by Carol Olson.
From the fertilizer used to grow the food we buy, the packaging in which we carry it home, to the plastic-based fabrics we wear, and the cement and steel used in the buildings we inhabit, the manufacturing sector produces the goods that surround us. When we can’t repair things, or avoid plastic, or afford to eat organic food, it may occur to us that we don’t have the right stuff for the energy transition.
The policies that allow manufacturers to receive subsidies and tax breaks are important to us all because they determine the business case for the stuff that is made. They can influence whether alternatives are competitive and steer the investments manufacturers make for the coming decades.
Awareness of the harm that the greenhouse gas (GHG) heating of the global climate is causing has led to climate laws being passed. In 2019, the Netherlands passed a Climate Law, and a National Climate Agreement, which was developed in close cooperation with stakeholders. In 2021, the European Climate Law was adopted, which established a binding objective for Europe to become carbon neutral by 2050, and for a 55% reduction in GHG emissions by 2030 (as compared to 1990).
While increasing wind and solar energy installations show progress toward the goal to decarbonize the electricity supply, the decarbonization of Dutch industry is still in the starting gates, even though it accounts for about a third of total emissions. In 2021, at the request of the Dutch Ministry of Economic Affairs, the OECD evaluated the consistency and cost-effectiveness of the policy instruments to decarbonize the manufacturing industry in the Netherlands. Their analysis and conclusions are the subject of this article.
EUROSOLAR Times Spring 2022
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The OECD analysis considered a decarbonization plan for the most energy-intensive industrial sectors. In the Netherlands, four sectors are responsible for 90% of industry’s direct (scope 1) GHG emissions: chemicals (predominantly plastics and fertilizers), refineries, metals (including steel) and food processing. The chemical sector alone is responsible for 44% of the direct emissions. These four also account for 72% of the industry’s indirect emissions from electricity, steam or other utility use (scope 2). Another notable feature of the Dutch industrial landscape is the intense concentration of the market: only 12 companies are responsible for more than 60% of the industrial emissions.
Eventually the manufacturing sector will need to make products that work within a circular economy, but this level of inquiry is not the starting point. The Dutch Climate Agreement has a target to reduce industry emissions by 14.3 Mteq CO2 by 2030, which is about 26% of the 2021 industry emissions. The policy toolbox to achieve this can be divided into two main pillars: carbon pricing and stimulation of low-carbon technologies.
Carbon pricing policies
The first group of policies includes a tax on carbon emissions introduced in 2021, as well as the European Emissions Trading Scheme (ETS) which each year sets a cap on emissions for particular industry sectors, prompting them to trade emission permits to conform to this level. Taxes on gas-fueled energy and surcharges on natural gas are also considered carbon-pricing instruments.
Unfortunately, these carbon pricing instruments are not working as originally hoped. Fear that energy-intensive industry sectors would become less competitive prompted Dutch authorities to give them preferential treatment, including generous tax exemptions, regressive tax and surcharge rates, and free ETS emissions allowances. The result is a very uneven handling between and within different sectors. While the food sector must pay on average Ä 76 per tonne in 2021, the chemicals sector pays less than a fifth of that, and refineries and basic metals less than a tenth of that price. The carbon pricing has very little to no effect on these three sectors which total 80% of industrial emissions.
In contrast, smaller energy users pay a relatively high price per tonne of carbon. In addition, small industrial, commercial and residential segments pay relatively high taxes on electricity, which are higher than those for natural gas (per GJ) for all but the most energy-intensive users. This is a barrier for many companies to electrify their processes. That large energy-intensive companies are exempt or pay only very little electricity tax raises equity and efficiency concerns. Delaying the action needed to decarbonize industry results in higher costs and wastes Dutch taxpayer money. Furthermore, the worry over competitiveness is fading as most other European countries are also decarbonizing, and the EU is preparing measures to insure competitiveness with products outside the EU. The OECD calls on the Dutch authorities to redesign the carbon pricing instruments as well as the taxes and surcharge on electricity.
Innovation & Deployment subsidy, SDE++
The second pillar consists of policies that aim to stimulate the cost-efficient deployment of emerging as well as new low-carbon technology. The main instrument is the SDE++ subsidy, whose goals are to decarbonize the industry and spur global leadership in low carbon technologies.
The number of patents in five key emerging low carbon technologies (hydrogen, carbon capture usage/storage (CCUS), electrification of heating processes, bio-materials and recycling) in 2018, accounted for 1% of Dutch patents – on par with the global average. However Dutch innovation efforts (2014–2018) were more than triple the world average in bio-based materials and twice the world average in carbon capture use/storage (CCUS). Efforts in the fields of hydrogen, electrification of industrial heating and recycling of plastics and metals, lag behind the world average.
Both green hydrogen (i.e. produced by water electrolysis using renewable electricity) and blue hydrogen (i.e. produced with carbon capture (CCUS) from natural gas) are both seen as being strategically important for the Netherlands. The OECD notes, however, that the demonstration budget of Ä 300 million is not adequate for green hydrogen technology development (e.g. a single 100 MW electrolyser costs ~Ä 50–75 million). Because the SDE++ prioritizes technologies according to cost per ton of CO2 reduction, it puts CCUS at the head of the list and less mature technologies, like green hydrogen, at the back. About two-thirds of the subsidy requests in 2020 for industrial projects concerned CCUS whereas the amount submitted for green hydrogen was negligible.
Because SDE++ projects also benefit from carbon tax savings, the OECD calculated their combined effect on a CCUS blue hydrogen project as compared with a green hydrogen project. It turns out that the two instruments together would overcompensate the CCUS project, creating an immediate ‘windfall’ profit. In fact, with favorable carbon pricing alone, CCUS wouldn’t even need the SDE++ subsidy to break even. It is interesting to note that in 2020 SDE++ awarded the Porthos CCS project Ä2 billion to be paid out over 15 years. Three of the four Porthos companies are in the club of the largest emitters in the Netherlands: Air Liquide, ExxonMobil and Shell. In contrast, a green hydrogen project might not even break even after receiving both funding sources, if, for example, electricity prices rise. The OECD recommends a redesign of the SDE++ to ensure support for key technologies that are still far from market and to take into account the effect of the carbon tax savings and other policy overlaps.
In conclusion, the OECD hails the Netherlands as a good example of combining ambitious technology support on the one hand with carbon pricing on the other. It is also seen as a model for how the National Climate Agreement and the decarbonization plan has been developed in close consultation with relevant stakeholders. Considering the results uncovered here, however, one may wonder whether the group of relevant stakeholders has been too narrowly defined.
On the other hand, the OECD recommends that the Dutch policy toolbox be shaped up to address some of the short-comings that are currently observed. The carbon pricing doesn’t affect most energy-intensive industry sectors because of the preferential treatment they receive. Originally meant to ensure the competitiveness of Dutch products, these favors may actually risk their competitiveness in a decarbonized economy. Delaying action to decarbonize is inefficient, and placing the burden of carbon and electricity taxes on smaller users is inequitable. The OECD calls for a removal of the preferential treatment of these companies, and redesigning the taxes to be more equitable.
Moreover, the key subsidy scheme (SDE++) favors technologies that are close to the market and effective in the short-term over the development of emerging technologies that promise significant longer-term gains. The SDE++ calculates CCUS as cost efficient per ton of CO2 removed. Skepticism about this calculation is warranted: when taking into account emissions from the natural gas supply chain (scope 3), CCS blue hydrogen emits more GHG than comes from simply burning natural gas. The CCUS blue hydrogen projects with their dependency on natural gas, with inherent methane leakage, and need for ever-increasing, indefinite, not monitorable CO2 storage can never be a long-term solution. Yet, SDE++ funding combined with carbon tax savings are giving them windfall profits. Green hydrogen, on the other hand, could be a part of a long-term solution, and one that is complementary to renewable energy generation by wind and solar. But it is so de-prioritized that the number of project requests are negligible. In addition, even with both SDE++ funding, and savings from the carbon tax, green hydrogen projects would still have risks to break even. The OECD recommends that the design of the SDE++ be reformed.
The insights from the OECD analysis may not only help to improve the effectiveness of policies in the Netherlands, but may also be of interest for other countries with similar policies.
Dr. Carol Olson is Founding Member and Co-Chair of EUROSOLAR Netherlands