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Pathways to decarbonisation

Hard-to-abate industries are emitting the majority of greenhouse gas emissions, which makes them priority industries on the path to decarbonisation

The climate-neutral transformation of industries is essential for mastering some of the challenges of the century: reducing global emissions and transforming businesses to meet decarbonisation goals. Deloitte’s leading global industry specialists, in close exchange with clients, public sector teams and in cooperation with the scientific community, have created a collection of insights to share the Deloitte perspective on possible pathways to decarbonisation for the key sectors that have some of the biggest impact on carbon emissions globally.

The combined hard-to-abate industry emissions, which among others include the hard-to-abate sectors steel, chemicals, automotive and food (see figure 1), accounted for approximately 82% of total global CO2eq emissions in 2021. Reducing fossil raw materials and carbon emissions from these sectors is a global challenge that should be tackled on a global scale.

While many obstacles tend to be rooted in the diversity of regulations, insecurity around technological advancements, and geopolitical influences, there are also two overarching solutions that may be leading enablers for all sectors alike: green electricity and green hydrogen. Therefore, we have dedicated a section to the important theme of green hydrogen, which outlines the enabling pathway that will likely be key for each of the sectors’ endeavours.

It is Deloitte’s ambition to not only provide a description of the situation but also offer our experience and insights around possible solutions and necessary actions that should be taken. Our goal: support Deloitte clients globally along this transformation with evidence-based analysis, unique perspectives and the breadth and depth of Deloitte’s knowledge.

Each section includes:

  • An overview on the current situation and specific challenges
  • The regulatory landscape and its implications for the economy
  • The most important technological levers
  • Success factors and hypotheses on how to win

Based on our analysis of the needs and requirements of these hard-to-abate industries, we have developed a set of offerings and ready-to-deploy solutions to help support global players on their individual paths. Explore the respective sections to find out more.

Power

THE STATE OF PLAY

The power sector is key to the decarbonization of the global economy, and electrification and renewables will play a crucial role in a net-zero world. Decarbonization of the power sector is well under way, with incumbent players, new entrants, policymakers, investors, and customers pushing hard in this direction. Incumbent players are transforming their business models, while new entrants view the power sector as an opportunity for growth and diversification. The sector is marked by significant regional differences related to local factors such as current power-generation mix, policy ambition, and access to electricity.

The sector faces several challenges: supply chain and workforce transformation; overloaded administrative and regulatory bodies; system stability as more renewable energy sources come onstream; engaging customers to play a more active role; social inequality issues; and limited in-sector financing capacity.

 

THE WAY FORWARD

The power sector’s journey to net-zero, which began a decade ago, is now accelerating due to its enabling role in the decarbonization of other power-consuming sectors. Customers’ demands for low-carbon solutions continue to grow, and the ongoing electrification of industrial processes is accelerating the rise in demand for electricity. System stability needs to be maintained in the face of these dynamic developments; to achieve this, the power sector depends on regulatory certainty, swift permit processes (which have yet to be seen) in all key markets, and the availability and readiness of the necessary technologies. Utility-scale solar PV and wind, as well as a variety of storage technologies, are the key generation-technology solutions in a net-zero scenario, but a more diverse set of technologies (small nuclear reactors, biomass, hydro, geothermal, distributed generation, etc.) may play a role in regions with specific geographic conditions. On the consumer side, electric mobility solutions (batteries and hydrogen fuel cells) and heat pumps (residential, commercial and industrial) will likely be the leading technologies.

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Steel

THE STATE OF PLAY

Currently, almost 2 billion tons of steel are produced globally per year, using a high proportion of coal-powered, blast furnace-based steelmaking processes. From a steel market perspective, demand for “emission-free” green steel continues to increase. Analysis indicates that by 2030-20358, market demand for green steel is likely to exceed the available supply in regions such as Europe.

THE WAY FORWARD

Carbon emissions from steel production should be reduced by 90% to meet the science-based targets of limiting global warming to well-below 2 °C above pre-industrial levels and pursuing efforts to limit global warming to 1.5 °C.

To help reduce emissions, many steelmakers are focusing on replacing their existing blast furnaces with direct reduced iron (DRI) and electric arc furnaces (EAF) facilities that can use hydrogen and renewable electricity. Investors and governments may play a pivotal role in this green transition by helping steel companies fund the large capital investments required. Furthermore, upstream mining companies may also play a key role in enabling the necessary supply of high-quality iron ore needed for direct-reduced iron (DRI) production, as well as helping to maximize the efficiency of blast furnaces that remain in use during the transition period. In addition, investments into other alternative steelmaking technologies, as well as carbon capture and storage (CCS) technology, may play a key role in bringing green steel to the market .

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Chemicals

THE STATE OF PLAY

The chemical industry emits 3% of global carbon emissions and plays a key role in the industrial value chain by providing critical products for industries such as automotive, construction, electrical and electronics, and consumer businesses.

THE WAY FORWARD

In the short- to mid-term, the availability of green electricity and green hydrogen may be critical factors in the chemical industry’s journey to net-zero. The industry should continue to be innovative and develop new technologies to help enable energy savings and circularity. Green skills in the workforce are becoming a highly competitive, sought-after asset, and they may be key to implementing these changes successfully.

As an asset-heavy industry with planning horizons of 20-plus years, the chemical industry often requires regulatory certainty. Effective carbon leakage management is one of the regulatory pillars essential to the industry’s successful transformation and to help ensure a level playing field across different regions and regulatory frameworks. 

Some of the strongest momentum is being seen in application industries that are driven by consumers’ requests for green products, and as a result are increasingly looking for suppliers offering sustainable options in the form of low- or zero-carbon products and services. This is not only setting the pace of change, but also represents a significant market opportunity for the chemical industry. 

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Automotive

THE STATE OF PLAY

The automotive industry is in the midst of an ambitious transformation process. The industry has a long history of advancing and producing vehicles with combustion engines. Now, it is gearing up to switch to electric vehicles (EV) in a relatively short time frame. This is one of the key elements to help reduce the large carbon footprint of the sector. In fact, in 2021, tailpipe emissions were responsible for 10% of total global CO2 emissions (related to energy and industrial processes), while there are also substantial emissions from the material and production of parts and vehicles as well as from fuel/electricity production and end-of-life emissions.Automakers have a responsibility for decarbonizing their entire value chain.10 They have already made good progress by ramping up EV production and sales—largely pushed by regulatory requirements. However, the lack of green inputs (e.g. steel, batteries) at scale, competitive green business models and the need to build up new infrastructures for EVs are only some examples of challenges the sector is facing.

THE WAY FORWARD

Automakers need to reduce CO2 emissions by 90% along the entire value chain by 2050—from basic materials extraction and processing, parts and vehicle production, to usage and end-of-life. This is necessary to meet the science-based target that is compliant with the Paris Agreement (i.e., to limit global warming to well-below 2 °C, preferably to 1.5 °C) compared to pre-industrial levels.

In the future, the majority of new cars will likely be electric. There will be a new infrastructure system for vehicle charging and green electricity supply and distribution will need to ramp-up concurringly. Vehicle production processes will be largely electrified. This includes heat pumps to provide process energy or green hydrogen for steel making. A closed loop material cycle, combined with multi-life approaches (e.g., second life for batteries) will be required for a sustainable use of rare resources and materials. To achieve this target state, traditional sector boundaries will dissipate, and strong cross-sectoral collaboration and joint activities are essential. 

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Food

THE STATE OF PLAY

Today’s food system is not sustainable. It is a major polluter, accounting for 25% of global CO2 emissions 11, 44% of global methane 12 emissions, and 80% of global nitrogen emissions.13 Nevertheless, it is a pivotal sector feeding the world, producing a large share of the global GDP, and providing around 40% of global jobs. The current production model is based on highly productive but unsustainable practices. Shifting to low carbon farming practices leads to lower yields and higher costs. Lower yields are problematic, as global food demand is projected to rise, while higher costs are difficult to pass down the value chain, since consumers are often unwilling or unable to pay higher prices. 

THE WAY FORWARD

The food sector has the potential to become not only net-zero, but also net-positive by acting as a significant carbon sink through natural carbon storage. This is very promising, but implies significant investments and a fundamental redesign of the food system. The good news is, most of the necessary levers to pull are already available. Changing the way we use land—and treat soil on agricultural land—could get us almost halfway to net-zero. Low-carbon farming practices, food waste reduction, a shift to renewable energy, and shifting diets could almost complete the journey. The entire food ecosystem will need to work in unison to make a net-zero or even net-positive food system become reality. Building coalitions will be key to establishing common standards, conducting monitoring, and fast-tracking system changes. Food processing and food retail industries will set the pace, driven by consumers and brand perception. Regulators must set standards to enforce end-to-end transparency. Data and analytics skills will help realize it. Innovation, improvement, and development of new technologies will be critical enablers in achieving net-zero. 

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Heavy road transport

THE STATE OF PLAY

The transport sector emits 7.7 billion tonnes of CO2 per year, of which heavy duty trucks alone account for 1.8 billion tonnes or 4% of global CO2 emissions.This places a heavy responsibility on the sector to decarbonize. But as a hard-to-abate sector, it faces a range of challenges to do so. The size and scale of the industry, and supply chain limitations in filling orders, constrain its ability to change. Due to limited financing and insufficient regulatory incentives, original equipment manufacturers struggle to balance the need to extract value from traditional businesses while developing alternative technologies. The renewable electricity capacity required for alternative technologies is not yet in place and may require significant time and investment to develop. The charging and fueling infrastructure for a switch to battery and hydrogen technologies will need to be standardized to cover entire road networks.

Complex value chains make it extremely difficult to determine CO2 emissions on a comparable basis. Legal and consumer pressures to track and report may force action in the future, but current frameworks are not sufficient. Additionally, psychological barriers will create resistance in moving to newer technology especially in developing countries.

THE WAY FORWARD

In the near to medium term, optimizing routes and transport networks along with electrifying short haul fleets are likely to be the highest-impact solutions for the sector in receptive markets with supportive policies and incentives. In certain developing geographies, transition fuels such as biodiesel and synthetic fuels are expected to play an important role. Success in first mover regions may strengthen the business case low-emission technologies. This may act as a catalyst for the market expansion of vehicle component technologies and enable the flow of innovations across geographies. In conjunction with technological advancement in vehicle development, charging infrastructure and availability of renewable energy should be scaled up significantly. Cross-functional collaboration between key ecosystem players may drive the pace of transition to help create a win-win situation while mitigating investment risks. Ultimately, hydrogen-powered fuel cell electric vehicles (FCEV) may be critical to support decarbonization for longer distances, but the technology cycle has not yet reached the point of mass production.

Hydrogen

THE STATE OF PLAY

Historically, the annual output of 90 million tons of mostly grey hydrogen was rather used as feedstock but not as a source of energy. Green hydrogen, nowadays, has the potential to become a clean enabler of the decarbonization of our energy system. Over 130 countries (representing 88% of global carbon emissions) worldwide have therefore published national hydrogen strategies. The total sum of clean hydrogen projects announced worldwide would, however, only provide a collective production capacity of 44 MtH2eq by 2030, a quarter of the global demand we predict.

THE WAY FORWARD

In a net-zero scenario, by 2030, green hydrogen accounts for two-thirds of the market with the remaining covered by blue hydrogen with effective carbon capture and storage (CCS) technology. Replacing existing grey hydrogen production with green hydrogen or blue hydrogen is therefore an obvious starting point to reduce global CO2 emissions markedly. Using hydrogen as energy—next to its use as feedstock—is a key element on the pathway to net-zero emissions. Molecules play a critical role in the decarbonization of the hard-to-abate sectors e.g., as basis for synthetic fuels in aviation or shipping, as fuel for high temperature processes or heavy-duty road freight, and to store electricity from variable renewables.

Decisive policy support is needed to scale up the clean hydrogen economy and ensure that, especially, green hydrogen plays its needed role on the path to net-zero. Policy makers should particularly focus on three components:

  1. Creating a business case. Use of targeted policy may reduce the cost-difference between clean and polluting technologies. Long-term offtake mechanisms can substantially mitigate projects risks, bridge the gap between price and willingness to pay, and strengthen price stability;
  2. Laying the foundations for a climate-oriented market structuring. A robust and shared certification process for clean hydrogen will be decisive to ensure transparency and avoid technological lock-ins.
  3. Building long-term resilience. The establishment of energy relationships should integrate diversification and inclusion targets to base economic development and regional integration on political stability and human rights. Fair development implies that developing and emerging countries capture parts of the global value chain. 

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References

  1. IEA, Global Energy Review: CO2 emissions in 2021 Analysis, March 2022.
  2. IEA, Chemicals Analysis, September 2022.
  3. IEA, Iron and Steel Analysis, September 2022.
  4. IEA, Cars and Vans Tracking Report, September 2022.
  5. IEA, Executive Summary – Breakthrough Agenda Report 2022, September 2022.
  6. IEA, World Energy Outlook 2022, p. 449, November 2022.
  7. IEA, Global Energy Review: CO2 Emissions in 2021, March 2022.
  8. Deloitte Analysis.
  9. IEA, World Energy Outlook 2022, October 2022. 
  10. Science Based Targets, Companies taking action.
  11. Poore, Joseph, and Nemecek, Thomas. “Reducing food’s environmental impacts through producers and consumers.” Science 360 (2018): pp. 987-992.
  12. Food and Agriculture Organization of the United Nations, “Key facts and findings”.
  13. Michigan State University, “How much fertilizer is too much for the climate?”.

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