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Terminology

Terminology: Building Blocks
Building blocks

 

Building Blocks icons

Building blocks are the economic sectors, such as energy, transport or industry, and cross-cutting areas, such as finance, innovation, and lifestyles, in which transformation is needed to achieve a climate neutral society by 2050, and across which ECNO tracks progress.

Building block assessment

On Track
Too slow
Far too slow
Wrong direction
Insufficient data
Building Blocks
Term: A
A

Acceleration factor

Or the ‘required change in speed’ is the ratio of the required change versus the past change on a given indicator. This results in the example formulation: ‘We need to increase our annual emission reductions to at least 4.9 Mt CO2e per year – or 2.6 times faster than the 1.9 MtCO2e per year achieved in the past’. 

Term: B
B

Benchmarks

Future reference points against which progress for each indicator is compared. ECNO derives benchmarks from official EU sources, such as directives, regulations, strategies, and action plans, including their related impact assessments. Benchmarks often come in the form of quantified policy goals or targets.

Term: C
C

Climate neutrality

Stands for the objective of achieving net zero greenhouse gas (GHG) emissions. This means that emissions are brought down as close to zero as possible, with remaining, difficult to abate emissions balanced by GHG removals within a given country or region.

Term: E
E

Enablers

The supporting conditions and underlying changes needed to meet the objectives in a given building block. They are the opposite of barriers or inhibitors.

Term: H
H

Historical data

Includes, but is not limited to, statistics from Member States harmonised and provided by Eurostat or the European Environment Agency (EEA) as well as from international organisations such as the OECD, FAO, or World Bank.

Term: I
I

Indicators

Track the historical development and status of enablers and objectives based on quantitative data. An assessment of indicator progress compares the trend against the required development to meet a future reference point, where data and relevant benchmarks are available.

Term: O
O

Objectives

Describe what needs to be achieved in each building block to reach climate neutrality.

Term: R
R

Required change

The change that underlies a pathway that meets the identified benchmark or target. Where benchmarks are missing, the required change indicates a direction and speed of change.

Term: T
T

Trend

The development of an indicator over time based on historical data. ECNO’s trendline is a straight, best-fit line that smooths out the variation in historical developments based on all data points, providing a sense of the general progress over time.

Briefing: Towards a Green Industry Deal - Avoiding blind spots and enabling industrial transformation

Aneta Stefańczyk • Aleksander Śniegocki
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Industry

To achieve climate neutrality by 2050, the EU economy needs to undergo deep transformation. This includes EU industry – a sector which over the last centuries spurred a surge in the consumption of fossil fuels, contributing substantially to the human-induced climate change we observe today. 

The industrial sector, defined here as the manufacturing and construction industries, remains today an important element of the EU economy. It contributes to about 20% of the EU gross domestic product (GDP). Industry’s direct greenhouse gas (GHG) emissions also constitute a significant portion of the EU total, amounting to 23% in 2021.

Meanwhile, ECNO's net zero progress assessment across thirteen critical ‘building blocks of a climate neutral future’ with deep scientific rigor has assessed that changes in the area of industry are far too slow to be compatible with a climate-neutral path for the EU

Download the briefing Go to conclusions

Progress of decarbonising the industrial sector has been far too slow.

The pace of emissions reduction has recently been slowing, as the potential for cuts resulting from structural economic changes has been largely exhausted, and there is no evidence for an increasing share of fully decarbonised energy sources in industry in the last five years. 

Enablers of decarbonisation, like circularity and energy efficiency, are progressing slowly.

The analysis of data regarding the enabling factors for industrial transition points to an unfavourable environment for future changes. Simultaneously, the current monitoring framework is insufficient to track progress on zero-carbon energy carriers and infrastructure.

More decisive action needed from EU policymakers to speed up the industrial transformation.

This can be done effectively by addressing the industry transition’s current blind spots: The promotion of circularity and energy efficiency and improving the quality and transparency of planning for development of zero-carbon energy sources and critical infrastructure. 

To reduce the sector’s emissions in line with the EU’s climate targets, the bloc’s industry has to undergo two crucial changes:

  • transform production processes in traditional industrial branches,
  • start producing new cleantech products at scale.

The urgency to speed up the increase in cleantech manufacturing capacity has gained a lot of attention from EU policymakers recently. As a result, new dedicated policy measures have been proposed to speed up the increase in cleantech manufacturing capacity (such as the Net Zero Industry Act which sets a cleantech manufacturing target), although significant gaps in this area remain.

However, there was no comparable policy push for the transformation of existing industry – this area remains a blind spot of the European road to net zero.

Industry

The specific challenge of reducing industrial emissions

Reducing industrial GHG emissions constitutes a very complex challenge. That is because these emissions consist of both combustion and process emissions. Combustion emissions in industry arise while burning fossil fuels to generate energy – particularly for generating heat at varying temperature levels. These emissions can be reduced by changing the energy source to a zero-emission one, for instance by replacing gas with solar panels, a heat pump or sustainable biomass to generate the heat needed for the industrial process.

Given the complexities associated with transforming the EU industry to make it sustainable in the long run, while simultaneously retaining its international competitiveness, the EU policymakers need to act now, to make sure that the progress in the area of industry is fast enough to be compatible with EU medium- and long-term climate targets.

Hard-to-abate process emissions

Meanwhile, process emissions are created by industrial processes involving chemical transformations other than combustion. The characteristics of these industrial processes determine which type of technology and energy carrier can be used in the production process. 

Some process emissions can be abated with the use of alternative production methods, but many of them are still in the early stages of development, and are currently too costly or not efficient enough to allow for their large-scale deployment. That is why some industry branches, which depend on technologies that result in process emissions, are called hard-to-abate. Prominent examples include manufacturing of steel, cement and petrochemicals. 

Recommendations to EU policymakers

Some of the most important policy measures aiming to stimulate industrial transition were proposed in 2021 and accepted as part of the Fit For 55 package. They either remove barriers to deployment of zero-carbon energy development in industry or stimulate their uptake. EU policymakers should focus on the effective implementation of these policies.

Recommendations to EU policymakers

The current monitoring framework should be revised to facilitate the successful implementation of policies supporting deployment of zero-carbon energy sources and infrastructure. Including more indicators related to this area will allow for a systematic, reliable evaluation of progress and enhance the quality of planning. 

Recommendations to EU policymakers

Prompt improvement of draft National Energy and Climate Plans (NECPs), which are currently weak on issues related to industrial transition, is necessary to boost strategic planning. 

Recommendations to EU policymakers

The effects of the implementation of policies outlined in the Circular Economy Action Plan (2020), and their prompt revision in case of low effectiveness, should be monitored carefully to help enhance the uptake of circularity. 

Recommendations to EU policymakers

The idea of a common fund for the EU industrial transition should be revisited. The funding should be dedicated not only to the cleantech value chain, but also to enabling infrastructure.

Recommendations to EU policymakers

The creation of common, ambitious, and legally binding standards for green public procurement could generate significant additional demand for zero-carbon products.

Recent trends in industrial GHG emissions 

In 2021, GHG emissions from the EU’s industrial sector were 36% lower than in 1990. The rate of decline of these emissions has not been steady over time and it slowed down recently. Historically, the largest drops happened during the early 90s and after 2009. They were associated with more general processes affecting the whole economy, which had a lasting impact on the industrial sector. 

When looking closer at what drives the emission dynamics, it is clear that many of the factors that contributed to past progress will no longer affect the industrial emissions. Over the last three decades, emissions reduction in the EU industry were caused to a large extent by the external economic shocks and incremental shifts within fossil-fuel-dependent technologies, and not a structural shift towards decarbonised production.

When taking a deeper look into the breakdown of emission reductions, the proportions between fuel combustion and process emissions in the EU industry are now quite balanced. This signals progress on the combustion emissions front. Process emissions however are proving persistent, especially in the hard-to-abate sectors (such as steel, cement, and chemicals). Focused efforts to address process emissions – alongside transition to using zero-emission energy sources – will thus be key for the EU to deliver its own climate targets. 

Share of zero-carbon energy sources hit a plateau

While overall, emissions in industry have continued to fall, even if at a too slow pace still, the transition to fully decarbonised energy sources hit a plateau – their share in total energy use has even marginally decreased in the last five years. That trend - in combination with a drop in the amount of total emissions – shows that in the medium term, some reductions in industrial emissions can be achieved even without improvement in the energy mix, and can instead be generated by factors such as changes in business structure, or improved energy efficiency.

Risk of fossil fuel lock-in

Achieving climate neutrality requires deep transformation of the energy and feedstock mix for the sector. A failure in transitioning to fully decarbonised energy sources may lead to fossil fuel lock-in. This means that investment and policy decisions related to the use of carbon-intensive technologies in industry would be made for a longer time than assumed in the pathway compatible with net-zero, thus prolonging the life cycle of these technologies and the time horizon in which they generate CO2 emissions. A fossil fuel lock-in in the industry sector would not only hinder the transition of industry, but also of the whole economy, because even if other sectors decarbonise faster and manage to achieve negative emissions, their amount is still very unlikely to balance out any excessive GHG emissions.

Emissions industry

The European Commission’s assessment of progress towards climate neutrality, published in October 2023, did not mention industry among the sectors that need urgent acceleration of progress. This is because it looked at the drop of industrial emissions compared to 1990 in absolute numbers only. 

Failing to consider the nuances of the underlying trends, the Commission’s assessment did not acknowledge the considerable slowdown in the pace of emissions reduction in the sector that took place in the last 5 years, which in turn signals insufficient progress on the structural enablers of the change required in the next decade and towards 2050.

Despite the current challenges of the EU industry's transformation, the sector can become climate neutral. However, inaction or a slow response will create a risk of derailing the EU’s progress towards climate neutrality by 2050 and loss of the EU industry’s competitive advantage.

Aneta Stefańczyk, briefing author and industry expert at ECNO

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Three key enablers: Progress with conditions enabling the transition

Zero-carbon energy carriers and infrastructure

To make industrial production less carbon-intensive, companies in the sector need to have access to sufficient amounts of zero-carbon energy carriers and infrastructure. The transition of industry will require mostly carriers such as electricity, ambient heat, biomass, hydrogen and synthetic fuels. For hard-to-abate sectors where some emissions are unavoidable, Carbon Capture and Storage (CCS) technologies could provide a way to achieve deep decarbonisation. An example is steel production, where switching from traditional methods to hydrogen-based “green steel” production would result in significant GHG emissions reduction, with the remaining emissions being managed by CCS technologies.

Availability of zero-carbon energy sources and infrastructure

Unfortunately, for now it is impossible to reliably assess the current state of development and progress in this area, or to accurately plan how to bridge the existing gaps. That is because the value of many of the crucial indicators (such as the annual production of renewable hydrogen for industrial use, CO2 injection capacity, capacity of CO2 transport network and capacity of the hydrogen transport network, annual production and use of sustainable biomass in industry) is now too insignificant to be tracked by the EU’s current monitoring framework for zero-carbon energy sources and infrastructure. While these aspects of industrial transition need development, the EU should still collect the data during the built-up to be aware of the progress. Inclusion of the targets for renewable hydrogen and CO2 injection capacity in the Net-Zero Industry Act (2023) and REPowerEU (2022) could be a sign that such statistics will be launched soon. Similarly, the launch of the European Hydrogen Bank could stimulate production of renewable hydrogen in the EU and contribute to the improvement of data availability. The European Hydrogen Bank, launched in 2022, is a financing instrument whose role is to accelerate private investments in hydrogen value chains. Thus it provides support also for domestic projects aiming at producing renewable fuel of non-biological origin (RFNBO) hydrogen, with the scale of available resources dependent on the intended size of production.

National plans are not detailed or consistent enough

Conclusions from ECNO’s recent assessment of the transparency and internal consistency of EU Member States’ draft National Energy and Climate Plans (conducted for 5 documents, presented by Hungary, Italy, the Netherlands, Spain and Sweden) indicate that national strategies for the advancement of renewable hydrogen production, consumption and trade, electrification of industry, and long-term geological storage of CO2 are currently not detailed and consistent enough. 

The analysis also found the NECPs to focus heavily on developing renewable hydrogen for industry decarbonisation, while seemingly neglecting strong measures for the electrification of industry. This bears the risk of overreliance on one specific technology for industrial transition, which is relatively expensive and comes with high energy and additional infrastructure needs. 
The quality and availability of data related to long-term geological storage of CO2 was low, which is a sign that plans regarding deployment of CCS/CCU are not well developed in investigated member states overall.

Circular economy

The second key to facilitating the next level of emissions reductions in industry is the increased application of circular economy principles. Industrial production designed in line with these principles leads to reduction of demand for raw materials whenever it’s possible, and maximises reusing and recycling of the raw materials and components used in the production process. Thus, circularity allows to extend the life cycle of products, minimise waste and create further value for the products. Implementation of the circular economy standards could also contribute to lowering the cost of industrial transition, as most of the circularity measures imply lower upstream emissions and lower overall energy and feedstock input.

The overall slow progress in the area of circularity is a concerning finding. However, given that the effects of EU policies implemented in the last three years under the Circular Economy Action Plan, are not yet reflected in the data, there is a potential for faster improvement of circularity indicators in the future.

Circular material use rate

The measure of circularity for which the EU has set a target is the ‘circular material use rate’, which is defined as the share of material recycled and fed back into the economy. The target, mentioned in the Circular Economy Action Plan (2020), determines that the EU should aim to double the value of the indicator by 2030 (relative to 2020). That would be consistent with a value of roughly 23%. However, the two readings of the indicator since the target was announced were even marginally lower than the 2020 value. The ECNO analysis thus shows that the current dynamics is far too slow for the target to be met.

Resource productivity

Another important indicator for circularity is resource productivity. It is defined as the ratio of gross domestic product (GDP) over domestic raw material consumption, and thus measures the relation between the total amount of materials directly used by an economy and the achieved GDP. It can be used to analyse if economic growth is decoupling from the use of natural resources.

The EU’s progress on resource productivity is slowing down. Its average annual rate of increase for the whole period since 2000 was 3.2%, but more recently, in the period 2016-2021, it fell to 2.0%. While the general direction of change in this indicator’s value is a positive development, the recent slowdown could be a sign that the potential for improvements that can be achieved without additional policy stimulus is running out.

Energy efficiency of industrial processes

The third key to supporting reductions of GHG emissions in industry is the energy efficiency of industrial processes. That is because lowering overall energy needs of the sector would also lead to lowering its fossil fuel use - even without transforming production technology or cutting down fossil fuel use specifically. Higher energy efficiency of industrial processes can be also associated with saving affordable zero-carbon energy carriers that could be potentially used for decarbonisation of other economic sectors.

Final energy consumed by industry

The observed pace of reduction of final energy consumed by industry is, however, far too slow to meaningfully support GHG emissions reduction in industry. Data shows that in the last decade on record, there was no clear trend in the amount of final energy consumed by industry, and its minor changes amounted to an average annual decrease of 0.01% between 2016 and 2021. This pace is far too slow to reach the target implied by the impact assessment of the 2030 Climate Target Plan, which outlines that the final energy consumption in industry should be 22-28% lower in 2030 and 22-30% lower in 2050 relative to 2005.

Energy intensity of output in industry

The measure of energy intensity of output in industry can help to distinguish between lower energy consumption resulting from lower economic activity in the sector, and reductions resulting for other reasons. If the indicator decreases along with the final energy consumed by industry, it means that the same unit of output could be produced using less energy than before. This effect can be a result of enhancement of energy efficiency across the industry or by structural changes in the economy – e.g. the increase in the share of production coming from the lower energy-intensive industries relative to the high energy-intensive ones.

Industrial transition in the Fit for 55 package

Some policy measures that are included in the Fit For 55 package, and have already been adopted by the EU institutions since 2021, constitute an accurate response to industrial transition challenges by strengthening the carbon pricing mechanisms and providing further incentives for uptake of decarbonised energy sources.

The key factor to successfully deliver the positive outcomes that these policies can potentially trigger will be their effective implementation. However, this issue remains open to question, as draft updated NECPs are characterised by insufficient data and ambiguity concerning challenges that are crucial from the point of view of industrial transformation. Moreover, the EU missed a chance to provide additional EU-level funding within the Green Deal Industrial Plan, which would help accelerate wide-scale deployment of zero carbon technologies. 

Another factor that can potentially hinder the process of reaching the expected effects of industrial policy included in the Fit For 55 package is slower progress in the area of reforms outlined in the Circular Economy Action Plan, especially those that promote new, more effective ways of channeling recycling and reuse.

Key policies included in Fit for 55

Phasing out free ETS allowances and introducing the Carbon Border Adjustment Mechanism (CBAM)

The gradual phase out of free emission allowances is expected to drive up the carbon price in industry and provide stimulus for businesses in the sector to reduce their emissions. The free allowances phase-out is aligned with the introduction of the CBAM. Its role is to ensure that the carbon price of products imported to the EU is equivalent to the carbon price of domestic production. CBAM will help to provide a level playing field for both EU and non-EU industrial enterprises, and to avoid the carbon leakage.

Key policies included in Fit for 55

Introduction of targets for renewable fuels of non-biological origin in industry

The update of the RED II Directive included a target for the percentage of renewable hydrogen used by industry by 2030. Member States are also obligated to increase the share of renewable sources in the amount of energy sources used for final energy and non-energy purposes in the industry sector. Introduction of these targets should contribute to upscaling the use of renewable hydrogen and accelerate the shift towards zero-carbon energy sources in industry.

Key policies included in Fit for 55

Inclusion of small and less energy-intensive industries into the strategic planning

Although the EU needs to continue to focus on energy-intensive industries, significant GHG emission reductions can be achieved also by the consideration of the needs and barriers to decarbonisation of smaller and less energy-intensive industries. Including these industries into EU ETS 2 is a relevant first step towards triggering these reductions.

 

Conclusions

So far, the EU industry has been reducing its GHG emissions at a pace that is far too slow to meet EU climate targets. Moreover, the pace of emissions reduction has recently been slowing, as the potential for cuts resulting from structural economic changes has been largely exhausted, and there is no evidence for an increasing share of fully decarbonised energy sources in industry in the last five years. 

Furthermore, the analysis of data regarding the enabling factors for industrial transition points to an unfavourable environment for future changes: progress on circularity and energy efficiency is still very slow, and while the current monitoring framework is insufficient to track progress on zero-carbon energy carriers and infrastructure, anecdotal evidence points to a sluggish pace of changes also in this area.

If the current dynamic of changes in industry persist, the EU could not achieve its 2030 and 2050 climate targets. EU policymakers should therefore take more decisive policy action to speed up the transition in industry by addressing the industry transition’s current blind spots:

  1. Promoting further circularity and energy efficiency in industry, 
  2. Improving quality and transparency of planning for development of zero-carbon energy sources and critical infrastructure. 

Some of the most important policy measures aiming to stimulate industrial transition were proposed in 2021 and accepted already, as part of the Fit For 55 package. They either remove barriers to deployment of zero-carbon energy development in industry (i.e. low-cost effectiveness) or stimulate their uptake (both increase in scale and scope). 

In spite of all the current challenges related to the transformation of the EU industry, the sector can become compatible with climate-neutral economy. That requires some additional policy action in the crucial areas, as suggested above, followed by effective implementation of the outlined measures. Inaction or a slow response to industrial challenges will be associated with a risk of derailing the EU’s progress towards carbon neutrality by 2050 and loss of the EU industry’s competitive advantage.

Download and read more

Download the full briefing or visit our pages on EU-wide progress to climate neutrality in industry. 

Download the briefing Read more about progress in industry Read more about progress on clean technologies

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