Reducing carbon emissions has become a focus for many governments and companies, and for society as a whole. Amid greater risks from climate change, investors, consumers and policymakers increasingly demand that businesses take action to decarbonize operations and use more renewable energy sources, moving toward the broader goal of limiting greenhouse gas (GHG) emissions that accelerate climate change. That’s one major focus of the 2015 Paris Agreement, which set the goal of net-zero GHG emissions globally by 2050.

This emphasis on decarbonization will be of particular importance to the industrials sector, which makes up a quarter of global gross domestic product. It is also a major carbon emitter, contributing to 28% of global GHG emissions. The top six industrial subsectors that emit the most GHG emissions—chemicals, petroleum refining, iron and steel, food, paper, and cement—contribute to more than 50% of energy-related CO2 emissions in the U.S. industrials sector, according to the U.S. Department of Energy.

Industrials sector emissions make up close to 30% of the U.S.’s total emissions (including electricity end-use emissions) and almost 35% of Canada’s.

Decarbonization will be central for companies to meet their environmental, social, and governance commitments, comply with ESG regulations, and meet investors’ expectations and consumer demand. California has already passed ESG laws requiring businesses to quantify and disclose their GHG emissions, and the U.S. Securities and Exchange Commission has been working on climate-related disclosure mandates.

But even as decarbonization is becoming imperative, it is not without challenges, especially because industrials companies tend to be capital-intensive and have low profit margins. Decarbonizing could involve upfront investments in technology that take years to pay off, making it financially unappealing.

That said, demand for decarbonization is growing. Consumer demand for electric vehicles (EVs) has been accelerating. Banks are increasingly hesitant to lend to companies that fail to demonstrate strategies that will result in meaningful reductions in carbon emissions.

Industrials companies understand that they need to adapt for the long-term profitability and viability of the business. A solution that combines technology and policy support, particularly tax credits, will be the key for businesses to decarbonize.

For the industrials sector to successfully transition to net zero, companies must focus on three primary areas: adoption of decarbonization technologies; supply chain and infrastructure capabilities; and economic efficiency and competitiveness. We explore each of these below.

Businesses without a clear decarbonization strategy have a high transition risk, which means that they’re not following societal and economic shifts toward a low-carbon and more climate-friendly future. Decarbonization efforts should focus on reducing fuel-related emissions, optimizing electricity use, addressing non-energy-related emissions from industrial processes, and optimizing product life cycles from both upstream supply chains and downstream consumption.

Some of the technologies key to the decarbonization of the industrials sector include:

• Electrification. In manufacturing, the use case is the electrification of production (particularly thermal processes or electrification of hydrogen production used for industrial operations) and facility heating, combined with the expansion of low-emission sources of electricity.
• Green hydrogen or low-carbon hydrogen. Low-carbon hydrogen can help reduce emissions in industrials sectors that are difficult to decarbonize with renewable power and can provide feedstock for cleaner production of fertilizers, plastics and metallurgy. Hydrogen-powered fuel cells can lower carbon emissions for heavy transportation sectors as an alternative to vehicle batteries.
• Bioenergy. Currently, bioenergy’s primary application is in electricity generation and heating. However, it is expected to become a more prominent low-carbon fuel source in sectors where electrification is challenging, such as aviation and shipping transportation, and an alternative to fossil-based feedstock in manufacturing processes.
• Solar and wind power generation. Advancing the use of renewable energy sources, complemented by energy storage, smart manufacturing, and electricity demand flexibility practices, is an attainable decarbonization strategy, especially for lighter industrial sectors.
• Carbon capture, utilization and storage (CCUS). CCUS involves capturing CO2 emissions from industrial processes and using the captured CO2 to create value-added products or storing it securely to prevent its release into the atmosphere. This technology is key in last-mile emissions reduction in sectors where electrification or renewable energy sources cannot meet the technological needs of the manufacturing process.
• Energy efficiencies/recycling. Energy efficiency efforts and recycling are cost-effective and immediate strategies for emissions and waste reduction that do not necessarily require major investments or process overhauls. Strategies include production process optimization, thermal energy recovery, material recycling, and a shift to energy-efficient appliances and smart manufacturing methods. Combined heat and power is one cost-effective and easy-to-deploy technology to optimize electricity and heat consumption.

Building a connected infrastructure running on new energy sources requires significant capital investments with long return-on-investment periods. Transitioning to new technologies will require scaling up electricity generation and transmission to absorb much higher electricity needs. It also involves securing a reliable supply of critical minerals essential for technologies like EV batteries and renewable energy. The geographic scarcity of these minerals and concentrated refinery capabilities creates additional challenges, but also growth opportunities for some jurisdictions.

Successful decarbonization of the industrials sector also requires companies to target sustainability and emissions reduction throughout their long supply chains and the life cycle of their products.

Progress of the movement to net zero will depend on making new technologies economically viable and competitive. This will require continuous innovation and scaling up technology adoption, optimizing operations, ensuring data-driven resource allocation and cost optimization, enhancing labor and material productivity, and removing inefficiencies in supply chains. Policymakers need to enable and accelerate investments in the green economy, while companies should leverage available credits and incentives to scale up and ensure the competitiveness of new technologies.

Reaching net-zero emissions by 2050 will happen only if the industrials sector plays its part and takes urgent and substantive actions to reduce emissions.