High emissions industries should be relocated to where the cheap clean energy is. So long as the shipping costs (in terms of price and emissions) aren’t prohibitively high, those locations can be anywhere in the world. To get the calculations right, Carbon Border Adjustment Mechanisms (accounting for the emissions of imported goods) must be harmonised internationally. They must also – crucially – count all relevant emissions. But the EU’s draft plans, leaked earlier this month, don’t do this, say Dolf Gielen, Paul Durrant, Barbara Jinks and Francisco Boshell at IRENA. The authors give examples of the policy shortfalls (e.g. petrochemicals and hydrogen are left out, recycled and pure steel should be differentiated, transparency should not be undermined by proprietary information). The authors explain and quantify the main relocation drivers for green hydrogen, ammonia, methane, aluminium, iron and more. Though not everything will benefit (e.g. cement) it’s already happening and will continue. But global emissions reduction strategies don’t take into sufficient account these relocation opportunities, say the authors. It should be a critical mechanism in the policy toolbox for future net-zero strategies. That means linking the discussions of carbon accounting for green commodities with clean energy generation.

The production of commodities such as iron, steel, chemicals, petrochemicals, non-ferrous metals and ceramic materials is energy and carbon intensive. In recent years, new energy-intensive services have also emerged, such as data centres and bitcoin mining operations. This creates an increasing challenge to reduce global emissions in the race to meet the Paris Targets. The number of industries where energy and fossil fuel feedstock are a sufficiently key cost component are relatively few in number, but their impact on global energy use and CO₂ emissions is significant, accounting for around two thirds of industrial energy use.

Carbon leakage: a barrier to climate policies

Carbon leakage – the relocation of carbon-intensive activities to countries with lax policy regimes or the increased import of carbon-intensive commodities in preference to national production –­­ has been a barrier for effective climate policies and global emissions reduction for decades.

The EU is considering the introduction of a Carbon Border Adjustment Mechanism (CBAM) no later than 2023. The European Commission is expected to present a proposal soon and a draft was leaked in early June.

Importers would have to buy CBAM certificates for an amount that is calculated by multiplying import volumes and embedded emissions with a CBAM price. The CBAM price would be calculated as the average of the closing weekly prices of all auctions of EU ETS allowances. The CBAM would apply to electricity, steel, cement, fertilisers and aluminium but leaves out some key categories including petrochemical products and hydrogen. The methodology for calculating the embedded emissions is not yet public but the United States and China are amongst those who have already expressed their concerns.

Calculating the actual carbon content

The calculation of the actual carbon content of the product is a key issue to be resolved. Recycled steel for example is very different from primary steel in terms of embedded emissions but the difference is not visible in customs categorisations. Energy and carbon benchmarking systems exist for various industrial commodities but these contain proprietary information and cannot be used for public purposes – this would cause issues of transparency.

Renewable energy certificate (REC) systems are well established and enable end consumers of electricity to validate the electricity that has been generated from renewable sources. A number of such systems are in operation, including the European system of Guarantees of Origin (GO), and many issuing bodies for GOs are members of the European Association of Issuing Bodies (AIB). Rules for disclosure and certificates in new sectors (such as renewable synthetic gases) are also under preparation (including for hydrogen and biomethane).

As Europe is developing its carbon standards and certification systems, other regions are also developing their own. There is a risk that the proliferation of separate systems will complicate international trade if they are not well aligned. International standards are usually developed under the auspices of international organisations such as the International Organization for Standardization (ISO) or the International Electrotechnical Commission, however the development of such multi-national standards can take many years.

There is therefore an urgent need to harmonise and accelerate the discussion on carbon accounting across green commodities, clean hydrogen and electricity.

Relocation of industry can reduce carbon leakage

Location choices for energy-intensive industry may change as energy policy priorities change. Countries accounting for around 70% of global CO₂ emissions have already subscribed to the goal of net-zero emissions by mid-century. As more and more countries join, industry will need to consider access to low-cost, clean energy to stay competitive.

Previous studies have suggested that leakage effects can be mitigated through the introduction of technical emission mitigation strategies, provided sufficient time is given for such transition – see for example Gielen (2000); Ismer and Neuhoff (2004); Gąska et al. (2019); and Neuhoff et al (2021). These analyses mainly focused on loss of competitiveness and carbon leakage as complicating factors in the decarbonisation of carbon-intensive industries. However, since these were published, the emergence of renewable energy solutions as economically viable alternatives has created an opportunity to change the debate and break the political deadlock.

Location drivers

Location choice is driven by many factors in addition to proximity to resources and consumers, including the availability of a competitive, skilled labour force and favourable political and regulatory environments, but the cost of energy can play a significant role. The relocation of energy-consuming processes therefore to areas with available low-cost renewable energy resources could yield significant emissions reductions whilst satisfying energy demand. And, since many areas with low-cost renewable resources are located in remote parts of the world, new economic activity in remote locations could also have positive socio-economic impacts.

There are past examples of this, for example aluminium smelters having been typically sited close to hydropower dams with large amounts of low-cost electricity (which is also renewable) in places as diverse as Canada, Mozambique, Russia, Suriname and Venezuela. Ammonia plants have been located close to sources of low-cost natural gas, for example in Russia, Norway or the Middle East. These examples show that remoteness is not an impediment for location choice if the business case is favourable.

Similar choices continue to be made; Indonesia has identified part of its remote hydropower potential as a driver for industrialisation, remote areas in the deserts of Australia and the Middle East are being developed for green hydrogen production and bitcoin mining operations are being located in areas with low-cost electricity such as Iceland, China and northern USA (close to hydropower plants).

It’s already happening: relocation to where the cheap clean energy is

Signs of an increase in locating industry closer to cheaper renewable resources are emerging. Green ammonia (produced from green hydrogen) is becoming economically feasible. Announced projects for renewable ammonia currently total 17 Mt ammonia per annum by 2030. This is about 9% of the current global ammonia production of around 183 Mt produced per annum. Approximately thirty commercial-scale plants are in development, mainly in places with very low-cost wind and solar potential such as in remote parts of Australia, Chile, Oman and Saudi Arabia. IRENA and the Ammonia Energy Association are jointly assessing the opportunities for green ammonia in more detail.

Renewable methanol (produced either from biomass or green hydrogen) can also play a role as a key building block in the chemicals industry to produce synthetic organic materials and fuel. Access to cheap feedstock will be critical for this industry.

Relocation is considered economically viable where the energy cost benefits exceed the additional shipping cost. The data in table 1 indicates that relocation may be beneficial for aluminium, ammonia, iron, jet fuel and methanol.

For hydrogen the benefits and cost balance out and for cement, relocation seems generally not to be economically viable as additional shipping costs exceed the energy cost benefit (and consideration of process emissions would show higher vulnerability). Green commodities have much lower shipping costs than hydrogen, therefore location choice may favour manufacturing closer to the hydrogen production sites.

Industry relocation can have a significant impact on the energy and CO₂ balance of countries due to the magnitude of industrial operations. Densely-populated countries with high energy consumption intensity can be particularly affected, for example in East Asia and Western Europe. Industry relocation for energy reasons is not unheard of; following the oil crises in the 1970s, Japan phased out primary aluminium smelters and switched to imports.

Relocation can also open up important new development opportunities such as the recent announcement by Mauritania in northern Africa signing an MoU to develop 30 GW of hydrogen electrolyser capacity in a country with only 0.5 GW existing power generation capacity.

The way ahead

Relocation of energy-intensive industries and processes can cause carbon leakage. However as shown above, such relocations can also have climate benefits and can create new economic activity. The impact of location choices on national energy and CO₂ balances can be profound and could become a critical mechanism in the policy toolbox for future net-zero strategies. The impacts and benefits of relocation are however not properly captured in today’s carbon mitigation strategies.

As the embedded carbon content of a commodity is not evident, a comprehensive set of standards and certification systems is needed as part of CBAMs. As today’s systems are fragmented, it is critical that systems for electricity, clean hydrogen and the trade of green commodities are well aligned. Coordination of international efforts to develop such systems is critical and will be beneficial for Europe and others. In this context, IRENA is cooperating with the World Economic Forum and conducting a series of dialogues with its members. In general, creating the conditions for trade in green commodities and fuels need to be higher on the agenda for COP26 as well as other international frameworks such as G20 and the Clean Energy Ministerial.

***

Dolf Gielen is the Director of the Innovation and Technology Center in Bonn, IRENA

Paul Durrant is Head of End-use Sectors & Bioenergy, Innovation & Technology Centre, IRENA

Barbara Jinks is a Programme Manager at IRENA

Francisco Boshell is an Analyst at IRENA