Congress and President Biden have made climate history. The Inflation Reduction Act (IRA) contains the strongest climate action ever taken in U.S. history. It also re-envisions industrial policy as climate policy, providing a comprehensive set of targeted, complementary approaches to reduce emissions from the most carbon intensive industrial processes, nurture domestic manufacturing and create sustainable jobs.
Heavy industry – notably metals (e.g., iron, steel, aluminum), cement and chemicals manufacturing – is responsible for 30% of U.S. greenhouse gas (GHG) emissions. While this includes emissions from electricity and heat used in the sector, most industrial emissions actually come from physically and chemically making those carbon-intensive products. Under current clean energy pathways, which focus largely on decarbonizing power, transportation and buildings, industry is set to become the top source of U.S. GHGs within the decade.
However, the IRA will chart a more promising course for the industrial sector, as it contains big, targeted, and well-designed federal incentives for industrial decarbonization. For the first time ever, advanced and clean technology investments will become financially accessible for these highly emissive yet vital sectors, which are critical to the U.S. economy, jobs, infrastructure, and the clean energy transition. This push will jump-start the process of decarbonizing the most challenging industrial applications, which will not only help realize near-term climate goals but will also be fundamental for the United States to achieve net zero emissions by midcentury.
The IRA will dramatically bend the curve of U.S. industrial emissions
Today, industrial emissions are not on track to meet President Biden’s pledge to slash U.S. GHGs at least 50% below 2005 levels by 2030, aligning with the Paris Climate Agreement. However, when paired with policies enacted in the bipartisan Infrastructure Investment and Jobs Act (IIJA) passed last year, the policies in IRA have the potential to dramatically bend the industrial GHG emissions curve in this decade towards the trajectory we need to be aligned with a 1.5oC warming pathway. Most notably, the climate bill makes deep emissions cuts possible for the first time in two highly emissive industrial sectors, so far considered to be the hardest to decarbonize industrial applications: steel and cement manufacturing.
In fact, analysis by the Department of Energy finds that the industrial sector will see the second largest emissions reductions following the power sector, owing to decarbonization policies in both IRA and IIJA.
While promising, this is just the start. For the 1.5oC target to remain within reach, even more action will be required by the Biden Administration to build on the IRA and IIJA’s catapulting push to set strong federal emissions standards, accelerate global cooperation to catalyze climate action, and continue leadership by states and cities.
The IRA puts the U.S. on track to produce the most competitive zero emission steel in the world
The energy intensity of many industrial processes means electrification cannot carry us all the way to our decarbonization goals, and a carbon-free, high-energy source like green hydrogen is necessary. As we discuss in detail here, the climate bill includes a generous 10-year clean hydrogen production tax credit (PTC) – the largest such incentive in the world — for facilities that begin construction before January 1, 2033. With the PTC, we estimate that green hydrogen—produced via the electrolysis of water powered by nearly 100% renewable electricity—can start competing with today’s incumbent grey hydrogen in some places in the U.S. today, and in most places by end of decade. This pushes forward the previous projected timeline for this cross-over by more than a decade and bears major implications for U.S. industry.
For the first time, and based on early estimates, it can be financially viable to replace highly emitting blast furnace steel mills that run on coal with clean, hydrogen-based steel plants. The latter would rely on a process known as the direct reduction of iron (“DRI”) that runs on 100% hydrogen and to the extent that the hydrogen is green, the process would produce nearly emission-free steel. All major European steel producers are currently testing and building hydrogen-based steel production processes using vital government support for the transition. The United States is poised to follow suit and now with IRA subsidies, can lead the global transition to green steel. This could be a boon for the U.S. economy, with prospects of recreating a domestic steel manufacturing industry and creating sustainable jobs.
Our colleagues at RMI estimated the near-term potential for hydrogen to decarbonize U.S. steel production, considering the current steel fleet, including blast furnace facilities that are of the age to have major financial investment decisions within the next five years and, given an appropriate incentive environment – such as the one provided by the IRA – could elect to transition to hydrogen-based production. This switch can shave off 43 million metric tons of CO2 by 2030 – roughly equivalent to the annual power sector emissions of the state of North Carolina.
The IRA will provide essential incentives to fully decarbonize cement manufacturing
Several of the provisions in the IRA relating to the decarbonization of cement manufacturing dovetail well with other measures, including some in the IIJA. Cement plants will be able to access funding to modernize their facilities by investing in advanced technologies. Among others, the IRA increases the tax credit for carbon capture and sequestration at industrial facilities like cement plants to $85 per ton of industrial carbon pollution that is captured and stored securely and long-term in geologic reservoirs (and not used for enhanced oil recovery). At the prior value of $50/ton, the tax credit was not high enough to make such projects viable. As we discussed here, analysis shows that the IRA’s enhancement will change that, allowing such projects to move forward for the first time and help demonstrate the technology, reveal its limitations, and eventually help reach commercial scale. This is a game changer for the cement industry whose process emissions limit the ability of other measures to fully decarbonize production.
Capturing carbon from cement plants is not a way to prolong dirty fossil fuels that can be replaced. Instead, it is a way to address a large share of emissions that cannot otherwise be abated for a material we rely on. More than half of GHG emissions from cement production are the result of an unavoidable chemical reaction that occurs when turning limestone rock into clinker. So, even if all fossil fuel emissions in the industry were zeroed out, the emissions associated with producing this critical building material would persist. The result is CO2 that would either be emitted to the atmosphere or captured and stored permanently underground. Importantly, capturing carbon must be done with appropriate safeguards for public health and local communities.
Finally, the climate bill smartly pairs the incentives to deeply decarbonize industrial manufacturing with demand-creation by leveraging the enormous purchasing power of the federal government. Government purchase of low-carbon materials, such as steel, cement and concrete, in public projects will create markets for the cleaner products coming out of these plants, give cleaner producers a competitive advantage and spur investor confidence.
The U.S. industry is entering a path toward a sustainable future, let’s make sure it stays the course.
The passage of the IRA is a seismic shift. All indications are that it will make a huge impact on a sector that has important implications for our climate and economy. Success by 2030 will be defined two-fold:
- The U.S. industrial sector will have deployed existing clean energy solutions such as electrification of industrial processes, where feasible, across facilities of all sizes and classes, and
- Where electrification is not possible, advanced technologies such as green hydrogen in steelmaking and carbon capture and permanent storage in cement will have been commercially demonstrated. To achieve that we must build first-of-a-kind projects to better define and reduce risks and lower barriers to adoption.
With the IRA, the table is set to do so. Now the crucial work of implementation begins. Over the coming years, it will be critical to ensure the law gets implemented fully and well, and that these projects get built in ways that support climate progress, create sustainable jobs and protect people’s health and communities. The U.S. stands to become a global leader on industrial decarbonization and restore its industries and jobs: let’s meet the moment.