Net-zero Transition: What Are The Solutions For Emerging Economies?

Although policymakers and industry recognize the urgency of action in emerging and developing economies for net-zero industry transition, the investment challenge remains significant. Achieving net zero emissions would require significant changes to the energy and land-use systems that produce the majority of the world’s emissions.

The manufacturing industry provides society with a wide range of materials and products that are necessary for economic activity and long-term development. Because that industry accounts for 40% of global carbon dioxide emissions, its role in achieving net-zero emissions by 2050 and meeting the Paris Agreement’s goals will be critical. International fora such as the G7 and G20, as well as a slew of new public- and private-sector-led initiatives, have also launched dedicated programs to foster dialogue in order to identify and propose solutions for industrial decarbonization.

Net-zero transition is a fundamental transformation of the world economy

Low-carbon technologies

Improving energy efficiency and supplying clean energy from sources such as green hydrogen and renewable heat will necessitate significant investment scale-up. Carbon capture, utilization, and storage, as well as circular economy concepts, will be required to drive significant emission reductions across industry value chains.

While the key technologies for industrial decarbonization are well known, many of them are still in the demonstration or early commercialization stages. When compared to traditional technologies, their high upfront investment and operating costs make market adoption difficult. Because the industry is primarily driven by private actors who must maintain profits, developing viable business cases is critical. This is a particularly pressing issue for emerging and developing economies, which will account for the lion’s share of global industrial production growth in the coming decades.

Annual steel production in India, for example, is expected to increase 3-5 times by 2050. Ensuring that new plants are emission-free would entail increasing scrap use and establishing approximately 100 direct reduction plants powered by green hydrogen, totaling 200 million tonnes annual capacity, or 10% of global steel production. This would necessitate an investment of at least US$ 200 billion for direct reduction plants alone, and at least US$ 1 trillion when investments in renewable electricity capacity and electrolysers required to produce green hydrogen are included. However, hydrogen-based steel plants are only available at the demonstration scale, with the first large-scale plants expected to be operational in 2024-26.

Another growing subsector is the production of clean fertilizer from green hydrogen. An OECD study titled “Green hydrogen opportunities for emerging and developing economies,” which will be published in November 2022, estimates an initial investment in green ammonia production capacity of USD 5-7 billion per million tonnes per year, with dedicated renewable electricity generation assets and electrolyzers. According to projections, global green ammonia production could triple by 2050 compared to current levels. The majority of this capacity will most likely be built in emerging and developing economies with abundant renewable energy resources. This translates to a total investment requirement of more than USD 2-4 trillion over the next three decades in order to achieve the expected green ammonia production volumes.

Low-carbon technologies will necessitate significant investment scale-up

The net-zero transition

Industry must ensure that its competitiveness also promotes long-term development. Low-carbon technologies have the potential to reshape the global industrial footprint. Access to low-cost energy and raw materials is becoming increasingly important when deciding where to locate manufacturing plants, as these decisions will determine new optimal solutions for global supply chains.

If conventional technologies are used, new investments in conventional technologies may lock in carbon emissions for decades to come. It will be critical to convert existing assets to low-carbon technology options. Furthermore, many new assets being constructed, primarily in emerging and developing economies, do not always use the best available technologies. Delaying action will be more expensive than making a quick transition.

The transition will entail more than just investing in low-carbon technology to transform manufacturing processes. It will also necessitate new infrastructure, such as supplying the additional electricity required and facilitating recycling and waste management.

Stimulating demand for carbon-neutral and green products that can drive market development, new approaches will be required. Creating a market and facilitating trade, certification, standards, labeling, and premiums, as well as green procurement initiatives, are becoming more common.

When it comes to decarbonization, large businesses and small and medium-sized businesses have different needs and priorities. To prepare all actors for more competitive and resilient industries, policymakers should account for the various benefits and impacts of climate policies. To ensure that as many people as possible benefit from the industry transformation, programs for skill development, knowledge transfer, and human and institutional capacity must be established.

Business and policy leaders should understand the forces transforming the global economy

Financing solutions for net-zero transition

To facilitate a net-zero transition and investments in low-carbon technologies, two types of solutions are required.

Firstly, market solutions must improve the enabling conditions that influence investment decisions. These conditions make it more feasible to invest in low-carbon technologies through policy frameworks by addressing issues such as technological innovation, policy instrument strengthening, and institutional capacity. For example, such market solutions can include initiatives like green public procurement programs, policies promoting innovation and research and development, and capacity building for financial institutions and industry sectors.

Secondly, financing solutions must increase the availability of capital for investments in emerging and developing economies. New and groundbreaking technologies will necessitate novel forms of financing. Public funds can aid in project development and improve the readiness of breakthrough technologies. Blended finance, viability gap funding for first movers and pilot projects, and other innovative mechanisms are examples of how to leverage funding from development finance institutions and then mobilize private capital. To address operational cost differences, supporting instruments such as contracts for difference will be required.

Final thoughts

The growing emphasis of industry companies on incorporating environmental, social, and governance criteria into their investments, the development of transition finance frameworks, and the alignment of investment plans with climate targets are all positive signs for decarbonisation. However, financing the industry’s net-zero transition will necessitate a comprehensive and system-wide approach, which is aligned with sector-level decarbonisation targets and strategies developed collaboratively by Governments or industry actors. To provide the necessary financing for this transition, local capital markets must be deepened and greened. A collaborative effort by governments, industry actors, and financing institutions would result in a clearly-defined project matching with market and financing conditions to overcome obstacles.