Policy priorities for  mobilizing investment in  Swedish green industrial  transitions

In its latest assessment reports, the Intergovernmental Panel on Climate Change stresses that there is a rapidly closing window of opportunity for global action to prevent and adapt to climate change and that mitigation and adaptation is needed now. The Swedish Climate Policy Council has stated that a transition has been initiated in Sweden, and national emissions have been cut by about 35% since 1990. Still an acceleration of this transition is needed to reach the national target of net-zero emissions by 2045. Industry is responsible for about a third of Sweden’s greenhouse gas emissions, and investments in deep emissions cuts in this sector are key for reaching the national target. This involves investments in innovative technologies that enable increased efficiency in the use of materials and energy, increased circularity, and fuel and feedstock switches. For most industrial sectors several pathways are being implemented, although there remain large uncertainties and risks associated with the options they are pursuing.The implementation of new technologies will often increase both capital needs and operating costs and there might be periods of elevated working capital as investments in new technologies have to overlap old production processes while verifying new solutions. Moreover, industrial sites have long lifetimes and long investment cycles. As a result, investments in technological and production changes that bring deep emissions cuts in heavy industry risk older assets having to be written off prematurely. Details are scarce on the extent to which capital investment entails a challenge for industrial transition and if so how to handle these challenges. 

The aim of this report is to better understand the key challenges for investments in technological and production changes that bring deep emissions cuts in heavy industry in Sweden. We investigate this matter from the perspective of both industry actors and actors from the financial sector. Our key research questions are: 
• Is the size of the capital investments needed for green industrial production a significant challenge for bringing about these transitions in Sweden?
• What are the most important challenges for actors’ willingness to invest in deep green industrial transitions and investors’ willingness to provide financing for those investments?
• What policies do industrial and financial actors think can best support the willingness to invest in and provide financing for deep green industrial transitions in Sweden? The report focuses on Sweden and the heavy industries that account for the largest share of greenhouse gas emissions: iron and steel, cement, refining and chemicals. We also include the pulp and paper industry in this study given that it is a large industrial point source of biogenic CO2 emissions (through the combustion of bio-fuels) and has the potential to contribute to meeting the national net-zero target with so-called “negative emissions”.

The study focuses on technological alternatives that can lead to radical reductions of direct emissions. This means that incremental energy efficiency measures and reduced demand, although important, are not considered. Our results are based on interviews with representatives from key industrial firms and financial firms and institutions. Our main results and recommendations: 

1. Neither the scale of investments nor access to financing are significant obstacles to deep green industrial transformation. Our key finding is that neither the scale of capital investments in deep green industrial transition nor access to financing to make these investments are perceived to be significant obstacles by industry or financial actors. The scale of investments is large and for many industrial actors there are needs for direct support for early-stage development of new technologies and production processes. However, given a viable business case for green industrial products, capital requirements and access to finance do not appear to be critical obstructions once companies are prepared for commercial level deployments. Instead, our interviewees emphasized issues related to creating market demand and infrastructure and permitting processes as most important for enabling investments in deep green industrial transitions.

2. Loan guarantees are an appropriate method of risk sharing for commercial-scale investments in deep green industrial transitions. According to our results, industry and financial actors find that existing direct financial support mechanisms and government credit guarantees are appropriate support and risk sharing tools. Our results do not point to any specific and new financing support mechanisms that industry and financial actors would like government to put in place. However, respondents did indicate that the scale of government support, both direct financial support and financial risk sharing, may need to be ramped up as industrial decarbonization pathways move from early stages to demonstration and commercial deployment.

3. Policies for improving the terms of financing will not likely play a large role in mobilizing the willingness to invest in deep green industrial transitions. Industrial and financial actors stated that securing financing for green industrial transitions will likely not be a challenge when the business case for making these investments is in place. Improving the terms of financing was not prioritized among our respondents as a key lever for improving business cases. Favourable financing terms certainly contribute, but our respondents pointed to issues of market demand, direct financial support for early development, infrastructure and permitting policies as much more important. As such, decision-makers should focus on these areas for the largest effects. Importantly, our respondents’ comparatively minor concerns regarding financing should be understood in the context of the early stage of development of deep green industrial transition. As many of the major investment decisions have yet to be made, our results may not reflect challenges that could occur at the point of commercial deployment. Moreover, it is very difficult to predict how financial markets will develop over the long timeframes over which investments in deep green industrial transitions are needed. As such it is still too early to make a judgement on the extent to which policy efforts could be needed to mobilize financing towards these transitions.

4. If needs for new financing solutions become apparent over time, public authorities will likely need to take a leadership role and set in motion proposals and dialogue with relevant private actors. We did not find developed ideas among industry or financial actor respondents for new financing solutions for green industrial transitions. This reflects both the perspective that financing is not a major obstacle and the early stage of development and deployment in some sectors. Because our results did not find forward-looking strategies in this area, decision-makers can contribute to green industrial transitions by tasking public authorities with investigating potential needs, gaps and innovative financing solutions for green industry transitions for future stages of deployment when capital requirements can become very high.

5. Policymakers should focus on market formation efforts. Particularly important are efforts at the European Union level to ensure that carbon price signals are high enough to create business cases for green industrial products and that efforts to prevent carbon leakage maintain fair competition. Our results show that the key policy space for mobilizing investments into green industry is in supporting market formation and demand for green industrial products. As confidence in technological solutions advances, more attention is focused on how the increased costs of green production can be transferred to end consumers. The most desired market generation policies from both industry and finance are general policies like carbon taxes combined with measures to protect the competitiveness of industries, for example a carbon border adjustment mechanism (CBAM).

6. The methods for and extent of demand-generating policies should be considered sector by sector as there may be divergence on the degree to which general policies and bottom-up approaches achieve the desired pace of change in different sectors. In addition to general market formation efforts, some actors emphasized demand generation policies directed at specific sectors, motivated by the different prerequisites for transition in those sectors. For example, public procurement policies for green industrial products were put forward as important for the cement sector especially. Another example, particularly important for the refining sector, are the policies requiring the blending of biofuels into petrol and diesel, which are already being implemented.

7. Both investors and policymakers should continue to push for companies to deliver transparency and target setting with respect to their scope 3 emissions. Working with value chains to create demand for green industrial products can accelerate the pace of transitions as has been proven in the case of green steel production in Sweden. Repeating this dynamic in other emissions-intensive industrial sectors is crucial. Our respondents emphasize that setting targets for emissions reduction and transparent reporting about progress towards these targets are important to stimulate transition not only of individual firms but also of whole value chains.

8. Government should continue with its existing financial support mechanism, reviewing financing needs periodically, and work to ensure that Swedish industry is able to access support measures at the EU level. Although our respondents indicated that access to financing for commercial deployment (assuming good market demand indications) is good, public funding is still needed to incentivize and accelerate the pace of investment in deep green industrial transitions. Getting to commercial readiness involves risky investments in research and development, piloting and demonstration. Our respondents are largely satisfied with the levels of national and EU direct support for research and development, particularly the national programme, Industriklivet. For commercialization and first-of-a-kind full-scale facilities, industry interviewees underlined the need to continue direct support at demonstration and commercialization stages and emphasized the importance of risk sharing between public and private actors.

9. The Swedish government should pay attention to how public support for industrial transitions may impact fair competition. As many countries strive to stimulate deep green industrial transitions, several industry respondents stressed that national direct support should be formed so that it does not undermine fair competition. The degree to which public support for green industrial transitions in the EU could undermine effective competition and innovation is an important area for researchers to investigate and policymakers to pay attention to. Our results suggest that more attention needs to be paid to how governments can best combine the need to bring about rapid and deep industrial transitions with maintaining competitive markets.

10. Policymakers should pay special attention to ensuring that necessary infrastructure will be available and implement reforms to permitting policies and processes to set a clear direction for industrial transitions and remove obstacles to investments. Access to low-cost renewable electricity and faster and more predictable permitting processes were judged to be most important by our respondents. Public efforts to ensure that preconditions for successful investments in deep green industrial transitions are in place set out a clear direction for industrial transitions and decrease private actors’ risk perceptions, clearing the way to mobilize more private capital.

11. Policymakers should invest more in dialogue and coordination between private and public actors (including financial actors) to solidify long-term planning for deep green industrial transitions. Shared visions and strategies can play an important role in accelerating the willingness to invest. Our respondents called for more state leadership in terms of its long-term plans for supporting deep green industrial transitions. The clearer the political landscape is for industrial and financial actors, the more confidence they can have in developing their transition plans and in providing financing. To reach this there is a need for increased dialogue and coordination between private and public actors.

12. As industrial transitions can evolve over decades, it is crucial that policymakers can deliver a stable and predictable framework that is credible over mandate periods. A clear result is that significant swings in policy priorities can easily undermine the willingness to invest in risky deep green industrial transitions. Therefore, policymakers should, as far as possible, be sending coherent signals to industrial actors on what technologies, industrial inputs and products will fit into the evolving policy landscape for green industrial production.

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