Hard to Abate, Impossible to Ignore: Industrial Decarbonization in a Shifting Policy Landscape

Key Concepts

• Decarbonization: Reducing carbon dioxide emissions.
• Hard-to-Abate Sectors: Industries where reducing emissions is technically challenging and costly.
• Green Premium: The additional cost associated with low-carbon or sustainable products compared to conventional ones.
• Direct Reduced Iron (DRI): A process for producing iron from iron ore using reducing gases, often natural gas or hydrogen.
• Green Hydrogen: Hydrogen produced using renewable energy sources, typically through electrolysis of water.
• Calcination: A thermal treatment process used in cement production that releases CO2 from limestone.
• Process Emissions: CO2 released as a direct result of a chemical reaction in an industrial process, not from energy consumption.
• Supplementary Cementitious Materials (SCMs): Materials added to concrete to improve its properties and reduce the amount of cement needed.
• Co-production: Producing multiple valuable products from a single industrial process.
• Cost Parity: When the cost of a low-carbon product or technology becomes equal to or lower than its conventional counterpart.
• Climate Pledge Fund: Amazon's $2 billion fund for investing in climate tech.
• Scope 1, 2, and 3 Emissions: Greenhouse gas emissions categorized by their source (direct, indirect from purchased energy, and other indirect).
• Science Based Targets initiative (SBTi): A framework for companies to set emissions reduction targets aligned with climate science.
• Carbon Border Adjustment Mechanism (CBAM): An EU policy to put a carbon price on imports of certain goods from outside the EU.
• Environmental Attribute Certificates (EACs): Tradable certificates representing the environmental benefits of renewable energy or other emissions reductions.
• Book and Claim Systems: A mechanism allowing the purchase of environmental attributes separately from the physical product.
• Critical Minerals: Minerals essential for modern technologies and economic security.
• Material Recovery: The process of reclaiming valuable materials from waste streams.

Cement and Steel: Crucial to Climate Solutions

This discussion focuses on the critical role of decarbonizing the cement and steel industries, which together account for a significant portion of global CO2 emissions (cement: 5-8%, iron and steel: at least 10%). Unlike the power sector, where solutions are rapidly advancing (e.g., exponential growth in solar PV and battery cost reductions), these heavy industries present unique challenges due to their "hard to abate" nature and persistent "green premium." The conversation explores technological solutions, economic viability, policy environments, and investment strategies for achieving industrial decarbonization.

Iron and Steel Decarbonization

Maria Persson Gulda, CTO of Stagger (formerly H2GreenSteel), explains that steel production is responsible for approximately 10% of global CO2 emissions. The primary challenge lies in the iron-making process, which accounts for 80% of emissions in flat steel production (as opposed to scrap-based long steel).

• The Problem: Traditional iron-making uses blast furnaces with coke (a coal derivative) to reduce oxidized iron ore. This process releases significant CO2.
• Existing Alternative: Direct Iron Reduction (DRI) has been used for decades, employing natural gas to reduce iron ore. This process converts iron ore into carbon monoxide and hydrogen. Carbon monoxide produces CO2, while hydrogen produces water.
• Green Steel Solution: By using high-temperature hydrogen produced via electrolysis powered by renewable electricity (green hydrogen) in the DRI process, CO2 emissions can be reduced by 100%. Hydrogen is also a more efficient reducing agent than carbon monoxide. This method also yields cleaner iron and steel by avoiding impurities present in natural gas.
• Stagger's Approach: Stagger is building a facility to produce 2.5 million tons of green steel, aiming for a 95% reduction in CO2 emissions. Their process involves:
  • Producing green hydrogen via electrolysis of water using green electricity.
  • Feeding this hydrogen into a direct reduction iron tower.
  • Producing 2.1 million tons of DRI (Direct Reduced Iron).
  • Using this DRI in the steel production process to yield 2.5 million tons of steel.
• Location Advantage: Stagger is located in Northern Sweden, benefiting from cheap and abundant hydropower, with electricity prices below €30 per megawatt-hour (approximately 3 cents per kilowatt-hour), significantly lower than in other regions like Germany (€120/MWh). This low electricity cost is crucial for the energy-intensive green hydrogen production.

Cement Decarbonization

Simon Brandler, General Counsel and VP of Policy and Public Affairs at Brimstone, highlights the inherent CO2 challenge in cement production.

• The Problem: Cement production starts with limestone (calcium carbonate). Heating limestone in a kiln causes calcination, where the carbonate group releases CO2. This "process emission" accounts for about 60% of cement's carbon footprint. The remaining 40% comes from the energy used to heat the kilns, often from burning fossil fuels like coal.
• Brimstone's Innovation: Brimstone addresses the problem by using calcium silicate rocks instead of limestone. These rocks are abundant and can be sourced near end-users.
  • Elemental Separation: Brimstone's process elementally separates calcium silicate into its constituent elements.
  • Co-production: The key breakthrough is co-production. They produce:
    • Ordinary Portland Cement (identical to conventional cement).
    • Supplementary Cementitious Materials (SCMs), which are also valuable for decarbonization.
    • Aluminum, a valuable commodity that helps offset the costs of the other products.
• Economic Goal: The aim is to produce and sell these commodity products at commodity prices, eliminating the need for a "green premium" for their decarbonized cement.

Investment and Commercial Perspectives

Nick Ellis, Principal at Amazon's Climate Pledge Fund, discusses the investment rationale and the role of large corporations.

• Cost Parity is Key: Amazon, through its Climate Pledge Fund, invests in companies that demonstrate a clear path to cost parity with incumbent industries. They are not interested in long-term, high-premium "charity" investments.
• Amazon's Climate Pledge: In 2019, Amazon committed to be net-zero by 2040, covering all its Scope 1-3 emissions. The Climate Pledge Fund, initially $2 billion, supports technologies that may take 10-30 years to scale.
• Catalytic Customer Role: Large corporations like Amazon aim to be "catalytic customers" by making early commitments and offtake agreements, helping to scale up and cost down these new technologies.
• Rivian Investment: An early investment in Rivian (electric vehicles) served as a proof of concept for scaling and cost reduction.
• Longer-Term Bets: Investments in Brimstone (low-carbon cement) and Electra (low-carbon steel) are examples of longer-term bets on technologies that are still in development.
• The Climate Pledge Community: The Climate Pledge now includes over 600 corporations committed to similar decarbonization goals and commercial offtake.
• Demand Aggregation: A critical aspect is aggregating demand. Companies like Microsoft have signed offtake agreements with Stagger, demonstrating a growing market for low-carbon materials.

The Value Proposition for Industrial Clients

Cornelius Paper, Senior Partner at BCG, provides insights into articulating the value proposition to large industrial players.

• Technology Adoption S-Curve: Historically, new technologies are slow to adopt, expensive, and inefficient, but then experience rapid growth. This pattern is observed with solar, EVs, and is expected for green steel and cement.
• Expanding Demand Sources: Involving entities further down the value chain (like Amazon or Microsoft) can help absorb the initial cost premium, as the impact on the final consumer price is often minimal. For example, the cost increase of green steel in a washing machine might be only a few percentage points of the final retail price.
• Sharing the Burden: The cost of decarbonization, which often occurs early in the value chain, should not solely rest on upstream producers. Mechanisms are needed to distribute these costs.
• Fear of Missing Out (FOMO) and SBTi: The approaching 2030 deadlines for Science Based Targets initiative (SBTi) commitments are creating a sense of urgency. Companies are realizing that by 2030, there may be a scarcity of low-carbon materials, driving them to secure capacity now.
• Cost Competitiveness of Stagger: Stagger's operational costs are on the lower end of a flat cost curve for steel production. However, the steepness of the cost curve increases significantly when considering the high cost of green electricity in regions like Germany compared to Northern Sweden.
• Partnerships for Investment: Stagger secured early investment from customers (like Mercedes, Volvo) and equipment manufacturers, demonstrating a broad partnership approach to de-risk and fund the project. Their initial round was $90 million, with total funding reaching $6.5 billion.
• EU Carbon Pricing and CBAM: The EU's carbon price and the upcoming Carbon Border Adjustment Mechanism (CBAM) are expected to make conventional steel production more expensive, leveling the playing field for green steel. A €100/ton carbon price could add €200/ton to steel production costs.
• US Policy Landscape: While the US has some state-level carbon pricing (e.g., California), there is no federal carbon price. The Inflation Reduction Act (IRA) has provided significant funding and incentives, which are seen as accelerants rather than the sole basis for economic viability.
• Financing Challenges for Cement: Cement production requires massive scale (plants costing billions) to achieve cost parity. Securing offtake agreements in a traditionally spot market is crucial for financing. Brimstone's strategy involves finding motivated end-users willing to commit in advance to de-risk financing.

Emerging Technologies and Future Outlook

• Electra's Technology: Electra offers a different approach to low-carbon steelmaking, using electricity directly to reduce iron ore at low temperatures and energy requirements. This technology can also function as battery storage and is scalable to smaller production units, making it suitable for emerging markets.
• Pace of Innovation: The pace of innovation in climate tech is accelerating, with electrochemistry showing particular promise.
• Scarcity of Supply: A significant bottleneck is the scarcity of supply for low-carbon materials. Corporations are urged to reserve capacity to secure future access.
• Global Dynamics:
  • Europe: Leading with strong climate policies and carbon pricing mechanisms (CBAM).
  • United States: State-level action is more prominent than federal. There's a shift towards domestic industrial policy and critical minerals. Opportunities exist in material recovery (e-waste) and nuclear energy.
  • Asia: Showing significant potential for bold moves and rapid adoption, particularly in India, with a focus on cost-effective solutions.
• Decoupling Iron and Steel Production: A potential future model involves decoupling iron making from steel making. Iron could be produced in regions with abundant low-cost green electricity (like Brazil, Africa, or even Northern Sweden) and then shipped to steel plants elsewhere, improving economic efficiency.
• US Opportunities (Next 3 Years):
  • Steel: US already has an advantage in scrap-based and DRI flat steel production.
  • Cement: Domestic production is insufficient, creating import reliance. Brimstone's co-production model also yields aluminum, a critical mineral with limited US refining capacity.
  • Nuclear Energy: Expected renaissance with private sector innovation and federal support.
  • Material Recovery: Exploding growth in e-waste recycling for rare earth elements.
• Environmental Attribute Certificates (EACs): EACs are seen as a transitional market instrument to facilitate the shift to low-carbon materials, especially in industries where physical connectivity is challenging (like cement). They are expected to be relevant for the next 10-20 years.
• Scale of the Challenge: The sheer scale of global cement (4 billion tons/year) and concrete (30 billion tons/year) production, particularly in the Global South, requires market mechanisms and economically advantaged solutions. Wealthier countries may need to support poorer nations in adopting these technologies.
• "Don't Let Perfect Be the Enemy of the Good": This principle applies to technology adoption, standards setting, and the use of transitional mechanisms like EACs or even Carbon Capture and Storage (CCS) to achieve scale.

Conclusion and Future Outlook

The transition to low-carbon cement and steel is a complex, long-term endeavor requiring a multi-faceted approach. Key takeaways include:

• Partnerships are paramount: Collaboration across the value chain, from raw material suppliers to end-users, is essential for securing investment, de-risking projects, and driving adoption.
• Economic viability is non-negotiable: While climate goals are critical, solutions must ultimately be cost-competitive to achieve global scale.
• Policy and market mechanisms are crucial: Carbon pricing, incentives, and regulatory frameworks (like CBAM) play a vital role in leveling the playing field and driving investment.
• Innovation is accelerating: New technologies, particularly in electrochemistry and hydrogen production, are offering promising pathways to decarbonization.
• Global disparities require tailored approaches: Strategies must consider the varying economic and policy landscapes across different regions.
• Urgency and proactive engagement are needed: The approaching SBTi deadlines and the potential scarcity of low-carbon materials necessitate immediate action and strategic capacity reservation.

The discussion concludes by emphasizing that while the journey is challenging, the increasing focus on industrial decarbonization, coupled with technological advancements and evolving market dynamics, presents a significant opportunity for innovation and transformation.