Policy design for the low-carbon transition of the European cement industry under technology uncertainty

• In Event: Transition Toward Decarbonization: Cross-National Perspectives on Transformative and Collaborative Policy Approaches

Abstract

The decarbonization of the European cement industry is a critical component of the European Union (EU)’s broader efforts to achieve climate neutrality by 2050. Recently, the question of how to design effective climate policies for the sector has gained in importance in the context of the EU Clean Industrial Deal. However, significant uncertainty surrounds key factors, including the future trajectory of carbon prices under the EU Emissions Trading System (ETS), capital expenditures (CAPEX) for carbon capture and storage (CCS) technologies, and the availability of CO2 transport infrastructure. These uncertainties complicate investment decisions for cement manufacturers, especially given the high costs and long-term nature of the required technological upgrades. Our paper addresses the policy design challenges posed by these uncertainties. By analyzing ex-ante the investment behavior of 177 cement plants across Europe under different policy scenarios, we provide insights into the potential impact of EU policy on decarbonization outcomes.

We apply a real-options valuation model to assess how uncertainty influences investment decisions in green solutions, such as using CCS or switching to biomass as a fuel, across geographies and over time. The model integrates uncertainty concerning ETS allowance prices, CCS CAPEX, and the availability of CO2 pipelines, simulating two potential future scenarios for the cement industry: the "Net Zero 2050" (NZ2050) scenario, where high carbon prices and early infrastructure development encourage early investment in green technologies, and the "Delayed" scenario, where lower confidence in EU climate policies leads to delayed investments and continued emissions. Investor expectations in these scenarios are empirically calibrated based on interviews with key market players in Europe. This approach allows us to identify both geographical patterns—such as the advantage of plants located near low-cost biomass sources or CO2 transport infrastructure—and temporal investment patterns, revealing how varying levels of policy credibility impact the speed and scope of the sector’s decarbonization.

Our results highlight the critical role that policy credibility plays in shaping investment behavior. In the NZ2050 scenario, where there is high trust in EU climate policy, cement plants invest early in CCS and biomass switching, ensuring compliance with emissions targets. However, in the Delayed scenario, where policy uncertainty prevails, many plants postpone investments, which could result in the cement sector exceeding emissions targets by 2050. This underscores the importance of reinforcing the credibility of EU climate policies, particularly regarding the carbon price trajectory and CO2 infrastructure availability, to prevent delays in the cement industry’s transition. We discuss options to increase policy credibility concerning these factors, particularly against the backdrop of also increasing geopolitical and global trade barrier uncertainty. Based on our analysis, the EU can better navigate the uncertainties that hinder decarbonization and promote a just transition across regions with varying investment conditions.

Author

• Bjarne Steffen, ETH Zurich
  Presenting Author