Achieving climate neutrality within the next three decades will require decarbonization of all sectors and negative emission technologies to compensate for residual emissions from hard-to-abate sectors. This report considers the decarbonization challenge for basic industrial materials such as steel, cement, aluminium, and various chemical products, which account for 22% of global CO2 emissions. It develops a conceptional framework for protection against carbon leakage.
To achieve the goal of limiting temperature increase to 1.5 degrees Celsius, policymakers will face new challenges. One is balancing efforts to transition to a competitive, low-carbon economy with short-term economic and social pressures that arise from increasing carbon prices.
In the absence of a global carbon price, differences in carbon prices give rise to concerns about carbon leakage and loss of competitiveness for firms in jurisdictions with carbon pricing.
Carbon leakage means shifting emissions and production from domestic firms to markets with fewer constrains on emissions. Carbon leakage thereby presents both environmental concerns and potential economic, social, and political challenges.
This report considers the decarbonization challenge for basic industrial materials such as steel, cement, aluminium, and various chemical products. It also develops a conceptual framework for assessing the compatibility of carbon leakage provisions in driving deep decarbonization as well as alternative approaches to measuring and addressing the risk of leakage, including border carbon adjustments.
Challenges to deliver emissions reductions for basic industrial materials
Delivering emission reductions from these sectors faces three key challenges:
High energy demand for production processes with limited opportunities for electrification
Greenhouse gases produced through chemical and physical transformations during the production process
Greenhouse gases emitted through decay or incineration of the material at the end of its life
Because of these challenges, deep decarbonization of basic industrial materials will require measures on both the supply and demand sides. Carbon pricing can push mitigation on both sides, e.g. by making carbon intensive inputs such as fossil fuels more expensive and providing an incentive to use them more efficiently. It can also spur innovation in production processes, encourage a shift towards low-carbon alternatives, and generate revenue for the development and deployment of mitigation technologies. However, putting a price on emissions can lead to higher costs that put domestic industrial producers at a competitive disadvantage and may shift emissions abroad. Leakage concerns therefore create a conundrum for carbon pricing policies. A balance between supporting long-term competitiveness in a low-carbon economy and shorter-term leakage concerns among emissions-intensive industries is needed.
The deep decarbonisation challenge
With this in mind, a conceptual framework was developed with criteria for evaluating leakage protection measures that are consistent with the deep decarbonization challenge:
Providing ongoing protection against carbon leakage
Compatibility with long-term transition – including incentives for low-carbon production, low-carbon consumption, and developing new technologies/markets
Political durability, including international acceptance and ease of implementation
Furthermore, the report addresses free allocation as an approach to leakage protection, alternative approaches to address carbon leakage, and additional policies supporting decarbonization.