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Here’s how to fund the decarbonization of hard-to-abate sectors in developing economies

Labourers work at a construction site on a hot summer day in Noida, India, May 12, 2022. Infrastructure growth in developing countries will lead to increased demand for steel and cement by a projected 30% and 45%, respectively, by 2050. That means decarbonization is a major challenge.

Infrastructure growth in developing countries will lead to increased demand for steel and cement by a projected 30% and 45%, respectively, by 2050. That means decarbonization is a major challenge. Image: REUTERS/Anushree Fadnavis

Arun Sharma
Group Head for Sustainability and Climate Change, Adani Group & Distinguished Professor Emeritus, Queensland University of Technology
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SDG 09: Industry, Innovation and Infrastructure

This article is part of: World Economic Forum Annual Meeting

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  • Steel and cement account for 7% and 6% of global emissions, respectively and are difficult to abate.
  • This problem is particularly acute for the developing world, which aims to balance the need for growth with the pursuit of net-zero carbon emissions.
  • To smooth this transition, developed countries should assist by implementing Viability Gap Funding, a combination of capital expenditure and initial support operational expenses for high-cost, low-carbon infrastructure projects.

While much of the discussion on net-zero emission for the developing world has focused on the decarbonization of electricity generation, attention must also be given to the mitigation challenge from rapid and necessary infrastructure growth in these countries.

This will mean a massive expansion of hard-to-abate sectors such as steel and cement —accounting for 7% and 6% of global emissions, respectively.

Many of the decarbonization solutions considered for these sectors will require significant up-front capital expenditure. Without support, there is limited prospect of their early adoption in developing economies.

The targeted use of transition funds proposed in Article 9 of the Paris Agreement in the form of Viability Gap Funding can accelerate the adoption of decarbonization solutions.

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Balancing growth and decarbonization

Infrastructure growth in developing countries will increase demand for steel and cement by a projected 30% and 45%, respectively, by 2050.

Green hydrogen will play an important role in the decarbonization of many sectors — it is the last mile in the net-zero journey. While blue hydrogen will assist with the transition in geographies endowed with low-cost natural gas and sequestration reserves, this is not the case for India and much of Asia.

So far as the two hard-to-abate sectors – steel and cement – are concerned, green hydrogen and carbon capture and storage will play a critical role or provide alternate pathways for decarbonization.

While policies to increase scrap use in electric arc furnaces powered by green electricity will contribute to overall steel sector emission reduction, the need for primary steel production from iron ore will remain the main game for the foreseeable future. Direct Reduced Iron (DRI) using green hydrogen is the most likely solution to the decarbonization of steel. So far as the existing stock of blast furnaces using coke derived from metallurgical coal is concerned, Carbon Capture, Storage and Utilisation (CCUS) will be necessary.

Cement is a very carbon-intensive business and particularly difficult to decarbonize. Reduction in clinker-to-cement ratio will be critical to lowering emissions. Already, certain forms of fly ash from thermal power plants and slag from blast furnaces are being used for this purpose, in addition to their use in concrete to reduce cement consumption. Other emission reduction measures will involve waste heat recovery, use of biomass and alternative fuels like green hydrogen or derivatives in the kiln. However, most decarbonization pathways for cement involve some form of CCUS.

Carbon capture and storage will be possible for geographies endowed with sequestration reserves. For countries without such reserves, utilising captured carbon dioxide with green hydrogen to produce polymers like PVC, which can be used as long-lived building materials, could be an alternative pathway to decarbonization. This will require significant reduction in the cost of green hydrogen and some form of a mandate to be viable. This is particularly relevant for countries like India that have a debilitating burden of petroleum and natural gas imports — feedstocks for PVC — and where the demand for such building materials is expected to grow significantly.

The capital expenditure challenge

The initial capital expenditure to equip blast furnaces or cement plants with carbon capture technology is a potential barrier to adoption, even if operating expenses like the cost of green hydrogen come down. Similarly, adopting DRI with 100 per cent green hydrogen will require considerable capital investment.

To meet these costs, developing countries need Viability Gap Funding (VGF). This is a combination of capital expenditure and some initial support with operational expenses while the cost of inputs such as green hydrogen is still high — if they are to be encouraged to embark on the decarbonization journey early.

A mutually beneficial path to decarbonization and net-zero

The transition funds envisaged in Article 9 of the Paris Agreement have been slow to materialise. Deploying some of those funds as VGF would work for both the developed country Parties and developing country Parties. Here’s why:

By providing VGF for the adoption of decarbonization equipment manufactured by their businesses, developed countries are using their promised transition funds to also serve the additional purpose of industry development and export incentive. This will go a long way in garnering support for these funds from their domestic stakeholders.

The expanded market for the technology will also fast-track cost reduction, and as the need for VGF for a particular solution diminishes, the transition funds can be used for other decarbonization levers.

For developing countries, this allows their businesses to adopt decarbonization solutions earlier rather than waiting for costs to come down. Adopting these technologies will enable them to continue to increase the production of materials critical to their infrastructure growth and simultaneously make progress on their net-zero journeys.

Such use of transition funds is also in the spirit of Article 10 of the Paris Agreement, which highlights the “importance of fully realizing technology development and transfer in order to improve resilience to climate change and to reduce greenhouse gas emissions.”

The opportunity of Viability Gap Funding

If the VGF fully covers the adoption of technology — capital expenditure and operational expenditure beyond business as usual — then there is a case for developing countries to mandate progressive adoption of the technology, further increasing the market size for the technology and reducing cost.

These hard-to-abate sectors are also economic drivers and sources of employment for developing countries. Both India and Africa are endowed with iron-ore reserves, have tremendous renewable resources with the prospect of becoming low-cost green hydrogen producers, and both lack metallurgical coal — combined circumstances tailormade for the adoption of green steel technology; DRI with hydrogen or the early stage Molten Oxide Electrolysis, which relies only on renewables.

Developing countries will need to adopt these technologies at the same time they become feasible in advanced economies to prevent the expansion of more emission-intensive processes.

A framework to validate their inclusion as candidates for transition funds will accelerate this process — work already in progress by the various bodies of the UNFCC’s finance and technology mechanisms can be adopted for this purpose. Such a framework will also contribute to the transparency provision envisaged in Article 13 of the Paris Agreement.

The sooner the developing economies are supported to adopt the best mitigation technology, the better it will be for the planet. There is no net zero without transition funding.

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