Pathways To Decarbonise The Cement Sector
Cement is considered a hard-to-decarbonise industry due to its peculiar energy needs and processes; it contributes to about 8–9% of global greenhouse gas (GHG) emissions. In its present form the industry is water intensive and polluting, which takes an adverse toll on the environment. Surprisingly, the Cement Production CO2 Intensity, which signifies the amount of carbon dioxide emitted per unit of cement manufactured, is more in developed countries than in developing countries. A survey conducted in 2015 by Global Efficiency Intelligence, an energy and environmental consulting and market research firm, suggests that Cement Production CO2 Intensity (kgCO2/t cement) in the US and Europe was ~820 kgCO2/t and ~ 620 kgCO2/t respectively, whereas Cement Production CO2 Intensity in China and India was ~540 kgCO2/t and ~ 515 kgCO2/t, respectively. Given that cement is essential for erecting infrastructure and for housing, it will continue to be used, particularly in developing countries. It is, therefore, imperative to decarbonise the cement industry to meet the global climate ambition.
The main methods to reduce GHG emission related to energy consumption from the cement industry are heating efficiency, fuel switching, and electrification of cement kilns. Carbon Capture Storage (CCS) will also be essential as it is nearly impossible to achieve zero-carbon emissions in cement production. While companies have already taken heating-efficiency measures, the other three methods are at various stages of development. Switching to clean energy depends on its landed cost and availability. The feasibility of adding large-scale CCS is expected to take at least a decade to be commercially feasible. The existing applied technologies can reduce CO2 emissions to a limited extent; however, there is a need to invest heavily in energy-efficient technologies, electrification of cement kilns, and CCS to reduce thermal fuel-related emissions from cement.
Reducing CO2 emission from cement production processes depends on the type of mineral and chemical admixtures and changing cement chemistry. The new cement chemistries, alternative materials, and new chemical production methods are expected to achieve materiality in commercial deployment but still need further investment in R&D to reduce technology costs and running of pilot projects to demonstrate its commercial viability.
Establishing an innovation ecosystem
A McKinsey study suggests that CO2 removal can be achieved in the cement industry through technological innovation and new growth horizons. These technologies may take a long time to substantially reduce carbon emissions without hampering the profitability of cement firms. Balancing these parameters warrants making crucial investments and setting up an innovation pipeline around the cement industry.
Investment in low-carbon technologies
The cement industry currently lacks solid incentives to invest in low-carbon technologies due to the absence of a carbon pricing mechanism and limited regulatory pressure. The repurposing of existing manufacturing facilities with the goal of reducing carbon emissions needs additional investment. Raising new equity capital can reduce the return on equity (ROE) and dilute the stake of existing shareholders – both financial decisions are not in the best interest of existing shareholders. Financing through debt capital can be ideal for keeping ROE intact but may face debt capital access challenges. Debt capital providers may not be convinced of the additional cash flow ability to repurpose existing manufacturing facilities. Once integrated with the plant, it will be difficult to separate the new technologies and ring-fence the asset for collateralisation. The existing regulations on the cement industry is not able to exert pressure on the cement industry to invest heavily in low-carbon technologies.
The role of transition financing
Concessional transition financing can help cement companies to reduce the existing plant’s carbon intensity. Cement companies in developing countries can get support from Multilateral Development Banks (MDBs) and International Climate Finance institutions such as the Green Climate Fund with a mandate to invest in low-carbon technologies that can provide concessional debt financing for cement plants that have a concrete plan to reduce carbon emissions.
In developed countries, governments can offer concession debt capital to help cement companies with a concrete green transition plan. Since the carbon intensity of the cement industry in developed countries is high compared to developing countries, governments can levy a tax based on their Cement Production CO2 Intensity. The money generated from this can be used for a research fund to invest in low-carbon cement technologies. Corporates can also raise capital from banks and financial institutions through the issuance of transition bonds or loans. The duration of loans or bonds must be long enough to deploy low-carbon technologies today but incentivise the company to generate financial savings in the long run. For example, an increase in carbon prices in the future can help those companies that have already deployed low-carbon technologies.
Transition financing, loans, or bonds (at a corporate level) are better options as the financier can assess the transition of the company across plants and not just a specific one. Transition financing can set carbon intensity targets for the company. It can add carbon-emission-related covenants to the loan/bond contract to incentivise the company to invest in less carbon-intensive technologies.
The rewards of collaboration
The collaboration between cement companies is critical where they can voluntarily pledge to share a percentage of their profit. The proceeds from these voluntary contributions can be pooled together to strategically invest, through an open, transparent, and competitive process, in relevant start-ups/incubators and to promote outcome-oriented projects in low-carbon technologies pertaining to the sector. The bigger contribution to the financial pool as a share of the company profits, the faster the sector can leapfrog towards achieving net zero while simultaneously reaping the benefits of economies of scale.
By Labanya Prakash Jena, Regional Climate Finance Advisor at The Commonwealth Secretariat
and Prasad Ashok Thakur, IIT Bombay and IIM Ahmedabad alumnus