• Economic Research
  • Responsible Investing
  • ESG

A tough job: Decarbonising heavy industry

20 December 2021 4 minute read
Author

Heavy industry and heavy-duty transport are responsible for nearly a third of global carbon dioxide emissions. While reducing emissions from these sectors will be difficult, the transformation will create opportunities for investors.

Important information
A tough job: Decarbonising heavy industry

The challenge

Heavy industry (like steelmaking) and heavy-duty transport (like the large trucks that deliver goods to supermarkets) are vital to our economic well-being, but ways must be found to reduce the carbon dioxide (CO2) emissions they generate.

However, the technological solutions needed to reduce their emissions are more expensive than in other industries and require huge investment. In addition, the technologies are at such an early stage that it is difficult for companies to choose the right option. However, some companies are entering into partnerships and exploring various technological options to identify the ones that will eventually emerge as the most efficient.

The lifespan of assets in these industries is extremely long

Another difficulty is that the lifespan of assets, such as steel foundries and aeroplanes, in these industries is extremely long. Anything built today is likely to still be operational in 2050. Many businesses need to decide soon to reinvest in carbon-emitting technologies or in decarbonised processes. Some are already addressing this issue. For example, Arcelor Mittal, the second biggest steel company in the world, and Maersk, the biggest container shipping company, say they will be net zero (in other words, will fully offset any emissions they generate) by 2050.

Decarbonising these sectors cannot happen one foundry or aircraft at a time. The sectors are embedded in a whole network of suppliers and infrastructure, all of which must be transformed. Since governments fund, are responsible for planning and are heavily involved in building much of our current infrastructure, their participation is key to helping with decarbonisation.

The solutions

The good news is it is technically possible to decarbonise even the most challenging sectors by mid-century at a total estimated cost of well under 0.5 per cent of global GDP, even though some of the technical solutions are still hotly debated and unproven, particularly at commercial scale.1

Greater energy efficiency and a more circular economy are essential to reduce costs and achieve full decarbonisation

Moreover, future technological breakthroughs could be a huge driver of change. Optimists argue that by 2035 electrically-powered aircraft could fly 1,000 kilometres and carry 100 passengers. Existing technologies could also enable certain sectors such as energy, buildings, industry and transport to reach net zero by the mid-century. Greater energy efficiency and a more circular economy, which involves more sparing use and recycling of existing resources, are essential to reduce costs and decarbonise.

Industries need to agree on a roadmap to net zero though. And the direction should developed jointly by all interested parties, so they can establish ambitious, science-based targets and show real progress against the roadmap.

Investment opportunities and risks

Investors could help accelerate decarbonisation and are now aligning their portfolios with climate targets to unlock capital and innovation. There is also growing acceptance that the risk of failing to tackle CO2 emissions is greater than the risk of investing in net zero. Much depends on the pace of regulation. If regulators are slow to crack down on emissions, decarbonisation will probably prove to be slow.

Changes in the use of subsidies could play a role

Changes in the use of subsidies, like those that supported the early development of renewable energy, could also play a role. Steel and fossil fuels, for example, currently receive huge subsidies across the world that could possibly be redirected to develop solutions and decarbonise heavy industry.

Meanwhile, there could be opportunities in the companies that provide infrastructure for net-zero technologies. There is also potential in other areas too, from substitution solutions such as rail to replace aviation, or new materials to replace carbon-intensive steel or cement, to industry leaders in relatively new technologies like sustainable biofuels.

Three points to remember

  • It is technically possible to decarbonise even the most challenging sectors of heavy industry and heavy-duty transport by the middle of the century at a relatively low cost
  • But success in doing so will depend on cooperation within these industries and the active participation of governments
  • The drive to decarbonise these sectors will open up investment opportunities

Reference

  1. ‘Mission Possible: Reaching net-zero carbon emissions from harder-to-abate sectors’, Energy Transitions Commission, November 2018

Related views

Important information

THIS IS A MARKETING COMMUNICATION

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable, but has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. Some data shown are hypothetical or projected and may not come to pass as stated due to changes in market conditions and are not guarantees of future outcomes. This material is not a recommendation to sell or purchase any investment.

The information contained herein is for general guidance only. It is the responsibility of any person or persons in possession of this information to inform themselves of, and to observe, all applicable laws and regulations of any relevant jurisdiction. The information contained herein does not constitute an offer or solicitation to any person in any jurisdiction in which such offer or solicitation is not authorised or to any person to whom it would be unlawful to make such offer or solicitation.

In Europe this document is issued by Aviva Investors Luxembourg S.A. Registered Office: 2 rue du Fort Bourbon, 1st Floor, 1249 Luxembourg. Supervised by Commission de Surveillance du Secteur Financier. An Aviva company. In the UK this document is by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: St Helens, 1 Undershaft, London EC3P 3DQ. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178. In Switzerland, this document is issued by Aviva Investors Schweiz GmbH.

In Singapore, this material is being circulated by way of an arrangement with Aviva Investors Asia Pte. Limited (AIAPL). Please note that AIAPL does not provide any independent research or analysis in the substance or preparation of this material. Recipients of this material are to contact AIAPL in respect of any matters arising from, or in connection with, this material. AIAPL, a company incorporated under the laws of Singapore with registration number 200813519W, holds a valid Capital Markets Services Licence to carry out fund management activities issued under the Securities and Futures Act (Singapore Statute Cap. 289) and Asian Exempt Financial Adviser for the purposes of the Financial Advisers Act (Singapore Statute Cap.110). Registered Office: 1 Raffles Quay, #27-13 South Tower, Singapore 048583.