A lot of attention, focus and success in the last decade has been centred around decarbonising the power grid and developing electric vehicles. Admirable progress has been made in both these areas in a very short span of time and results are evident. The levelized cost of solar and wind generation has been falling dramatically and has now become very competitive vis-a-vis traditional fossil fuel generation assets. Likewise, EV's are fast becoming the vehicles of choice across many geographies and EV sales have held up whilst ICE vehicles faced considerable headwinds because of the pandemic.
However, we have heard very little when it comes to carbonising the industrial sector. Is it because most green house gas (GHG) emissions occur in the power generation space or through tail pipe emissions? The answer is actually an emphatic no!
As per most independent studies, the lion share of GHG emissions happens in the industrial sector, more precisely in the heavy industrial space. By heavy industries, I mean three core ones - Iron & Steel, Cement and Petrochemicals.
Despite heavy industry being at the cornerstone of GHG emissions there is limited material out there that dwells on this problem. Through this note, I aim to share with you some key aspects of the heavy industrial sector so that you can take away these facts and form a more informed judgement on this very critical issue.
A brief note of caution for the reader. I have shared sources in this note wherever possible; for any omissions I do apologise in advance. To determine the exact quantum of emissions is challenging for any analyst. This is a subject that is evolving and data analysis is subject to a lot of interpretation. My aim here is to share data from various sources but the overriding purpose of the note is not to focus on the precise number but to absorb and reflect on the magnitude of the problem at hand.
Let's begin then.
GHG Emissions by the Industrial Sector
The annual GHG emissions (CO2, methane, nitrous oxide etc) from human activity including agriculture are estimated at 51 Giga tons (51 Billion tons). Whilst 2020 emissions fell due to COVID, we should work with this number as a start. Bill Gates in his book - How To Avoid A Climate Disaster references this number extensively. If I look at the site Our World In Data, total GHG emissions over the most recent years hovers around the 50 Giga ton mark. So for the purposes of this note, we shall stick to 51 Giga tons.
We now need to drill a bit more into this 51 Giga ton number. What is it composed of and where do emissions come from?
Based on Our World in Data, CO2 accounts for 75% of GHG emissions, methane is around 17%, nitrous oxide is about 6% and the balance is other gases. So CO2 forms the bulk of GHG emissions but it is not the only gas that causes this issue. Additionally, each of these gasses has very different properties with respect to heat transmission and absorption but this is not the focus of this note [There is extensive literature out there on this topic hence I shall not dwell upon it in this note].
Coming to the second question, where do these emissions come from? About 73% of the emissions arise from the use of energy (burning fossil fuel to produce energy), around 20% arise from agriculture and land use and the balance from process emissions and waste.
Drilling down further demonstrates around 24% of the total emissions takes place on account of energy usage in industry. Additionally, around 5% of emissions take place because of process related emissions arising out of industrial manufacturing processes itself. The combined effect is staggering and clearly demonstrates that the industrial sector is the chief emitter of GHG emissions and must be studied in greater detail.
The Industrial Sector
The industrial sector is very broad and encompasses many industries that manufactures diverse products including many intermediary products. A broad classification of the industrial sector could include (a) ferrous metals (iron & steel), (b) non - metallic (cement, lime) (c) aluminium (d) petrochemicals and polymers (e) pulp, paper, forestry (f) food, tobacco etc (g) glass, silicates (h) others.
For the purposes of this note we shall focus on the three heavy industries namely:
- Iron & Steel
- Cement
- Petrochemicals and polymers
During subsequent notes, I shall go into each of these three heavy industries in greater detail. For this note I will share a few interesting facts about each of them before getting into the main body of the note which is why these industries are challenging to decarbonise.
Iron & Steel: Firstly, 1 ton of steel production generates around 1.4 - 2 tons of CO2 (this is based on the most widely used steel manufacturing technique namely the blast furnace / basic oxygen furnace; there are many other techniques to produce steel).
Total world crude steel production in 2020 was 1.8 B tons with China producing over 1 B tons and India coming next at around 100 million tons. To put things in better perspective, in the year 2000, global crude steel production was 850 million tons meaning that steel production has more than doubled in the last 20 years!
Estimates of direct CO2 emission for the Iron & Steel industry centre around 2.6 G tons per annum. If indirect emissions are considered then the estimate is around 3.6 Gt. Steel making is highly energy intensive consuming more than 25 exajoules of energy or around 7%-8% of total global energy consumption which ties in with the fact that steel making is a high CO2 emissions industry.
Cement: Production of 1 ton of cement generates around 0.5/0.6 tons of CO2 which makes it another high CO2 emitting industry. Basis the IEA, the industry emitted around 2.4 G tons of emissions in 2019; a staggeringly high number for a single industry. Cement production is also highly energy intensive with 3 GJ of energy being used to produce one ton of cement. Basis some independent estimates, the total energy consumption of the cement industry is around 15 exajoules per annum.
World cement production in 2020 touched around 4.1 billion tons and has been around the 4 billion ton mark for nearly a decade now. In the year 2000, global cement production was just slightly north of 1.5 billion tons which demonstrates that production has nearly tripled over the last two decades! China produces around 2.2 billion tons of cement making it by far the largest cement producing country in the world.
Petrochemicals and Polymers: The petrochemicals & associated industries are the largest energy consumers in the world with estimates of energy consumption per annum touching nearly 50 exajoules. Bulk of the energy consumption in this industry comes from fossil fuel. However, emissions are not as high as one would expect given the massive fossil fuel energy consumption. This is due to the fact that carbon from fossil fuel forms an integral part of the finished product.
Worldwide plastic demand is the fastest growing bulk / heavy industry product outpacing global GDP growth, cement or steel. Production center for petrochemicals, polymers etc is the Asia Pacific region with around 50% of the global output and China dominates production capacity within the AsiaPac region.
This sector is immensely diverse & challenging, the end products are multiple, many processes and approaches all leading to massive challenges around decarbonising the industry.
I shall be writing individual notes on all the above three sectors in a bit more detail. The purpose of introducing these three industries here was to give the reader a flavour of these three industries which form the bulk of GHG emissions in the industrial sector.
Now we come to the main point of the note. Why is it hard to decarbonise the industrial sector? Why is the industrial sector associated with the term 'hard to abate'?
I did argue at the start of this note that much of the media and discussions steer towards decarbonisation of the power grid and cleaner electric vehicles whilst the industrial sector has languished in terms of coverage. Let us focus in greater detail on what the specific challenges are hence why scant attention has been paid to this segment.
A. High temperature requirements: Industry in general and heavy industry in particular needs high temperatures for many of its processes. In many cases temperatures needed are in excess of 1,000 celcius. Blast furnaces, petrochemical complexes all operate at very high temperatures and this high temperature generation at the moment can only be achieved via fossil fuel combustion. Combustion of fossil fuel is a near automatic cause of the GHG emission. At such high temperatures, electrification as a means to generate heat is not viable alternative and hence the industry sticks to fossil fuel combustion.
B. Process emissions: The cement industry is an excellent case in point. The chemical process used to produce clinker which is ultimately used in the production of cement itself emits CO2. What this means is emitting CO2 is a must to produce the final product. In a separate note around cement (to be published in due course) we can get into more details but this is a key and fundamental issue why CO2 emission is hard to abate. The petrochemicals sector on the other hand uses some of the carbon from fossil fuel in the final product hence CO2 emissions from this sector are not as high as one would imagine given it consumes an incredible amount of fossil fuel.
C. Industry characteristics: Heavy industry in particular is characterised by large capex, low margins, cyclicality and low R&D spend. Compared to the life sciences or technology industry, heavy industries like iron & steel spend very little on R&D. Process improvements have been slow and marginal over time. Further, as the margins are slim and the industry very cyclical, it prevents large financial resources being spent on optimising the process or reducing emissions. The ability to develop a completely radically new approach is very challenging.
D. Highly traded nature of products: This applies to the iron & steel and petrochemicals industry. Cement is not a highly traded product and consumption generally takes place where it is produced. As the end products are highly traded, with slim margins and little product differentiation, it comes down to price as the key determinant. When price becomes the key determining factor, there is little incentive for the producer to spend large amounts of money on anything other than reducing the cost of production. Another related issue is whilst emissions are occurring in one country, consumption of the finished goods may be taking place in another country and this massively complicates issues. Border adjustment tax is one recent legislation being discussed in Europe to adjust for this problem.
E. Integral nature of end products: the end products produced by heavy industry have now become integral to our living. For developing nations, the demand for steel and concrete is directly to developmental growth and infrastructure build out. Plastic consumption is rising across the board and is at a faster growth rate than global GDP growth rates. Whilst COVID may have temporarily blunted the growth in some sectors, it is back to near normal again in most. Product substitution is very challenging, for example no zero carbon substitute for steel exists today at any comparative cost. Even within the developed world where building & infrastructure activity is not as frenzied as developing countries, demand has not cratered and come to zero.
Further, for many of the low carbon solutions in other sectors such as power generation, the requirement of steel & concrete is fundamental as shown in the graph below.
F. Age of assets: Unlike the consumer goods or the high tech world where asset life is just a few years, steel mills, cement plants are long life assets (hardly anyone refurbishes a smart phone). Most heavy industrial assets have an asset life of 30-40 years and at some point in their mid life they are refurbished to extend the asset life. Hence, any decisions taken today to either build a new plant or to extend its life will have an impact many decades from now. The ability to set up entirely new plants with new processes is extremely challenging and not a viable solution. Retrofitting and making modular adjustments or trying to amend the fuel mix are therefore some potential solutions. In subsequent notes we shall touch these solutions in greater detail.
As mentioned earlier in this note, China is a key player in the heavy industry space and has around 40%-60% of global manufacturing capacity in most of these sectors. The graph below from IEA shows the age of iron & steel and cement plants in China. Blast furnaces on average are 12 years old and cement kilns are 13 years old on average compared to their useful life of 40 years. These are therefore very new assets and have many years to go before they can be retired and this underscores my point that simply replacing assets is not a viable solution.
In the next note, we shall look at the Iron & Steel sector in a lot more detail. In that note we shall review the main processes to produce iron & steel, how demand has grown, where its produced, the key challenges around CO2 emissions, some of the potential solutions the industry is looking at and how the next decade will shape up for this industry.
Subsequent notes will cover cement, petrochemicals, hydrogen and carbon capture techniques. I hope that after reading all the notes, you will appreciate the challenges of decarbonising the entire global economy and pay much greater attention to government policies and technological developments in the heavy industry space.
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