This article is the product of a POLITICO Working Group, presented by Dow.
Financing a green pivot has gotten a lot harder for the bloc’s most carbon-intensive industries — hammered by high energy bills and anxious over a lack of clear rules from the European Commission on what, exactly, will be required of them to decarbonize.
Those in the steel, cement and chemicals sectors in particular are biting their nails over when and what sort of clean technology to invest in to meet the EU’s goal of net zero emissions by 2050.
Some of the answers are being finalized in negotiations this week on several key EU climate files, such as the revision of the EU Emissions Trading System (ETS) — while others, like rules for sustainable products and removing CO2 from the atmosphere, are only slated to begin initial debates on legislation next year.
The climate clock is ticking — and industry is begging for clarity before making massive investments.
“We are less than 30 years away from that objective and as an industrial sector we don’t even know when our sector needs to be climate neutral in order to do our share,” said Florie Gonsolin, climate change transformation director at Cefic, the chemicals industry group.
“Given the long investment cycles in this industry … if we don’t have regulatory clarity about eligible solutions, we are going to be left wondering, ‘What are the tools we are allowed to use?'” Gonsolin added. “This is why we have been asking desperately for a roadmap” from the Commission.
Brussels’ answer so far has been to trumpet the use of clean-burning hydrogen — made from renewable electricity and water using a machine called an electrolyzer — to replace the natural gas currently used in steelworks to soften up iron ore, or stripped to produce refined chemicals like fertilizers, in a bid to prevent greenhouse gases like CO2 from entering the atmosphere in the first place.
Dechema, the German chemical engineering and biotech society, also found in a study that the chemicals sector could achieve significant emissions reductions by switching chemical plants to run on power-based heat and steam systems, burning biomass like wood residue — which is granted renewable status under EU regulations — and using hydrogen, captured CO2 and other leftover molecules from industrial processes to recycle into new chemicals.
But all of those ideas require massive amounts of new CO2-free electricity and clear rules on when companies can claim emissions reductions when capturing carbon and re-using it (CCU).
So far, that’s not happening.
In Brussels, the European Commission has plans to double the share of wind and solar in the bloc’s energy mix by 2030, but efforts to cut red tape haven’t been finalized.
Meanwhile, in negotiations taking place this weekend to revamp the ETS — the bloc’s cap-and-trade carbon market — the European Parliament is pushing to severely restrict how companies can account for captured and reused CO2 in new products.
Without those final rules in place, firms risk building first only to have subsequent regulation make their investments obsolete or unworkable.
One recent example is ArcelorMittal’s €200 million first-of-its-kind CCU demonstration plant at a steelworks in Ghent, which opened last week.
The project captures industrial CO2 emitted during steel production and uses bacterial digestion to transform it into ethanol.
But “in our mind this is already dead — there will not be any other CCU projects for the steel industry in Europe,” said one steel executive familiar with the project.
That’s “because the legislation adds so many constraining bricks, starting with the fact that after 2035 industrial CO2 can no longer be used for this kind of product,” the executive explained. “So due to policy, due to regulations, the door for CCU is slowly closing.”
Green grumbles
There are other gripes over the direction the Commission is choosing.
Jonas Helseth, director of industrial decarbonization with NGO Bellona Europa, said that decarbonizing the chemicals sector using only direct electrification, hydrogen and CCU was a “pipe dream.”
That’s because, according to the Dechema study, “the full electrification of all chemical processes would require 140 percent of all EU electricity production, while their plans to make synthetic fuels from hydrogen and CCS would require 350 percent of EU electricity production,” Helseth said.
Instead, “industry is going to need CO2 storage,” also known as CCS, which permanently locks away carbon in underground storage or in products such as concrete, he said.
The EU ETS does have an approximately €38 billion Innovation Fund meant to finance industrial decarbonization projects — awards announced Wednesday include hydrogen and CCUS projects — but candidates for the cash must be ground-breaking and are subject to selection by the Commission.
In other words, “You’re just betting that you will get support — that’s not how you make a business case in the industry,” said the steel executive.
Europe has long been tarred for what several referred to as a “stick-first” approach — focusing on regulation that carefully circumscribes how technology should be built, or in worst cases picking technological winners outright.
Those complaints have grown louder with the introduction of the U.S. Inflation Reduction Act (IRA), with its “carrot-first” policy of laying out incentives for decarbonized industrial projects that don’t dictate technology solutions, as long as the final products meet the CO2-free requirements.
“A core element of the U.S. strategy is ‘Buy Clean,’ public procurement and the creation of lead markets for decarbonized products,” Helseth said. “This is a major missing piece in the EU industry puzzle.”
In Parliament, Swedish lawmaker Emma Wiesner said she and her fellow negotiators on the ETS file are taking aim at the Innovation Fund.
“We need to broaden the Innovation Fund on three fronts: we need to front-load so we have more innovation now, we need to have more upscaling on projects at technological maturity, and we also need to add more sectors,” Wiesner said.
But that fund is now being raided for other legislative priorities.
Tuesday’s overnight deal on the REPowerEU scheme, meant to wean the bloc off Russian energy, stipulates that 60 percent of a €20 billion new money pot to diversify energy infrastructure should come out of the Innovation Fund.
The Council has also raised the possibility of using money from the Innovation Fund to finance the Social Climate Fund, meant to shield vulnerable consumers from having to pay for CO2 emissions from buildings. Negotiations resume on the ETS file on Friday and Saturday.
“I’m very worried about the Council’s tendency to always sacrifice the Innovation Fund and empty its pockets, that’s the main issue at the moment,” Wiesner said.
The Commission is also trying to explore how to better deploy the Innovation Fund to help industry decarbonize going forward. A conference on financing clean technology will take place in Brussels on January 19.
A good first step, Helseth said, would be to “get rid of this hydrogen hype.”
This article is the product of a POLITICO Working Group, presented by Dow and was produced with full editorial independence by POLITICO reporters and editors. Learn more about editorial content presented by outside advertisers.
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