Public policy and financial support are urgently required to align two of the country’s largest CO2-emitting industrial sectors with long-term, low-carbon pathways.
Steel and cement are the two largest CO2-emitting sectors in India, accounting for more than half of all industrial emissions. However, the per capita consumption of steel and cement in India is just about a third of the world average. Rapid industrialization and urbanization is putting the country on track to becoming the world’s second-largest producer – after China – of steel and cement by mid-century.
Estimates by The Energy and Resources Institute (TERI) and World Business Council for Sustainable Development (WBCSD) show that by 2050, the steel and cement sectors would see a three-to-four-fold increase in demand and a near tripling of sectoral CO2 emissions, making the industrial sector the single largest source of CO2 emissions in India. Yet, at the same time, the country has set a highly ambitious net-zero target for 2070. Reconciling this target with trends in industrial output and emissions will require gradual decoupling of industrial growth from emissions.
The challenge is that steel and cement are energy and emission-intensive. They are also hard-to-abate, meaning that decarbonization of these sectors requires deep systemic changes in the way these materials are produced, used, and recycled. Most of the innovative technological and operational solutions required to reduce emissions from these sectors are currently either commercially unviable or remain underutilized. Government and private sector support is therefore urgently required to put these sectors on long-term decarbonization pathways.
Decarbonizing the steel and cement industry will require a wide-ranging mix of low-carbon solutions (LCS) consisting of current and innovative technologies, process modifications and behavioural changes. These solutions must target the two types of emissions from production – process emissions and energy emissions – each making up about half of the total emissions depending on the raw materials and fuels used by the industry.
Process emissions are a result of chemical conversion of raw materials, chiefly limestone to cement, and iron ore to steel. Mitigating these emissions is hard as it requires a fundamental shift in raw materials and chemical processes. Some solutions, however, include the use of such alternate materials as fly ash and slag to produce cement, as well as the use of hydrogen (blue or green) instead of coal or natural gas as feedstock to convert iron ore to iron.
The remainder of the emissions come from combustion of fuels for heat and electricity. Indian steel and cement industries rely heavily (>90%) on fossil fuels, to meet their energy demand and supply chains of these carbon-intensive fuels are deeply entrenched with both sectors. There are several technological options to cut down energy emissions, including improving energy efficiency, deploying renewable energy and storage technologies for electricity, shifting to alternative fuels (biomass, waste, green hydrogen and solar thermal power), or direct electrification of processes.
Other solutions that can reduce overall industrial emissions include technological measures like carbon capture, utilization and storage (CCUS), or demand-side measures such as improving resource efficiency (reducing steel intensity of end-products like cars), material substitution (using timber as a construction material), and increased material circularity (recycling steel and cement for reuse).
Finding the right mix of solutions
The right mix of LCS that can be feasibly deployed in the industry will depend largely on two factors – technology maturity and the contextual setting.
Technology maturity refers to where the LCS stands in the research, development, demonstration and deployment (RDD&D) cycle. Solutions currently being adopted by industry in India – such as energy efficiency, renewable energy, alternate fuels – can only deliver incremental emissions reductions and are insufficient for deep decarbonization. Most technologies capable of delivering disruptive change are still in the development stage (hydrogen-based or electrified cement kilns, direct electrolysis of iron ore) or demonstration stage (green hydrogen, solar thermal and CCUS).
As different LCS progress the RDD&D ladder and become ready for deployment, their adoption will depend on a myriad of contextual factors such as level of ambition of industrial players and associations, institutional capabilities, maturity of capital markets, national climate targets, and supportive sectoral policies and frameworks. And so, transforming the steel and cement industry requires tailored support from public policy and finance, appropriate to the contextual setting. This support entails fiscal and market-based measures that include public spending on RDD&D, RDD&D support for corporations through subsidies and investment tax credits, a carbon price through tax or cap-and-trade markets and creating demand for green products through public procurement schemes. Other effective measure includes the use of standards, codes, and labelling schemes such as use of energy or emissions standards for the industry, standards for use of alternate fuels and materials, codes for end-use sectors (green building codes), and labelling programmes for industrial products.
India’s current policy mix for decarbonizing the steel and cement sectors consists of only a handful of measures – largely lacking in measures described above. The foremost gap is the absence of any comprehensive sectoral decarbonization framework or roadmap for the industry. The sectoral roadmaps that do exist are charted by civil society, but are neither formally adopted by the government, nor are binding to the industry. There is also very limited policy support and corporate funding for RD&D of early-stage low-carbon technologies in India. RDD&D is typically largely carried out by large industrial players (both private and state enterprises), through their own corpus, and is reserved mainly on upgrading plant equipment and improving internal processes.
India’s spending on RDD&D – predominantly through government ministries and other agencies, such as the National Council for Cement and Building Materials – is also insufficient both in terms of the amount of funds allocated and the scope of technologies covered under RDD&D funding programmes like the Steel Development Fund.
The government, however, does have a cornerstone policy for industrial decarbonization in the form of the Perform, Achieve and Trade scheme – a cap-and-trade mechanism for reducing specific energy consumption of energy-intensive industries by setting targets and allowing entities to trade energy saving certificates (ESCerts). Under the first PAT cycle (2012-2015), industry, particularly the steel and cement sectors, achieved significantly higher energy savings than their targets. While this is commendable, it also led to an oversupply of ESCerts. A recent study shows that the market price of ESCerts was too low to incentivize investments in low-carbon technologies. An important learning for future cycles is therefore to set more ambitious targets and a floor price for ESCerts to incentivize a minimum level of technology adoption. Furthermore, with a vision to demonstrate national and sectoral climate action and create a national carbon market, PAT may be evolved to function as an emission- rather than an energy-oriented scheme.
Local and international support to reduce emissions
Globally, India has taken important steps to strengthen collaboration in order to increase funding for RDD&D, create markets and improve affordability of low-carbon industrial products. Most notably, at COP26 in 2021, India endorsed the Breakthrough Agenda – a commitment for countries to work together to accelerate the development and deployment of the clean technologies and sustainable solutions in key sectors like steel and hydrogen. In the same year, India and the United Kingdom launched the Industrial Deep Decarbonization Initiative (IDDI), the largest and most diverse coalition of governments and the private sector to create a thriving market for net-zero carbon industrial products in the next three years and work towards decarbonization of heavy industries, starting with steel, cement and concrete. The outcomes and effectiveness of these initiatives are yet to be seen.
Locally, India’s steel and concrete industry is actively preparing itself for an imminent transformation. Several large players in the industry have taken up medium-to-long-term voluntary decarbonization targets and are looking to domestic and international capital markets to raise green financing. Noteworthy examples are JSW Steel and Ultratech, which have recently raised significant capital form international markets through the issue of sustainability-linked bonds. These are significant developments since direct investments by large corporations would be key in deployment of LCS at scale in the long-term. In the near-term however, investments are likely to focus only on mature and available LCS unless supported through innovative financing mechanisms that lower the cost of adoption of LCS.
The majority of potential emissions savings for Indian steel and cement sectors through 2050 will come from LCS that are currently not commercially viable or lack an enabling environment required for widespread adoption. Therefore, it is crucial for policy-makers to work together with the industry and financial institutions to chart out feasible pathways for long-term decarbonization, formulate and implement clear policy measures, and mobilize technology-specific financing support.