FinancingtheLow-Carbon

TransitioninHeavyIndustry

Report/March2024

AboutRMI

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ClimateBondsInitiativeisaninternationalorganisationworkingtomobiliseglobalcapitalfor

climateaction.Itpromotesinvestmentinprojectsandassetsneededforarapidtransitiontoa

low-carbon,climate-resilient,andfaireconomy.Themissionfocusistohelpdrivedownthecostofcapitalforlarge-scaleclimateandinfrastructureprojectsandtosupportgovernmentsseeking

increasedcapitalmarketsinvestmenttomeetclimateandgreenhousegas(GHG)emission

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FinancingtheLow-CarbonTransitioninHeavyIndustry/2

AuthorsandAcknowledgments

Authors

RMI:ShuyiLi,WeiLi,Shutong(Lucy)Lu,PeishanWang,YujunXue,RongYan,BoyaZhang

CBI:WenhongXie,XiaoyunXu

Authorslistedalphabetically.

Contacts

ShuyiLi,sli@

Shutong(Lucy)Lu,llu@

CopyrightsandCitation

ShuyiLi,WeiLi,andShutong(Lucy)Lu,FinancingtheLow-CarbonTransitioninHeavyIndustry,RMI,CBI,2024

,/insight/?nancing-the-low-carbon-transition-in-heavy-industry/.

RMIvaluescollaborationandaimstoacceleratetheenergytransitionthroughsharingknowledgeand

insights.Wethereforeallowinterestedpartiestoreference,share,andciteourworkthroughtheCreative

CommonsCCBY-SA4.0licens

e./licenses/by-sa/4.0/.

AllimagesusedarefromiSunlessotherwisenoted.

Acknowledgment

Theauthorswouldliketoexpresssincerethankstothefollowingexpertsfortheirinsightandcomments:

JinlongChen,ChinaLianheEquatorEnvironmentalImpactAssessmentCo.,Ltd,GreenFinanceDepartment,GMAssistant

ManshuDeng,ClimateBondInitiative

ShujuanLiu,StructuralEngineeringandEcologicalEnvironmentalMaterialsResearchCenter,China

BuildingMaterialsIndustryPlanningandResearchInstitute,SeniorEngineerandDeputyDirector

SiboLiu,ChinaLianheEquatorEnvironmentalImpactAssessmentCo.,Ltd,GreenFinanceDepartment1GMAssistant,HeadofInternationalBusiness

ZixuanLuo,GreenHydrogenTechnologyandEconomyResearchInstitute,TsinghuaSichuanEnergyInternetResearchInstitute,ResearcherandSeniorEngineer

MatthewMacGeoch,ClimateBondInitiative

QingNi,PwCChina,Climate&SustainabilityLeaderDanQin

YongQiu,GreenLowCarbonResearchInstitute,DelongSteelGroup,DirectorJiaShi,ClimateBondInitiative

FangWang,SpecializedCommitteeonEnergyE?iciencyandInvestmentEvaluation,ChinaEnergyResearchSociety,DeputyDirector

HaiyangWang,BeijingJianlongHeavyIndustryGroupCo.,Ltd,SecretarytotheChairmanJijieWang,DalianInstituteofChemicalPhysics,ChineseAcademyofSciences,ResearcherHuiWeng,ChinaPetroleumandChemicalIndustryFederation,SeniorEngineer

LingfengXia,IndustrialIntelligenceTechnologyCenter,ZhongcunBigDataTechnology,Director

Thecontentsofthisreportdonotrepresenttheviewsoftheaboveexpertsandinstitutions.

FinancingtheLow-CarbonTransitioninHeavyIndustry/3

TableofContents

Introduction5

Low-CarbonTransitionPathwaysforHeavyIndustryinChina9

SteelIndustry9

CementIndustry11

PetrochemicalsandChemicalsIndustry15

FinancialInstrumentstoSupportLow-CarbonTransitioninHeavy

Industry19

CapitalDemandforHeavyIndustryTransition19

FeaturesofCapitalDemandforHeavyIndustryTransition24

ExistingFinancialGuidanceandInstruments29

OverviewofTransitionFinanceDebtInstrumentsandFinancingCasesforHeavyIndustry

Companies32

NextSteps34

FurtherUnlockingthePotentialoftheGreenFinanceMarket34

SeizingtheOpportunityoftheTransitionFinanceMarket35

Appendix38

Endnotes39

FinancingtheLow-CarbonTransitioninHeavyIndustry/4

Introduction

Low-carbontransitioninheavyindustryisessentialforreachingthetemperaturegoalsetintheParis

Agreement.Achievingthistargetoflimitingthetemperatureriseto1.5°Cor2°Cabovethe

preindustriallevelrequiresnet-zeroCO2emissionswithoutrelyingoncarbono?setsfromlanduseinthelongterm.Itwillbecriticalforheavyindustrytotakecarbonreductioninitiativesoverthenextdecade—notonlyreducingitsownCO2emissionsandachievingearlyemissionsreductionbutalsolayingthefoundationforothersectorstoreachnet-zeroemissionsbymid-century.

Atpresent,thesteel,cement,andpetrochemicalsandchemicalsindustriesemitabout18%ofglobalCO2emissionsandconsumeabout3,300milliontonsofstandardcoalequivalent(Mtce)annuallyi—almostequaltothetotalannualnationalprimaryenergydemandoftheUnitedStates.Theenergyconsumptionofthethreeindustriesincludes2,700Mtceoffossilfuels,constitutingapproximately

82%oftheglobaltotal

.1

Clearly,thesuccessofthenet-zerotransitionofheavyindustrydependsonthetransitionawayfromfossilfuels.

·Longerassetlifespanraisestheriskofstrandingassetsfromrapidtransition.Industrialassetsgenerallyhavealifespanof30–40years.Undertherequirementforrapidtransition,theearlyretirementofexistingcapacitywillcausesignificanteconomiccosts.Therefore,newer

industrialcapacityresultsinalock-ine?ectunlessthereisfurthersubstantialinvestmentforretrofittingfacilities.

·Enablingdeeperemissionsreductionsinheavyindustrywillrequiresignificantinvestmentininnovativecarbon-reducingtechnologies.Unlikebuildings,transport,andindustryingeneral,heavyindustryhaslimitedpotentialtoreduceemissionsthroughelectrificationandcleanerelectricity,andrequiresmoredisruptivetechnologiestoachievedeeperemissionreductions.However,thesedisruptivecarbonabatementtechnologiesareunattractiveforinvestment

becausetheyareatanearlystageofdevelopmentwithunproveneconomics:

。Significantinvestmentinnewenergytechnologiesisthefoundationforrevolutionizingenergyuseinheavyindustry.Manyprocessesrequirehightemperatures—upto

1,500°C—andlargelyrelyonburningfossilfuels,aslarge-scalehigh-temperature

electrificationiscostlytoimplementwithcurrenttechnology.Inaddition,theavailabilityofbiomassfuelslimitstheirapplicationsinheavyindustry,whileotheremergingenergysources,suchasgreenhydrogen,arestillunderfurtherdevelopment.

。Eliminatingprocessemissionsischallengingandrequiresinvestmentincarbon

sequestrationtechnologies,suchascarboncapture,andinnewindustrialprocessesand

iAccordingtotheInternationalEnergyAgency(IEA),thetotalUSenergyconsumptionwas2,300milliontonsofstandardoilequivalent(Mtoe)in

2019—roughlyequalto3,300Mtce,usingaconversionfactorof1tonofstandardcoalequivalentto0.7tonsofoilequivalent,

/articles/the-challenge-of-reaching-zero-emissions-in-heavy-industry.

FinancingtheLow-CarbonTransitioninHeavyIndustry/5

products.SomeindustriesproduceCO2emissionsfromchemicalreactions.Forexample,thecalcinationofcementclinkerproduceslargeamountsofCO2andaccountsforabouttwo-thirdsoftheindustry?sdirectemissions.Thisproblemcanbesolvedby

manufacturingnewproductsorapplyingnewprocesseswhoseapplicabilityand

scalabilityhaveyettobedemonstrated.Ifitisdi?iculttochangethecurrentproductionpathincertainindustries,investmentincarboncapturetechnologieswillstillbeneeded.

·Thegreenpremiumforproducinglow-carbonindustrialproductsremainshighintheshorttomediumterm.Comparedwiththetraditionalpath,thecurrentcostpremiumforproducing

zero-carbonindustrialproductsis20%–100%(seeExhibit1),whilemostindustrialproducts

faceintensecompetitionwithlowprofitmargins.Downstreamindustrieshavelimitedabilitytowithstandhighpremiums.AsChina?scarbonmarketsystemdoesnotyetincorporatemajorheavyindustries,producersfacethechallengeofswitchingtolow-carbon,butmoreexpensive,productionwithoutraisingprices.Smallermarginsalsoreducethewillingnessofheavy

industryenterprisesandfinancialinstitutionstoleadinlow-carboninvestment.

Exhibit1GreenPremiumRatefortheProductionofKeyZero-Carbon

IndustrialRawMaterialsinChina

Steel

Cement

Aluminum

Plastics

0%20%40%60%80%100%

120%

Zero-carbonproductiongreenpremiumrate(2020)Zero-carbonproductiongreenpremiumrate(2050)

RMIGraphic.Source:RMIanalysis

China?sindustrialsectoraccountsforabout66%ofthecountry?stotalenergyconsumption.iiThesectoraccountsfornearly40%ofthecountry?stotalCO2emissionsifonlyaccountingfordirect

emissionsand64%ifrelatedelectricityemissionsareinclude

d.2

Carbonemissionsfromfourmajorheavyindustries(steel,cement,petrochemicalsandchemicals,andaluminum)amountto52%ofthenationaltotal,highlightingtheimportanceofthelow-carbontransitionofheavyindustryin

meetingChina?sdual-carbongoals.

Sincethelaunchofthe14thFive-YearPlan(2021–25),China?sstateministriesandcommissionshaveissuedanumberofdocumentsthatcreatea“1+N”policysystemforcarbonpeakandcarbon

iiAccordingtotheNationalBureauofStatistics,in2020,China?stotalenergyconsumptionwas4,980Mtce.Theindustrialsectorconsumedabout3,300Mtceor66%ofthetotal.

FinancingtheLow-CarbonTransitioninHeavyIndustry/

neutrality,statingthatindustryisakeyareaforpromotingcarbonpeakandcarbonneutrality.Thegovernmenthassubsequentlyissuedthe“ImplementationGuidelinesforEnergySaving,Carbon

Reduction,RenovationandUpgradinginKeyAreasofEnergy-IntensiveIndustries(2022Edition)”andthe“ActionPlanforCarbonPeakingintheIndustrialSector,”whichprovidefurtherguidanceonthelow-carbondevelopmentoftheindustrialsecto

r.3

Atthesametime,thedecarbonizationofChina?sheavyindustryfacesseveralmajorchallenges:

·Largeproductioncapacity:Chinaproducesandconsumes50%oftheworld?stotalsteel,

cement,andaluminum,andisthelargestproducerandconsumerofmajorchemicalproducts.Theseindustrieshavesignificantproductioncapacitycharacterizedbyheavyassetsandhighenergyconsumption,makingthetransformationtaskformidable.

·High-carbonrawmaterialsandfuelstructure:Themainrawmaterialsforheavyindustrial

productioninChinaarehighlydependentonfossilrawmaterials,representedbycoal.In

addition,heavyindustrymostlyuseshigh-temperature,high-pressureprocessesinproduction

wherefossilfuel,mainlycoal,isthemainsourceofenergy.Thedecarbonizationoffuelsfaces

significanttechnological,economic,andgeographicbarriers.Forexample,morethan90%ofChina?sdomesticsteelproductionisbasedontheblastfurnace–basicoxygenfurnace(BF-BOF)processusingcokeasareducingagent.Coalprovidesmorethan95%oftheheatincement

production,whileitaccountsfornearly80%oftherawmaterialsforthesynthesisofammoniaandmethanolinchemicalproduction.

·Youngassets:MostofChina?sheavyindustrycapacitywasbuiltinthepast30yearsandmost

assetsarestillinearly-tomid-life

.4I

ndustrialassetsfacetheriskofaccelerated

decommissioningandassetstrandingunderthedual-carbonrequirements,puttingpressure

oncorporatefinancesandfinancialinstitutions?returns.

Large-scalefinancialsupportisurgentlyneededforthelow-carbontransitioninheavyindustry.Heavyindustrycompaniesshouldachievethisbystartingtoupgradetheirequipmentnowwithproventransitiontechnologies.However,inheavyindustry,theupgradeoflarge-scaleequipmentandinfrastructurerequiresmassivecapitalinvestment.Italsogoesfarbeyondsimplyrelyingonexistingmaturetechnologies.Significantresourcesandfundingarerequiredfortechnology

innovationanddeployment,bothforshort-termbreakthroughsandforlong-termsustainabilitygoals.Iffossilenergyistobereplacedbycleanenergy,thenewtechnologypathwaysforheavy

industryareverydi?erentfromtheexistingones,whicharecharacterizedbyhighR&Dcosts,largeup-frontinvestmentrequirements,hightechnologicaluncertainty,andlongpaybackperiods.Theriskofstrandedassetsduringthetransitionfromoldtonewtechnologicalpathwaysshouldbeaparticularconcern;tomitigateandsharethisriskrequiressubstantialresourcesandfinancial

instruments.

Inthecontextoftheenergycrisisandtheglobaleconomicdownturn,heavyindustrycompaniesaregenerallyfacingsignificantfinancialpressures.Withtheirworkingcapitalunderpressure,theirownfundscanhardlymeetthedemandforlow-carbontransition,andtheyurgentlyneedexternal

financialsupport.Inthesteelindustryforexample,in2022,thecokingcoalpurchasecostof

benchmarksteelcompaniesincreasedby24.9%yearonyear,andtheinjectioncoalpurchasecostincreasedby24.3%,accordingtotheChinaIronandSteelIndustryAssociation.Theoperating

revenueandprofitofthebenchmarksteelcompaniesdecreasedby6.4%and72.3%,respectively

.5

FinancingtheLow-CarbonTransitioninHeavyIndustry/7

Inrecentyears,greenfinanceinChinahasdevelopedrapidly,boostingconfidenceinthetransitionoftheentiremarket.BytheendofJune2023,thegreenloanbalanceof21majorbanksreached

RMB25trillion,makingitthelargestintheworldandanimportantexternalsourceoffinancingforthelow-carbontransition.

6

However,greenfinanceinvestmentshavemostlyfocusedon“pure

green”projectswithhightechnologicalmaturity,suchascleanenergy,greentransportation,andgreenbuilding.Forindustrieswithhighcarbonemissions,suchasheavyindustry,orprojectsat

relativelyearlystagesoftechnologydevelopment,financialsupportremainsinsu?icient,makingitdi?iculttomeetthetransitionneedsofthesesectors.Designingfinancingmechanismstochannelmorefundsintothelow-carbontransitionofheavyindustry,especiallyforresearch,development,andpromotionofinnovativetechnologies,willbeakeyopportunityandchallengeinachievinganet-zerofuture.

FinancingtheLow-CarbonTransitioninHeavyIndustry/8

Low-CarbonTransitionPathwaysforHeavyIndustryinChina

SteelIndustry

Chinaistheworld?slargeststeelproducerandconsumer.In2020,Chinaproduced1.065billiontonsofcrudesteel,accountingfor56.4%oftheworldtota

l,7a

ndconsumed995milliontonsofsteel,

accountingfor56.2%.Inthesameyear,China?ssteelindustryemittedabout15%ofthecountry?s

totalcarbonemissions,andover60%oftotalglobalsteelcarbonemissions

.8

Atpresent,domesticsteelproductioninChinaisstilldominatedbythelongprocess—withacarbonintensitythreetimes

greaterthanthatofshortprocesses.China?ssteelindustrywillshifttolow-carbonmetallurgythatreducescarbonemissionsthroughenergy-e?iciencyimprovement,scrap-basedshortprocess,

hydrogen-basedmetallurgy,andcarboncapture(seeExhibit2andExhibit3).

Energy-e?iciencyimprovementsinsteelproductionmainlyinvolvewaste-heatandpressure

utilization,anddistributedenergycoupling.Overthepastdecade,China?ssteelindustryhasmaderapidprogressinenergy-e?iciencyimprovement,reducingkeysteelcompanies?energy

consumptionintensityfrom600kgofstandardcoalin2010to545kgin2020.However,withrespecttometallurgyprocesses?carbonemissionsandenergyconsumption,thereisstillagapbetween

Chinaandadvancedcountries.Chinahasclearpotentialforenergy-e?iciencyimprovements.

Oneofthemaintrendsinthetransitiontolow-carbonsteelisuseofthescrap-basedshortprocessinwhichcrudesteelisproducedfromscrapfeedstockwithanelectricfurnace.InChina,duetoan

insu?icientsupplyofdomesticscrapandelectricfurnacecapacity,short-processsteelmaking

accountsforabout10%ofnationaltotalcrudesteel.Socialscrapandimportedscrapresourceswillgraduallyincrease,andrecyclingsystemswillbecomemoree?icient.TheshortprocesswillbeakeycomponentinChina?se?ortstoreducethecarbonintensityofsteelproductionanditsdependenceonimportedironore.

Hydrogen-basedmetallurgymainlyconsistsofinjectionofhydrogenintoblastfurnacesand

hydrogen-baseddirectreducediron(DRI).Thefirstoftheseprocessese?ectivelyutilizesexisting

blastfurnaceequipment,avoidinglarge-scalestrandingofyoungassets.Thehydrogeninjection

techniquereducescarbonemissionsbyreplacingpartiallypulverizedcoalandcokewithhydrogen.DRIhasahighpotentialforcarbonreductionashydrogendirectlyreducespelletizedoretosolid

spongeiron.Theemissionsreductionpotentialcanreach95%whenusinggreenhydrogen.Intheshortterm,injectinghydrogenintoblastfurnaceswillbeafocusoftheindustry.DRIisunder

pilot/demonstrationandexpectedtobeputintolarger-scaleproductioninthemediumtolongterm.

ThemainusecaseforcarboncaptureinthesteelindustryiscapturingCO2generatedintheBF-BOFprocess.Speakingbroadly,thesteelindustryhasvariousemissionssourcesandlow-carbon

concentrations,socarboncaptureisrelativelydi?icultandcostly.TheCO2contentofblastfurnacegasishigherthanthatofotherprocessessuchasbasicoxygenfurnace.Theblastfurnacecanbe

prioritizedforcapture,butcarboncaptureinthemetallurgicalindustryisstillarelativelyexpensivetechnology.

FinancingtheLow-CarbonTransitioninHeavyIndustry/

Inaddition,emergingtechnologiessuchasironoreelectrolysismayplayanimportantroleinthesteelindustryifthesetechnologiesmatureandcanbesuccessfullyimplementedinlarge-scalepilots.Ironoreelectrolysisreducesironoretoironathighorlowtemperaturesbydirectlyusingelectricity,butnopilotprojectshavethusfarbeenlaunchedinChina.

Giventhetechnologymaturity,cost-e?ectiveness,andotherfactorsofeachlow-carbonproductionroute,theshort-,medium-andlong-termpathwaysfortheChinasteelindustryaresummarizedasfollows:

Exhibit2RoadmaptoCarbonReductionintheChina?sSteelIndustry

CarbonIntensity（%）

100%

80%

60%

40%

20%

0%

Recoveryofcokeovenrisingtubewasteheat;ultrathick-layersinteringtechnology

Optimizedandenergy-e?icientironandsteelrollingprocessinterface;high-temperatureandhigh-pressurefullydryquenching;integratedsinteroreverticalcoolingandsinteringfluegas;energye?iciencyrecoveryofwasteheatfromelectricarcfurnaces

Furnacefluegasrecyclingtechnology

E?icientrecyclingandutilizationofsensibleheatfromgoldslag

E?icientutilizationofmediumandlowtemperaturewasteheatandenergy

E?icientrecyclingofzinc-containingdustandsludge

Tailingsresourceutilization;pressurizedheatboringrecoveryofsteelslag;integratedtreatmentandrecoveryofwastewaterresources

E?icientandintelligentdetermination,gradingandprocessingofscrap;e?icientutilizationandrecyclingofslag;utilizationofmetallurgicalby-productgasresource

Lowcarbonlogistics;highscrapratioinBOF;

Whole-processintelligentrefiningtechnologybasedonbigdata;Powergenerationfromrenewablesandteelgaswasteheatforpeakingandself-supply

Lowtemperaturemetallurgy;hydrogen-baseddirectreduction

Carbon-richcircularblastfurnace

Non-carbonelectricfurnacesteelmakingprocess;hydrogen-basedsmeltingreduction

Microwavemetallurgy;flashmelting;ironoreelectrolysisprocess

High-performancesiliconsteels;corrosion-andweather-resistantlong-lifesteels;high-strengthlow-alloywear-resistantsteel

New-generationhigh-performancespecialsteel;greensteelbasedonalife-cyclecarbonfootprintassessment

Coldrolledhighstrengthautomotiveplates

Commonkeyprocesstechnologyforgreenecosteelmaterialsresearchandpreparation

Carboncapture,utilization,andstorage

CO2mineralization;geological,chemicalandbiologicalutilizationofCO2;multi-industryjointcarbonextraction,reductionandsequestration.

Resourcerecycling

Processoptimizationandinnovation Metallurgicalbreakthroughs

Systemenergy–e?iciencyimprovement

CO2sequestrationforenhancedoilrecovery;utilizationofCO2resourceformanufacturingprocess;limecalcinatingthroughhotcarriercirculationandrecyclingofCO2resource

intelligentsteelmakinginelectricfurnace;highratioofpelletsinblastfurnace;nearend-formfully

continuousmanufacturing

Productiterationandupgrade

20202030204020502060

RMIGraphic.Source:ChinaIronandSteelAssociation

Exhibit3CrudeSteelProductionForecastforDi?erentProductionRoutes

(2020—50)

Production(100Mt/year)

12

10

8

6

4

2

0

Blastfurnaceandotherlong-termprocesses

Primarysteel-CCS

Primarysteel-hydrogen

Shortprocess-electricfurnace

2020203020402050

RMIGraphic.Source:RM

I,/insight/pursuing-zero-carbon-steel-in-china/

FinancingtheLow-CarbonTransitioninHeavyIndustry/1o

Nearterm(2020–30):Thesteelindustrywillrelymainlyonenergy-e?iciencyimprovementand

developmentofthescrap-basedshortprocesstoreducecarbonemissions.Nationaland

industry-levelpolicyrequirementsforultra-lowemissionstransition,energyconsumptionintensity,andshort-processdevelopmentwillfurtheracceleratethedeploymentoflow-carbontechnology.InJanuary2022,China?sMinistryofIndustryandInformationTechnology(MIIT)issued“Guiding

OpinionsonPromotingtheHigh-QualityDevelopmentoftheIronandSteelIndustry,”requiringthatmorethan80%ofthenation?ssteelproductioncapacityshouldcompletetheultra-lowemissionstransitionby2025.Thetotalenergyconsumptionpertonofsteelshouldbereducedbyover2%by2025,toensurecarbonpeakingby2030.GuidanceissuedbyMIITandotherministriesand

commissionsinJuly2022statesthatby2025,theannualprocessingcapacityofcompaniesqualifiedtoprocessscrapshallexceed1.8milliontons,andshortprocesswillaccountfor15%oftotal

steelmakingoutputs.

Mediumterm(2030–40):Outputreductionandthescrap-basedshortprocesswillbeprioritizedtoreducecarbonemissions.Hydrogen-basedmetallurgyandcarboncapturewillbecommercializedgradually.Beyond2030,China?ssteelproductionwillplateauandthendecline.Crudesteel

productionisexpectedtodropto780milliontonsperyear(Mt/year)in2040.Productiondeclinewillrequireoptimizeddevelopmentofexistingcapacitiesandtheeliminationofobsoletecapacitiesinthesteelindustry.In2040,theavailabilityofscrapwillfurtherexpandwithincreasinglyhigher

recyclingproportionandquality.Theproductioncapacityofshort-processsteelmakingisexpectedtoreach310Mt/year.Hydrogen-basedDRIandcarboncapturewillgraduallybecome

commercialized—drivenbythefallingcostofhydrogen,carbonpricing,andthescalingof

equipment—eachcontributingsteelproductionofabout108Mt/year.In2040,thetotalcarbonemissionsofthesteelindustryareprojectedtoreach850Mt/yearwhilethecarbonemissionsintensitywillbereducedto1.1tonsCO2pertonofcrudesteel

.9

Longterm(2040–50):Outputreductionandthescrap-basedshortprocesswillcontinuetoplayan

importantro