon Peacock, Global Oil & GasLeader, KPMG in Australia, says this shows an evolution in howsocieties treat these companies: “You can continue to produce hydrocarbons provided you can demonstrate a positive intent on how you plan to or are reducing emissions,” he says, partly driven by carbon pricing in some countries as well as pressure from stakeholders including employees, communities and activist shareholders. 

But these technologies are at early stages of development and represent relatively risky investments, which may or may not offer strong returns. “Companies are still trying to work out what the most economically viable means of emissions reduction looks like,” says Peacock. “It varies by geography, geology and government policy.” He adds that US-based oil and gas companies generally focus on minimizing scope 1 and scope 2 emissions from production and the composition of products rather than those generated by customer use, known as scope 3 emissions, and generally have higher market valuations than those with a stronger focus on customer decarbonization. Those oil and gas companies trying to move to new types of energy production are being affected by a polarization in investor views between those who want the sector to deliver reliable returns from fossil fuels, increasingly from projects with relatively short timeframes, and those who avoid the sector completely because they do not think its transition plans are strong enough.

Peacock adds that there are broader reasons for rich countries and companies to work on decarbonization technologies, as these could help provide poorer countries with green, safe and reliable sources of power, including the 2.4 billion people wholack access to cleanly-fueled cooking facilities.20

The use of oil in producing plastics and gas in ammoniabased fertilizers as well as their current dominance of energy means both fuels will continue to be needed until societies decide to stop using derived products or researchers find adequate substitutes, something which will take time. Peacock says that oil and gas companies are well-placed to work on decarbonizing their products as they have the capital to invest in research and development, are used to working across borders and have an engineering-led approach to delivering results. “It’s not oil and gas or renewables,” he says. “They have got to work together.”