11 February 2022

Will rising carbon prices curb industrial emissions in Europe?

The industry is vital for the competitive position of Europe in the world, but it emits large quantities of CO2. Refineries, chemical and steel companies are concentrated mainly in industrial clusters. Still, there are also many smaller companies like paper mills and the food and beverage industry that need to reduce emissions too.

The targets for the reduction of CO2 emissions as agreed in the Paris Agreement are not being achieved. In practice, it seems complicated for companies to take the necessary steps. There are solutions for almost every industry to reduce CO2 emissions substantially. Think about energy efficiency measures, electrification of processes, the use of renewable energy sources or more use of hydrogen to replace coal, oil and natural gas.

Altogether, industry is accountable for significant CO2 emissions and, therefore, an important sector where decarbonization needs to be accelerated to achieve the Paris climate goals and develop towards a clean and sustainable society.

Deep decarbonization starts with curbing the demand and energy efficiency

The first step in decarbonization is curbing the demand and improving the efficiency of existing assets by upgrading and modernization where possible. Next comes the electrification of existing assets, building hybrid systems, and generating carbon-neutral power with renewables to move away from conventional fuels like coal, oil, and gas. After 2030, energy efficiency, electrification and carbon-neutral power will remain essential. But there's also a need for green hydrogen and biomass as a fuel or feedstock and Carbon Capture Storage and Usage. It's not something done just by clicking your fingers, but something that has to be invested in right now to help us to achieve zero emissions by 2050.

Financial incentives are necessary to speed up

Energy efficiency, renewables, end-use electrification, green hydrogen and synthetic fuels play a crucial role in global decarbonization. But many measures require significant investment. It is not always easy to find valid business cases, but times are changing. On the one hand, green technology is developing rapidly and becoming cheaper, and grants and subsidies for adopting these technologies lower the threshold. On the other hand, rising carbon prices are shortening the pay-back time. A big uncertainty is the evolution of oil and gas prices over time. Oil and gas are finite, and as they will become scarce, they are expected to become expensive over the coming decades.

Necessary technologies such as PV systems, wind turbines, batteries, heat pumps and electrolysers show steep learning curves. They will quickly find their way into all kinds of applications, including in industry. Renewable energy is getting cheaper and is already competitive with fossil fuels in many situations. And although hydrogen is no "Haarlemmer oil", this is an essential building block to achieve sustainable energy and production.

There are two proven methods for CO2 pricing: emission trading and taxation. European countries like Sweden, Denmark, France and the Netherlands have already introduced a carbon tax.

Carbon pricing needed to achieve the climate goals

In Europe, we have known CO2 prices for years from the EU Emissions Trading Scheme (ETS). The ETS price has proven to be volatile in recent years.  In 2017, it was around €8 per ton CO2; it climbed in subsequent years to €28, but fell back in 2020 to €17. These days the ETS price is around €60. For many years, carbon prices have been too low to effectively incentivize industrial companies to act to meet climate targets. There are now signs that this is changing.

Carbon tax in the Netherlands

On the 1st of January 2021 the Netherlands introduced a new carbon tax for industry. The Dutch carbon tax on industrial emissions complements the EU ETS. The tax mainly applies to large industrial emitters including waste incinerators. The tax is on top of the ETS price. If the ETS price is less than the tax, the amount of tax paid is the difference between the tax and the annual average ETS price for the year. In this way the tax sets a minimum level for the carbon price, but does not prevent the carbon price from going higher if ETS prices are high. For industry this new tax makes the carbon price rise linearly from €30/tCO2 in 2021 to €125/tCO2 in 2030. This makes the business case for a sustainable solution more favourable.

It is not only economics

All these developments contribute to ultimately achieving the climate goals, but it is not only about money and proper planning and decision-making, as illustrated earlier. A legal framework with adequate and up-to-date rules, regulations and standards is needed to reduce the barriers to green solutions for the industry.

The objectives of the Paris Climate Agreement are translated into national law and regulations. In the Netherlands, we have laid down this in the Climate Act. In addition, European regulations, laid down in the EU Directives, are of great importance. As the name suggests, the Energy Efficiency Directive promotes the energy efficiency of business enterprises. Based on European legislation, all Dutch companies consuming more than 50,000 kWh electricity or 25,000 m3 natural gas (or the equivalent), are obliged to implement all energy-saving measures that pay-back within five years. In the Netherlands, recognized measures are now listed for 19 different industries, mainly focussing on the heating efficiency of buildings and the electricity efficiency of the equipment in the company buildings. Although the measures on those lists are mandatory, they are not consistently implemented.

Review your investment plan

There are some good reasons to review your investment programme. First, current developments in green technologies result in a cleaner performance and decreasing investments. Second, the government's grants and subsidies for adopting these technologies now make these investments more attractive. Third, the rising carbon prices from the emission trading and additional taxation shorten the pay-back time. And fourth, oil and gas prices are expected to increase over the coming decades as they will become scarce. Advancing investments in clean assets will curb industrial emissions from large, medium and small companies.

Where do you start?

It naturally starts with a situation assessment where you take a picture of the company in terms of sustainability. Toolboxes are available to map the current situation. You can choose different angles for this. For example, by looking at the energy and material flows in the company, at the energy performance of significant consumers or by assessing whether the organization is set up to improve energy performance and material use continuously. Based on this photo, you develop several concrete measures to be selected and prioritized with internal stakeholders. This can be, for example, in the field of improving thermal processes, smart control and modification of electrical installations, motors and compressors. This is followed by the implementation, in which the organization or the assets themselves are improved. By evaluating the effect afterward, you close the loop, and the next improvement can be started.

The author

Principal Consultant

Jack Doomernik

Jack Doomernik is lector of Smart Energy at Avans University of Applied Sciences and a principal consultant at Stork. Jack advises organizations on energy management processes and implementation of new, energy-efficient technologies. His recommendations typically begin with conducting an analysis of how individual production processes contribute to total energy use, followed by outlining the potential for energy savings and the measures necessary to improve energy performance. This includes options for introducing renewable energy sources such as solar and wind, as well as storage solutions. A cost-benefit analysis can help in making decisions on how to prioritize the proposed measures and come up with an energy plan.

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Sustainable efficiency upgrades

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