Countries across the world are making climate pledges for 2030 through their INDCs (Intended Nationally Determined Contributions). Why can’t industrial sectors do the same? Industries are afraid that climate measures will hurt their international competitiveness, but this problem could be avoided if they agreed on international sectoral pledges. Rolf de Vos of Ecofys proposes a new mechanism: Intended Sectorally Determined Contributions (ISDCs).
Yes, there are plenty of companies in the world that are eager to reduce their greenhouse gas emissions. Business initiatives like We Mean Business, Caring for Climate and The Climate Group, with members like Ikea, Unilever and Nike, are urging policymakers to agree on ambitious reductions.
In an Open Letter sent on 16 April CEOs of 43 global companies from 20 different economic sectors called upon governments ‘to take bold action’ at the Paris climate summit. These included retail, electronics and financial companies, like Philips, Ikea, Marks & Spencer, Munich Re, but also energy and chemical companies like Enel, Iberdrola, GdF Suez (Engie), Dow and Solvay. At the end of July, another 13 US-based multinationals, including Coca-Cola, Walmart, Cargill, Google and Microsoft, signed the American Business Act on Climate Pledge. Under this “Act”, initiated by the Obama Administration, companies express their support for a strong climate treaty and make pledges to reduce their own greenhouse gas emissions.
The missing link
But in all these initiatives one major group of companies is largely missing: the energy-intensive industry. And this is the group that is needed the most.
When confronted with climate measures, the energy-intensive industry has one trump card, which they invariably play: the argument for a level playing field
Energy-intensive companies, such as refineries, cement, steel, aluminium, chemicals, paper and glass producers, tend to play a modest role in green business networks. Some sectors, such as the cement industry (see text box: Cement Sustainability Initiative) and the European pulp and paper industry, do take initiatives. Others are absent from the debate, or even lobby actively against climate policies. See for example the opposition from EU industry (e.g. Eurofer and Business Europe) to the 40% greenhouse gas emission reduction goal that was agreed by the European Union last year.
This is not a trivial matter. According to the IPCC’s Fifth Assessment Report, industry accounts for about a third of all greenhouse gas emissions (including the ‘indirect’ emissions from energy consumption). The major part of these emissions comes from energy-intensive industry.
Strong lobby, strong arguments
Of course policymakers are aware of this and they could simply take measures to impose limits on industrial emissions. But the energy-intensive industry has a strong lobby. They also have persuasive arguments: they are crucial to employment and economic growth in many countries. And to be fair, unlike light industry or the service sector, they are much more affected by higher energy prices – and often have few alternatives to fossil fuels.
I asked UNFCCC’s Secretary General Christina Figueres in May if she believed ISDCs would be a possibility, but she kindly directed me to the climate change business associations
When confronted with climate measures, the energy-intensive industry has one trump card, which they invariably play: the argument for a level playing field. If policymakers take national or even regional measures, industry warns that it will be forced to move to places with laxer regimes. They have no choice, they say, it’s a question of competitiveness.
The EU Emission Trading Scheme (ETS) is a case in point. In the EU for years a complex debate has been going on about the danger of “carbon leakage”. As a result, 90% of EU industry receives emission allowances for free and this does not look as if it is about to change. And with free allocation, industry does not pay for the full costs of their CO2-emissions.
‘Look beyond borders’
So how can energy-intensive industry be brought into the climate fold? There are several options on the table. What they all have in common is that they are supra-national, cross-border approaches, which target industry or industrial sectors as a whole. As Rob van der Meer, Director Public Affairs of HeidelbergCement, one of the world’s largest cement producers, puts it: “We believe that a global sectoral approach, founded on a uniform but differentiated carbon pricing system, would be a way forward. If policymakers could step out of their national preoccupations, Paris might give room for further development of these sectoral approaches.”
The most common examples of cross-border approaches are: carbon pricing, carbon taxes on imported products, and sectoral approaches.
Carbon pricing (which usually takes the form of cap-and-trade systems or carbon taxes) is acceptable to almost all businesses, as long as their competitiveness is not affected. The previous UN climate summit in Peru showed that carbon pricing is becoming increasingly popular. The draft negotiation text for Paris, as agreed in Lima, calls carbon pricing a key approach for cost-effective emissions cuts. But that is as far as it goes: a global, coordinated approach is still far away.
Carbon taxes could take the form of import taxes, also known as Border Carbon Adjustments. Such border taxes could neatly solve the inequity of different emission reduction regimes. However, they would stray into the territory of the mighty World Trade Organisation (WTO), which aims to reduce import taxes and stimulate free trade. Border carbon adjustments are also a very complex solution. What if steel is taxed, but not cars?
The case of the cement industry
The Cement Sustainability Initiative (CSI) is a sectoral initiative covering about a third of the global cement industry. It already delivered its first successes and could be regarded as an ISDC avant-la-lettre. CSI-spokesman Rob van der Meer explains that sectoral industrial initiatives depend strongly on policies. “We believe that a global sectoral approach, founded on a uniform but differentiated carbon pricing system, would be a way forward. However: policy makers tend to regard their own country or region only. If they could step out of their national preoccupations, Paris might give room for further development of these sectoral approaches.”
The Cement Sustainability Initiative represents about 35% of global cement production, says Van der Meer. “Each member has its own reduction goal, so there is commitment. However, it is not binding.”
“One major problem for further progress is the stability of policies. In cement production, the kilns are built for thirty years or more, so stability is of the essence to earn back any investments. Even in the EU, the emissions trading scheme does not provide enough certainty.”
“The cleanest cement production occurs in the EU. But let’s be clear: if the EU would structurally increase carbon prices, at a certain level it will become more profitable to produce in China—which actually already produces about 60% of all global cement—Indonesia or elsewhere, and transport the cement to Europe.”
So we may consider the third option, the sectoral approach, in which a complete industrial sector (e.g. steel, cement) is subject to global targets. This also has its difficulties: it would require differentiated targets among industries from rich and poor regions, which would have to be negotiated. Negotiations about sectoral approaches did actually take place in the past at previous climate summits, but without concrete results.
What could be a solution is if industry organisations took up this challenge and came up with sectoral plans: Intended Sectorally Determined Contributions (ISDCs), comparable to the Intended Nationally Determined Contributions (INDCs) by country governments. Industry could be open to this, since it would allow for a fair distribution of climate change abatement responsibilities.
If the INDCs for2030 could be complemented by ISDCs, the missing link between policy and business would be found. To be sure, this is not likely to happen before Paris. I asked UNFCCC’s Secretary General Christina Figueres in May if she believed ISDCs would be a possibility, but she kindly directed me to the climate change business associations.
Yet if the energy-intensive industry and policymakers could inspire each other with mutual ‘Determined Contributions’, something similar could happen as between China and the US a couple of months ago. These two leaders of the world took an important joint step in climate change policy. Politicians and industries could do the same. Let’s ask them!
In a next blog post I will return to this subject. I will address in more detail how we can define what would be needed from the energy-intensive industry, both for sectors as a whole and for individual companies, and what methodologies are being developed for this purpose.