Industrial sectors, across production and energy, contribute over 30% of global GHG emissions, increasing to over 40% when combined with transport (see Figure 3). Currently, none of these sectors are on course to achieve net-zero emissions by 2050. Progress, in terms of emissions reduction and sector readiness has been limited in most regions over the past year.

Decarbonizing these emissions-intensive sectors is primarily dependent on removing the reliance on fossil fuels as the primary energy source and switching to renewable alternatives such as clean power and clean hydrogen, as well as efficiency improvements and abating emissions from any remaining fossil fuels.

Low-emission products, fuels and technologies hold less than 1% market share in most sectors. This is because they are currently costly or hard to scale and many sectors prioritize near-term emission reduction solutions, while there’s insufficient regulation, standards and consumer awareness about alternative products and their emission-cutting potential.

Positive advancements are underway in regions such as the US and the EU, where low-emission technologies are projected to gain traction by 2030. It is crucial to implement a customized blend of incentive-driven and mandate-based policies, considering the economic conditions of developing nations. Global companies need to take more substantial actions to expedite the transition.

As population growth, urbanization and economic expansion drive increased demand across all sectors, the carbon-intensive nature of these industries poses a formidable challenge to 1.5^o C aligned climate goals. Prioritizing proactive decarbonization, coupled with the creation of employment and wealth, is imperative. However, adopting reactive measures risks higher costs, diminished competitiveness and a failure to meet emissions reduction targets. Industries need to de-couple emissions from demand by embracing innovative technologies, optimizing supply chains, transitioning to cleaner energy sources, encouraging policy collaboration and raising consumer awareness. Energy efficiency and energy savings can often be a quick way to achieve some reductions in emissions and energy consumption. However, there needs to be a complementary tool for developing and scaling technologies that can deliver deeper emissions cuts. Ultimately, in a 1.5^o C aligned scenario, demand reduction through efficiency improvements, product diversification and substitution with low-emission alternatives will be needed.

Fossil fuels comprise more than 90% of the current energy mix, for sectors in scope. As such, the volume of absolute emissions increases alongside accelerating global demand. Absolute emissions increased by 8% between 2019 and 2022 across most sectors in scope. Though production and transport demand decreases are evident in the data through the course of the pandemic. Most sectors have recovered to or surpassed pre-pandemic demand levels, leading to a subsequent increase in emissions, emphasizing the need to dissociate emissions with demand growth and reduce energy intensity by substituting fossil fuels with renewables, new energy sources and increasing efficiency.

Emissions intensities have shown little reduction over the same time period, suggesting that all sectors require large-scale process and technology improvements. It is crucial to recognize that efficiency improvements that are important to reduce emissions may reach a plateau due to inherent process limitations. Therefore, fossil fuel substitution is equally key to reducing emissions intensities in line with 1.5°C scenarios.

The absence of precise sector-specific definitions for scientifically quantifying thresholds is a prevailing issue. Yet, the significance of establishing these benchmarks cannot be overstated, given that the predominant focus of current endeavours remains centred on high-emission trajectories. Currently, around 7% of production meets the existing thresholds of reduced emission production, defined as a percentage of production aligned with 2030 targets. Similarly, less than 1% meets low-emission thresholds, defined as the percentage of production aligned to 2050 thresholds. The trends over the last four years suggest that none of the sectors are on track to meet 2030 targets, and a significant acceleration of efficiency measures and low-emission technology adoption is needed.

Reaching net zero by 2050 across industrial sectors is dependent on advancements in five key areas: technology, infrastructure, demand, policy and capital. This requires strategic actions to bolster technology, upgrade infrastructure, stimulate sustainable and low-intensity energy demand, develop effective policies, and secure the necessary capital investments. Achieving these objectives mandates a pragmatic and coordinated approach to promote sustainable growth and innovation.

The technology landscape remains very similar to last year, with most technologies currently under development expected to reach commercial readiness by 2030. The transformation of emissions-intensive industrial and transport industries, where changes take a long time to incubate, heavily relies on technological innovation, active investments and industrial coordination and collaboration to share and replicate learnings. These sectors encounter distinct challenges, often centred around the imperative to reduce technology costs through strategies such as scaling up production, process optimization and deriving insights from initial deployments. In some instances, genuine technological revolutions are indispensable, as evidenced in sectors like aviation and cement production. As such, three net-zero technologies warrant prioritization for accelerated development:

1. Increase clean power-based technology adoption across all sectors: Clean power is expected to comprise up to 65% of the final energy mix by 2050 and is the least complex method of driving emissions reductions.

2. Commercial scaling of carbon capture utilization and storage (CCUS) technology, particularly for cement: With a lack of viable alternatives for net-zero cement, research and development (R&D), investment and additional projects are needed to improve applications for small and remote facilities and accelerate commercial scaling within this decade.

3. Accelerated development of green hydrogen technology: Access to green and blue hydrogen is an important decarbonization solution for several sectors. Despite positive developments in blue hydrogen, it is particularly important to significantly reduce costs and increase supply of green hydrogen to decarbonize and reduce fossil fuel dependence.

Furthermore, sector transition extends beyond the advancement of operational technologies; it equally emphasizes the critical necessity of integrating these innovations with established business systems. To expedite progress towards achieving net-zero emissions, it becomes imperative to prioritize the acceleration of technology readiness levels (TRLs). This goal can be realized through collaborative industry efforts and the development of new cross-industry partnerships.

Clean power, clean hydrogen and fossil fuels abated by CCUS will need to account for over 90% of the final energy mix for net zero by 2050 with applications across all sectors in scope, totalling around $13.5 trillion in investments (see Figure 7). Accelerating clean power generation and energy storage is crucial. The shift towards clean power sources requires significant changes in electricity procurement and markets, placing a growing emphasis on renewable energy procurement strategies, such as access to and coordination of a diverse set of industry players to include solar, nuclear and hydropower. A clean hydrogen economy is vital for industries like cement, steel and ammonia, while sectors like shipping and aviation are exploring hydrogen-derived fuels. Carbon capture capacity may need to increase by 120-125 times by 2050; however, inconsistent CCUS revenue models must be addressed.

With less than 1% of the required infrastructure currently in place, the risk of cross-industry competition for limited resources grows as demand for low-emission products and transport rises towards 2050. To tackle this, promoting shared infrastructure models like infrastructure hubs and industrial clusters can boost access to development, encouraging more equal sector growth and creating advantages of scale. Industries should partner with infrastructure and energy providers to develop new contracts and complementary operational models. Bi-directional partnerships between two or more industries hold the potential to drive low-emission product demand through market opportunities and industrial applications.

Early market demand signals are emerging in most sectors, supported by developing policies and an increase in offtake agreements and green subsidies. Initiatives such as the First Movers Coalition (FMC) have contributed to creating a stronger demand signal for innovative, clean technologies in industrial sectors. Many production sectors have seen an increase in low-carbon alternatives over the last year. However, a lack of reporting standards, supply chain stability and transparency are consistent challenges across most sectors, with associated green premiums largely untested at the commercial scale. The current industry dilemma regarding whether to stimulate demand or supply requires immediate attention and resolution. Industry leaders and consortia share a unanimous commitment to developing net-zero pathways, though the absence of reliable customer revenue signals both in terms of price and volume limit execution. This uncertainty poses challenges for businesses looking to invest in and pursue potentially transformative but uncertain opportunities. Industries need to collaborate across the value chain to create transparency around applications of clean technologies, clarify infrastructure demand requirements and prioritize accordingly, reducing the energy intensity of process activities.

Across various sectors, several key prerequisites have emerged as essential for creating demand for low-emission products and raising consumer awareness of product and service carbon attributes. These prerequisites include:

1. A standardized framework for low-emission products

2. A simple-to-deploy emissions intensity calculator

3. An auditable carbon footprint assessment process.

Notably, the aviation sector has made progress in promoting transparency through the use of carbon footprint calculators. Similarly, the construction sector has taken steps to certify green products, especially in the context of low-emission buildings, although it has historically excluded primary materials from these certifications. While these sectors serve as commendable examples, it is imperative for other industries to follow suit and adopt similar measures.

Policy plays a pivotal role in sectoral decarbonization, serving dual objectives: advancing climate goals and bolstering demand and economic resilience. It must also navigate the delicate equilibrium between domestic economic growth and the expenses tied to supply chain onshoring. Major producing countries/ regions such as China, India, the US and the EU have now committed to net-zero targets, making it imperative for businesses within their jurisdictions to align their operations and strategies with the evolving regulatory landscape. However, complex and ever-changing policy regimes result in businesses allocating substantial resources towards compliance, impeding progress. Establishing more consistent and stable regulatory frameworks with well-defined timelines is imperative for mitigating these risks.

Emerging signals indicate a range of cross-sectoral policy systems being tested worldwide:

- Currently, 20% of countries have implemented various forms of carbon pricing to incentivize a shift away from emission-intensive production routes.¹ Additionally, import control programmes, like the EU’s Carbon Border Adjustment Mechanism (CBAM), complement these measures.

- In countries like China and India, national level action plans and roadmaps for clean hydrogen have been adopted to encourage investments across the hydrogen value chain that aid large-scale industrial transformation. Also, the G20 member countries have agreed to guiding principles that enable the production, consumption and global trade of clean hydrogen.

- Several countries have introduced policies to enable CCUS technology and infrastructure developments. These include carbon capture and storage (CCS) investment tax credits in Canada, the EU’s Innovation Fund for CCS projects, and Japan’s commitment to develop a CCS-specific regulatory framework.

- Comprehensive policy packages like US’ Infrastructure Investment and Jobs Act (IIJA) and Infrastructure Investment and Jobs Act (IRA) that provide fiscal stimulus to multiple areas of industrial decarbonization have also been deployed.

While these policy systems show promise, it’s important to note that their applicability varies across different sectors, particularly in addressing emissions-intensive sectors across industry, energy and transport. Each sector demands specific, well-defined policies and regulations that align with evolving consumer revenue models. Furthermore, there is an urgent need for effective cross-regional policies that bridge the current disparities among regions, which are impeding global CO2 emissions reduction efforts.

An additional $11 trillion is required by industries to retrofit existing assets with clean technologies and order a new zero-emission fleet outside the BAU asset renewal cycle. For some industries, like cement, this means attracting almost double their annual CapEx to invest in clean technologies. However, the current market landscape lacks sufficient incentives to invest in low-emission technologies and poses a risk to early investors across most sectors.

Industry collaboration is imperative to reduce costs, accelerate learning curves and establish market stability to incentivize greater investment in decarbonization efforts. Industrial decarbonization requires the pooling of collective knowledge and resources across sectors; both start-ups and incumbents have a role to play. Collaboration allows for the efficient exchange of expertise and assets, leading to the development of more economically viable decarbonization technologies. This cooperative approach not only alleviates the financial burden on individual sectors but also creates market predictability. A stable and predictable market environment is paramount in attracting increased investments in decarbonization initiatives and cultivating stakeholder confidence.

Redirecting capital for industry transformation requires strategic policy interventions, including carbon pricing, technology subsidies, public procurement and a strong business case. Institutional investors and multilateral banks can play a crucial role by providing access to low-cost capital linked to emissions targets. However, adapting financial models to align with the specific needs of various industries and regions is equally vital to mobilizing the necessary capital.

Many companies have demonstrated their commitment to reducing emissions by integrating emission considerations into their decision-making processes. Some companies exhibit a more comprehensive approach, providing detailed emissions reporting and clear emission reduction targets. However, a significant portion of companies lag behind, limited to basic emission reporting and reduction targets, particularly in developing countries.

Current industry profit margins indicate that many industries are ill-prepared to absorb additional costs while generating sufficient returns. To improve access to capital and generate sustainable returns, improved transparency surrounding low-emission and low-carbon alternatives is needed. Strengthening demand signals, particularly for new technology applications, is key. Collaborative infrastructure development across regions can play a pivotal role in mitigating early investor risk, reducing CapEx requirements for individual sectors, and ultimately leading to more substantial and sustainable returns on investment.