Financing the decarbonisation of heavy industry is within the reach of Polish companies, but state support is needed at political, regulatory and financial levels, states the report ‘Sustainable Finance as an Opportunity? A Roadmap for Decarbonisation of Polish Heavy Industry’ by Kamil Laskowski, analyst at WiseEuropa.
The decarbonisation of carbon-intensive industries such as cement, steel and chemicals (i.e. so-called heavy industry) presents a number of unique challenges, including the significant investment required to implement low-carbon technologies.
“Efforts to reduce CO2 emissions, however, require support from industrial policy,” says Kamil Laskowski.
High costs a barrier to decarbonisation
The high cost of carbon capture and storage (CCS – Carbon Capture and Storage) technologies is a major barrier to the decarbonisation of industry, which emits CO₂ in chemical reactions during production or from the generation of heat at very high temperatures.
“Such processes, found in the cement or steel industry, cannot be replaced by renewables – their decarbonisation requires other technologies, such as CCS itself or the use of hydrogen, preferably emission-free,” says Kamil Laskowski.
The price of CCS technology may fall in coming years and, in light of the rising cost of carbon allowances, may also prove more competitive. However, the industry cannot wait to invest in decarbonisation because of regulatory pressure from the European Union.
“The phasing out of the allocation of free emission allowances until 2034 means that, in the absence of a reduction in carbon emissions, industrial production could become significantly more expensive and thus less competitive,” says Kamil Laskowski.
Regulation is also holding back the move away from coal
In the case of CCS or hydrogen technologies, there are also regulatory or logistical constraints, and it can take up to approx. 10 years. Implementing this type of investment may therefore take too long in the context of the phasing out of free emission allowances and the EU’s overall climate targets for emission reductions.
“It is worth mentioning that in Poland, industry is responsible for roughly ¼ of carbon dioxide emissions under the EU ETS,” says Kamil Laskowski.
A significant obstacle for decarbonisation of industry in Poland is additionally the approach of public authorities and industrial companies themselves. This issue is neither supported nor sufficiently addressed by the state, and private entities do not always show any particular interest in reducing their CO2 emissions. This is a result of the free allocation of emission allowances, which largely covered carbon dioxide emissions from Polish industrial production.
“Above all, there is a lack of strategic understanding and vision at central government level. The lack of a cross-cutting strategy for decarbonisation of the entire economy means that the role that industry should play in this process remains undefined. Decarbonisation of industry is not a priority for the government, and this is a mistake given the looming threats to the competitiveness of Polish industrial production,” says Kamil Laskowski.
What can be done to reduce CO2 emissions?
The decarbonisation of heavy industry in Poland in the 2030 perspective should be based on two realistic pillars: increasing energy efficiency and replacing fossil fuels with less carbon-intensive or renewable substitutes, mainly sustainable biomass.
“Our calculations show that, based solely on commercialised and already available energy efficiency technologies for cement, steel and ammonia production, a total reduction in emissions of up to nearly 21% compared to 2021 is possible by 2030,” says Kamil Laskowski.
Capital expenditure on these technologies could amount to EUR 3.5 bn. This is a maximum amount, inflated by the assumption that Polish cement plants can increase capacity by combining kilns, which requires the largest outlay of the technologies considered and is highly dependent on the cement plants themselves. The average total costs are around EUR 2 bn.
Can Polish industrial companies afford to invest in decarbonisation?
The financial situation of Polish industrial enterprises is good enough that they should be able to bear the costs of increasing the energy efficiency of their production.
“Juxtaposed with the amount of investment made by companies over the past few years, it can be expected that the private funding generated in the coming years by the steel and chemical sectors will be sufficient to finance their decarbonisation in Poland by 2030,” says Kamil Laskowski.
By contrast, in a worst-case scenario, additional investment for decarbonisation could place a significant, unprecedented burden on cement companies. For them, external leverage may be necessary to support decarbonisation efforts.
“We estimate that the Polish cement sector has the capacity to borrow an additional approximately EUR 1.7 bn by 2030, which would be sufficient to finance decarbonisation efforts,” says Kamil Laskowski. “However, using the available borrowing capacity to the limit could prove risky, so a good solution for the cement sector would be mixed financing, i.e. financing with public funds.”
And estimates indicate that nearly EUR 80 m of EU funds will be available for the energy and industrial sectors in the coming years, including for energy efficiency investments. On top of this, sufficient funds to finance energy efficiency improvements in Polish industrial enterprises could be provided by the EU Modernisation Fund: currently, funds from this source are not fully utilised and precisely distributed by the state, and it is estimated that nearly EUR 20 bn will still be available to Poland under this fund by 2030. However, the Polish administration needs to be far more ambitious in applying for these funds.
A last resort to support decarbonisation investments may be private sustainable financing, the development of which is lagging behind due to the limited experience of capital market financing in Polish industry. For this reason, it is important to start communicating and exploring the potential of green bonds or sustainability-linked loans among Polish industrial companies.