The G7 has an opportunity to accelerate the global transformation of heavy industry sectors. G7 members – Canada, France, Germany, Italy, Japan, the United Kingdom, the United States plus the European Union – in 2020 accounted for around 40% of the world’s economy, 30% of its energy demand and 25% of energy system CO₂ emissions. The G7’s economic heft, its leadership at the innovation frontier, and the international alliances it can mobilise, mean the Group has outsized power to inspire successful energy transitions around the world. Efforts to accelerate the transition for heavy industry sectors are no exception.

Heavy industry is responsible for more than 15% of coal use and about 10% of oil and gas use in G7 members. This makes the net zero transition in heavy industry an important pillar for reducing the reliance on fossil fuels in the G7 in the wake of Russia’s invasion of Ukraine. The war has caused turbulence in global energy and commodity markets, posing risks for the industry sector transition, but also reinforcing the impetus for it. Russia’s war in Ukraine bolsters the case for heavy industries to reduce their dependence on fossil fuels, with energy security concerns echoing the thrust of climate-oriented motivations.

There is a need for policy to explicitly target emissions from heavy industry sectors. This report 1 focuses on two key areas for achieving net zero heavy industry sectors in G7 members, both of which are priority areas for Germany’s 2022 G7 Presidency. The first is a toolbox of policies and financing mechanisms to initiate and sustain the industry sector transition. The second is a series of common and practicable definitions of what constitutes near zero emission steel and cement production, a key step to establishing future policy mechanisms, irrespective of the exact mitigation pathway or the specific technologies chosen. The report is designed to inform policy makers, material producers and consumers, investors, leading sectoral initiatives and the research community in the lead up to the G7 Climate and Energy Ministerial in May 2022.

Industry’s direct CO₂ emissions are currently around 9 Gt of CO₂ per year, or about one quarter of total energy system CO₂ emissions. Heavy industry sectors – steel, cement and chemicals – account for around 6 Gt (or around 70% of industrial emissions), meaning that reaching net zero emissions is impossible without dramatic reductions in emissions from heavy industries. Yet, demand for these products is set to grow in the context of a sustainable future for the energy system, given their extensive use in the construction of wind farms, nuclear power plants, transmission lines, electric vehicles and other clean energy infrastructure.

Heavy industries face unique challenges when it comes to substantially reducing emissions. Four key obstacles need to be overcome for heavy industry sectors to be able to reduce emissions at a scale that is compatible with achieving a net zero emissions energy system. First, many technologies required for the industry sector’s transition are still at prototype or demonstration stage and not yet ready for deployment at scale. Second, new production processes with substantially lower emissions intensities will – at least initially – have higher costs. Third, many products of heavy industries such as steel are traded internationally in competitive markets, with margins that are too slim to absorb elevated production costs and encourage first movers to adopt new technologies. Finally, heavy industry facilities are long-lived and capital intensive, locking in emissions inertia. Existing efforts to overcome these challenges are not yet sufficient to deliver substantial emissions reductions on a time scale commensurate with reaching net zero emissions by 2050. A multi-faceted technology and policy response is required, spanning innovation, infrastructure and supply chains.

G7 members alone cannot deliver net zero heavy industries globally, but they can make a pivotal contribution. The IEA’s Net Zero by 2050 roadmap lays out a pathway to net zero emissions by 2050 – but not necessarily the pathway – in which global industrial CO₂ emissions decline by nearly 95% by 2050. The G7 produces 17% of the world’s steel, 8% of cement and 28% of primary chemicals: China is the only single country with larger heavy industry sectors than the G7 members combined. The G7 members must therefore make a significant contribution to global industrial decarbonisation. In the Net Zero Emissions by 2050 Scenario, industrial CO₂ emissions from G7 heavy industry sectors decline by 27% by 2030 relative to today, compared to 18% for the rest of the world.

Commercially available technologies and strategies for reducing emissions can only take us part of the way to net zero. Material efficiency and energy efficiency make important contributions to reducing industrial emissions, accounting for around 25% of emissions reductions by 2050 in the Net Zero Emissions by 2050 Scenario, relative to today’s levels. Technologies which are not yet available on the market at the scale needed – hydrogen, direct electrification technologies, and carbon capture utilisation and storage (CCUS) – take the world most of the rest of the way to net zero. Technologies at the prototype and demonstration phase today account for about 60% of emissions reductions by 2050 in the Net Zero Emissions by 2050 Scenario.

Near zero emission material production is a key area for G7 leadership. In the Net Zero Emissions by 2050 Scenario, by 2030, innovative technologies for producing materials account for around 10-20% of primary steel, cement and primary chemicals production in the G7, depending on the sector, on average about two-thirds higher than the level in the rest of the world. In the G7, hydrogen-based direct reduction is the leading near zero emission primary steel production route in 2050, followed by CCUS-equipped routes, although there are important differences by country reflecting each G7 member’s own circumstances. In the cement sector, CCUS-equipped production does the heavy lifting across the world, but the G7 moves faster: 12% of production is CCUS-equipped by 2030, compared with 9% for the rest of the world. By 2050, uptake of innovative technologies has largely converged across regions, but the first movers in G7 economies have the opportunity to establish early lead markets: around 25 Mt per year each of near zero emission primary steel production and clinker used in cement production by 2030 in the Net Zero Emissions by 2050 Scenario, or 10‑15% of current production levels of G7 members combined.  

Ambitious, stable and well-designed policy frameworks are vital to create conditions for heavy industry sectors to transition rapidly; this report proposes a policy toolbox that the G7 and other countries may draw upon. Many governments have already stated their ambitions in this area, but the sector is not on track to reach net zero emissions by mid-century. Governments need to create a level playing field for near zero emission material production in competitive international markets. International cooperation can raise global policy ambition, better harmonise policies, and catalyse global technology development. The next few years are critical to develop and strengthen policy frameworks to stay within the narrow opportunity for achieving net zero by 2050. Leadership from G7 members can provide valuable impetus for global acceleration.

Push and pull measures are needed in tandem. “Push” policies focusing on the supply side are essential to overcome project risks for innovative technologies. Targeted public financial support can leverage private investment by lowering risk: full-scale demonstration, early commercial projects and the build-out of infrastructure (including for low emission hydrogen and electricity, and for CO₂ transport and storage) are important areas that can merit direct use of public funds. “Pull” demand side policies can reinforce the business case. Carbon contracts for difference, public procurement and near zero emission material mandates and quotas can create differentiated markets for materials produced with near zero emissions, which at least in the short term will face higher costs than those produced with conventional technologies. Measures supporting material efficiency and circularity strategies can serve to reduce the scale of the challenge on the supply side.

Common definitions for “near zero emission material production” can establish a shared vision of the future for key production processes in heavy industry sectors. This report proposes such definitions for the consideration of the G7; they are designed to be stable, absolute and ambitious, and they are compatible with a trajectory that reaches net zero emissions from the global energy system by mid-century. Interim measures that substantially lower emissions intensity of materials production – but fall short of the near zero thresholds – should also be recognised. As such, complementary – but distinct – definitions for “low emission production” of steel and cement are also proposed as part of this report; they are needed to recognise the important interim steps taken towards lower emissions intensity. An important distinction must however be made between technologies that can achieve low emission production now, and near zero emission production later – and those never able to meet the near zero emission thresholds without significant reinvestment.