4. INDUSTRIAL SECTOR11

4.1. Introduction

In 1990, the global industrial sector12  directly consumed an estimated 91 EJ of end-use energy (including biomass) to produce $6.7 x 1012 of added economic value, which resulted in emissions of an estimated 1.80 Gt C. When industrial uses of electricity are added, primary energy attributable to the industrial sector was 161 EJ and 2.8 Gt C, or 47% of global CO2 releases (SAR II, 20.1; Tables A1-A4). In addition to energy-related GHG emissions, the industrial sector is responsible for a number of process-related GHG emissions, although estimates vary in their reliability. Industrial process-related gases include the following (SAR II, 20.2.2):

The industrial sector typically represents 25-30% of total energy use for OECD Annex I countries. The industrial share of total energy use for the non-Annex I countries averaged 35-45%, but was as high as 60% in China in 1988. The Annex I countries with economies in transition have experienced declines in industrial energy use, which are not expected to reverse until the latter half of the 1990s. It is clear that different countries have followed very different fossil-fuel trajectories to arrive at their present economic status. The variation in industry's energy share among countries reflects not only differences in energy intensity but also the more rapid growth of the industrial sectors of non-Annex I countries, the transition of OECD Annex I country economies away from manufacturing and toward services, improved energy efficiency in manufacturing, and the transfer of some energy-intensive industries from OECD Annex I countries to non-Annex I countries (SAR II, 20.2.1).

During the first half of the 1990s, industrial sector carbon emissions from the European Union and the United States remained below their peak levels of 10-15 years earlier, while Japan's emissions remained relatively constant. The CO2 emissions of the industrial sector of non-Annex I countries continue to grow as the sector expands, even though energy intensity is dropping in some countries such as China. If energy-intensity improvements continue in non-Annex I countries, and if decarbonization of energy use follows the pattern of OECD Annex I countries, total GHG emissions from the developing world could grow more slowly than projected in the IPCC IS92 scenarios. Figure 2 shows industrial sector CO2 emissions relative to per capita  gross domestic product (GDP), illustrating that, for some countries, industrial sector emissions have fallen or remain constant even with substantial economic growth as a result of energy-intensity improvements, decarbonization of energy, or industrial structural changes.

4.2. Technologies for Reducing GHG Emissions in the Industrial Sector

Future reductions in CO2 emissions of 25% are technically possible for the industrial sector of OECD Annex I countries if technologies comparable to present-generation, efficient manufacturing facilities are adopted during natural capital stock turnover (SAR II, SPM 4.1.1). For Annex I countries with economies in transition, GHG reducing industrial options are intimately tied to economic redevelopment choices and the form that industrial restructuring will take.

4.2.1. Introducing New Technologies and Processes

Although the efficiency of industrial processes has increased greatly during the past 2 decades, energy-efficiency improvements remain the major opportunity for reducing CO2 emissions. The greatest potential lies in Annex I countries with economies in transition and non-Annex I countries, where industrial energy intensity (either as EJ/ton of product or EJ/economic value) is typically two to four times greater than in OECD Annex I countries. Even so, many opportunities remain for additional gains in OECD Annex I countries. For example, the most efficient industrial processes today utilize three or four times the thermodynamic energy requirement for processes in the chemical and primary metals industry (SAR II, 20.3). The greatest gains in efficiency for OECD Annex I countries have occurred in chemicals, steel, aluminum, paper, and petroleum refining, suggesting that it should be relatively easy to achieve even larger gains in these industries in non-Annex I and transitional economies.

4.2.2. Fuel Switching

Switching to less carbon-intensive industrial fuels such as natural gas can reduce GHG emissions in a cost-effective manner, and such transitions are already underway in many regions. However, care must be exercised to ensure that increased emissions from natural gas leakage do not offset these gains. The efficient use of biomass in steam and gas turbine cogeneration systems also can contribute to emissions reductions, as has been demonstrated in the pulp and paper, forest products, and some agricultural industries (such as sugar cane) (SAR II, 20.4).

4.2.3. Cogeneration and Thermal Cascading

Increasing industrial cogeneration and thermal cascading of waste heat have significant GHG reduction potential for fossil and biofuels. In many cases, combined heat and power or thermal cascading is economically cost-effective, as has been demonstrated in several Annex I countries. For example, coal-intensive industry has the potential to reduce its CO2 emissions by half, without switching fuels, through cogeneration. Thermal cascading, which involves the sequential capture and reuse of lower temperature heat for appropriate purposes, requires an industrial ecology approach that links several industrial processes and space and water conditioning needs, and may require inter-company cooperation and joint capital investment to realize the greatest gains (SAR II, 20.4).

4.2.4. Process Improvements

Industrial feedstocks account for an estimated 16% of industrial sector energy, most of which eventually ends up as CO2. Replacing natural gas as the source of industrial hydrogen with biomass hydrogen or with water electrolysis using carbon-free energy sources would reduce carbon emissions in the manufacture of ammonia and other chemicals, and, if inexpensive enough, might ultimately replace coking coal in the production of iron. Efforts to produce cheap hydrogen for feedstocks need to be coordinated with efforts to produce hydrogen as a transportation fuel (SAR II, 20.4; SAR III, 9.4).

Industrial process alterations can reduce all process-related GHGs significantly or even eliminate them entirely. Cost-effective reductions of 50% of PFC emissions from aluminum production, and over 90% of NOx from nylon production have been achieved in the United States and Germany through voluntary programs (SAR II, 20.3).

4.2.5. Material Substitution

Replacing materials associated with high GHG emissions with alternatives that perform the same function can have significant benefits. For example, cement produces 0.34 t C per ton of cement (60% from energy used in production and 40% as a process gas). Shifting away from coal to natural gas or oil would lower the energy-related CO2 emissions for cement production, and additional CO2 reductions from other techniques (e.g., the fly-ash substitution and the use of waste fuels) are possible. Shifting to other construction materials could yield even greater improvements. A concrete floor has 21 times the embedded energy of a comparable wooden one, and generates CO2 emissions in the calcination process as well. Denser materials also extract a GHG penalty when they are transported. The use of plants as a source of chemical feedstock can also reduce CO2 emissions. Many large wood-products companies already produce chemicals in association with their primary timber or pulp and paper production. In India, a major effort to develop a "phytochemical" feedstock base has been underway. Lightweight packaging, for example, will cause lower transport-related emissions than heavier materials. Material substitution is not always straightforward, however, and depends on identifying substitutes with the qualities needed to critical specifications (SAR II, 20.3.4).

4.2.6. Material Recycling

When goods are made of materials whose manufacture consumes a considerable amount of energy, the recycling and reuse of these goods can save not only energy but GHGs released to the atmosphere. Primary materials release about four times the CO2 of secondary (recycled) materials in steel, copper, glass, and paper production. For aluminum, this figure is substantially higher. Carbon savings of 29 Mt are estimated for a 10% increase in OECD recycling of these materials. Recycling can involve restoring the material to its original use or "cascading" the material by successively downgrading its use into applications requiring lower quality materials. Emphasis is needed on technological innovation to upgrade the quality of recycled materials (SAR II, 20.4.2.4).

4.3. Measures for Reducing GHG Emissions in the Industrial Sector

A variety of potential sector-specific measures, discussed briefly below and in Table 8, could encourage improvements in energy efficiency and reductions in process-related emissions (SAR II, 20.5; SAR III, 11). In addition, economy-wide instruments (e.g., phaseout of energy subsidies and adoption of carbon taxes) could affect emissions in the sector by encouraging processes that are less energy- or fossil fuel-intensive. These economy-wide instruments are not discussed here, because they are covered in Section 9. Economic Instruments.

4.3.1. Market-Based Programs

4.3.1.1. Incentives

Tax incentives could be designed for OECD Annex I country firms to encourage continued innovation in energy-efficient and low GHG-emitting processes. Most industrial processes have a relatively short lifetime, on the order of a decade or less, while facilities are used for several decades. Hence, there are large opportunities to rapidly introduce low-emitting technology into the manufacturing process as part of normal capital-stock turnover. Under present circumstances, where GHGs are uncosted externalities, there are no compelling reasons beyond profit maximization for companies to choose a lower GHG- emission strategy over a higher one when they are planning new processes or products. Even when it is cost-effective to introduce low GHG-emitting technologies, there may be barriers to doing so. Hence, there is a need for additional incentives to encourage firms in OECD Annex I countries to utilize the natural cycle of capital stock replacement to introduce less GHG-intensive technology and production facilities to achieve further reductions. Perhaps accelerating depreciation taxes might encourage such a shift.

In addition, financial incentives that encourage industry to adopt combined heat and power facilities, use more renewables, or use more secondary materials could accelerate a further lowering of emissions. Even if incentives are not provided, removing impediments to industrial cogeneration of electricity and heat would be effective.

4.3.1.2. Government Procurement Programs

Governments could establish procurement requirements for products that minimize GHG emissions in their manufacture and use. If drawn flexibly, government purchasing criteria would stimulate suppliers to develop low GHG-emitting products that met both governmental and larger market needs.

4.3.2. Regulatory Programs

4.3.2.1. Emissions Standards and Offsets

Setting industry- and product-specific GHG emission standards, like the energy-efficiency standards for appliances or vehicles, can bring about more certain compliance. Efficiency or performance standards can help to overcome a variety of barriers and shift production to lower GHG-emitting industrial practices. These barriers can include lack of information about high-efficiency products, financial analyses or investment criteria that overemphasize investment costs and de-emphasize operating costs, or difficulty in obtaining more efficient products through suppliers. However, reaching agreement about the appropriate standards for different types of equipment in different applications can be difficult, while monitoring and enforcement costs may be high and may raise the price to consumers. Moreover, use of regulations could run counter to the recent emphasis on use of flexible approaches.

A government might encourage the manufacture of more efficient products by allowing companies to receive some credit for reducing emissions during product use as an offset to manufacturing emissions standards. Many manufactured products, including computers, automobiles, and light bulbs, consume far more energy and release more GHGs during their use than in their manufacture. For automobiles, the ratio may be more than 10 to 1.

4.3.3. Voluntary Agreements

Voluntary agreements in the United States and Europe have been effective in achieving energy and GHG reductions in industries that have been encouraged to manufacture or install efficient lighting, computers, office equipment, and building shells. These include negotiated but voluntary targets for achieving emissions reductions, voluntary adoption of high-efficiency products or processes, cooperative RD&D efforts, and agreements to monitor and report emissions reductions based on voluntary actions. Voluntary agreements with industry groups to improve general environmental quality could be expanded to include GHG reduction (e.g., expansion of government-industry environmental covenants in The Netherlands), as could the ISO 14000 process.13  Domestic and international supplier requirements that specify low GHG content also could be developed. These private agreements could be modeled on the no- CFC specifications of many electronics firms prior to the 1995 phaseout. The potential for emissions reductions has been estimated with reasonable certainty by the U.S. Environmental Protection Agency for HFC- and aluminum-related GHGs, and for the "Green Lights" and Energy Star Programs. Public relations or other economic benefits (such as potential for manufacture and sale of new products) accrue to participating companies and are essential in promoting voluntary actions by firms.

4.3.4. Research, Development, and Demonstration

RD&D is needed in the near term in order to create and commercialize new industrial technology and to reach future emissions goals in the 2020 to 2050 time frame. For example, if hydrogen is to become a zero-carbon feedstock and fuel, work needs to begin now to ensure that the technology to produce it, and the infrastructure to deliver it, are available and affordable in the future. Systematic evaluation of the effectiveness of policies that are either already in use in different countries or that have been proposed is also needed to determine which will encourage the greatest GHG reductions at the lowest cost.

4.3.5. International Initiatives

4.3.5.1. Special Opportunities for Annex I Countries with Economies in Transition and Non-Annex I Countries

The reindustrialization process in countries with economies in transition provides major opportunities to replace inefficient, high-carbon industries with efficient low-carbon manufacturing processes. Much of this change will involve restructuring these economies, as heavy industry is replaced by alternative manufacturing. In addition, since most of the growth in industrial energy use is likely to be in the non-Annex I countries in the coming decades, the greatest reductions in the growth rate of future GHG emissions can be achieved by introducing new technology and industrial processes early in these emerging industrial economies.

Tradable permits and joint implementation 14  could be useful mechanisms to achieve GHG reductions within the industrial sector by providing investment capital in energy-efficient manufacturing and process technology. These measures are discussed more fully in Section 9.Economic Instruments.

Opportunities also exist for companies in OECD Annex I countries to create GHG reducing joint ventures with companies and governments in Annex I countries with economies in transition, as well as in non-Annex I countries.

4.3.5.2. Barriers to International Initiatives

Technology transfer of modern industrial capacity to non-Annex I countries and Annex I countries with economies in transition is being impeded by disagreements over intellectual property rights and a lack of available capital and hard currency. Other barriers include a lack of capacity and basic environmental legislation, and institutional factors in the host countries. There are currently legal and treaty impediments to implementing cooperative actions among firms to reduce greenhouse gases. Many countries have anti-trust laws to prevent price collusion and monopolistic behavior by firms. Within the World Trade Organization, there is concern about environmental protection as a potential restraint on free trade. These restrictions need to be examined to determine how environmental benefits, like GHG reductions, can be achieved by firms without compromising the intended goals of these rules. As the private sector takes on a larger role in addressing GHG emissions from industry, there will need to be greater transparency of these actions through reporting and verification mechanisms involving third parties such as non-governmental organizations, and governmental and international agencies.

4.4. Global Carbon Emissions Reductions through Technologies and Measures in the Industrial Sector

The IPCC IS92 scenarios indicate that total energy and CO2 for the industrial sector of Annex I countries are projected to rise from approximately 122 EJ and 2.1 Gt C in 1990 to 165 EJ (141-181 EJ) and 2.7 Gt C (2.1-3.1 Gt C) in 2010, and to 186 EJ (154-211 EJ) and 2.9 Gt C (2.1-3.5 Gt C) in 2020, reaching 196 EJ (140- 242 EJ) and 2.6 Gt C (1.4-3.7 Gt C) by 2050. Projected average annual growth in both energy use and emissions is close to 1% per year greater for the world as a whole, indicating the growing importance of the industrial sector in non-Annex I countries.

Annex I countries could lower their industrial sector CO2 emissions by 25% relative to 1990 levels, by simply replacing existing facilities and processes with the most efficient technological options currently in use (assuming a constant structure for the industrial sector). This upgraded replacement would be cost-effective if it occurred at the time of normal capital stock replacement. This seems within the realm of both technological and economic feasibility (SAR II, SPM 4.1.1). It is difficult to estimate potential emissions reductions compared to the IS92 scenarios for Annex I countries with economies in transition and non-Annex I countries; however, such reductions are likely to be significant due to the existing energy-intensive facilities and the potential to implement more efficient practices and technologies as growth occurs in these regions.


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