FLSmidth Opinion - 19/January/2022

EU Taxonomy will heavily impact the cement industry

Three out of four European cement producers are operating above the emissions threshold set by the new EU Taxonomy for Sustainable Activities, risking both their license to operate and commercial opportunities, says Fleming Voetmann at FLSmidth

The views expressed are those of the author and do not necessarily reflect the position of FORESIGHT Climate & Energy


Changes to European regulations provide opportunities and barriers for the cement sector

New targets from the European Union commit member states to lower emissions of greenhouse gases by 55% by 2030. It is a substantial increase on the previous goal and will require significant investment in green technologies.

The EU Taxonomy for Sustainable Activities is a major pillar of the bloc’s strategy to mobilise the necessary finance and achieve the targeted reduction. Its aim is to bring transparency to the green-finance debate by clearly defining what is and what is not a sustainable investment—although the politicians are still squabbling over the details.

It does this by requiring companies to report their economic activities against six objectives: climate change mitigation, climate change adaption, pollution prevention, circular economy, healthy ecosystem and finally sustainable use of water and marine resources.

Economic activity is considered environmentally sustainable if it makes a “substantial contribution” to at least one of these six areas; so-called Technical Screening Criteria (TSC) are used to define in detail what it means for economic activity to contribute to an objective. The activity must also do “no significant harm” to any of the objectives and must respect minimum social safeguards—such as the International Bill of Human Rights.

The taxonomy model is going to represent a challenge to the cement industry. According to our research, of the 156 cement plants that operate in the EU, 75% are at risk of not aligning with the TSC for cement manufacturing. Only 11% operate below the threshold; for the remainder, the data was not available. There is then much need for improvement and investment if the industry is to align with the performance thresholds. What incentives are there to put the effort in?

 

PERFORMANCE THRESHOLDS

The introduction of the EU Taxonomy means from 2023, cement companies will have to report how much of their production aligns with two minimum performance thresholds: The first is for clinker and specifies emissions below 0.766 tonnes per CO2-equivalent (tCO2e) per tonne of clinker. The second specifies emissions below 0.498 tCO2e per tonne of cement or alternative binder. The worldwide average is about 0.840 tCO2e per tonne of cement.

It is therefore important that the industry begins to consider how—and how much—the EU Taxonomy may change the way businesses operate. This can be in regard to securing finance, winning new business, maintaining a social licence to operate, and attracting and retaining workers.

The cost associated with the green transition will depend on the individual path taken by producers – for some, the availability of clay will enable them to reduce the use of clinker, while for others carbon capture solutions might be needed. This obviously comes at a cost but needs to be considered in the context of the expected reform of the EU Emissions Trading System (ETS). The cement industry, which has so far been receiving CO2 allowances for free are likely to pay for at least half of them by the end of the decade with the recurrent reform proposal. We estimate this could cost the industry €4.7 billion in 2030. Over the five years between 2026—when the phase-out of free allowances is scheduled to begin—and 2030, the cumulative impact could total €13 billion.

 

 

THE CARROT

The EU Taxonomy is designed to channel funds into projects that will help meet the EU’s ambitious climate goals by providing transparency and standardised measures of sustainability performance. It is also important to note that investors will have to report their own alignment with the EU Taxonomy: for instance, what proportion of their investments are in, and revenues come from, taxonomy-aligned activities.

Sustainability measures will therefore play an increasingly important role in determining where investors place their capital; at the extreme, it is possible that companies with poor levels of alignment to the EU Taxonomy will find it much more difficult or expensive to access capital markets.

 As the EU Taxonomy will influence where investors put their cash, this can determine purchasing decisions. Companies are increasingly likely to judge potential suppliers according to their sustainability performance. This will be particularly important for the cement industry should public procurement on large-scale construction projects be linked to a certain level of alignment with the EU Taxonomy.

 Having a social licence to operate is the most intangible of the three incentives mentioned so far, but perhaps the most important. A social license is based on the goodwill of neighbouring communities, businesses, governments—all of which could be endangered if a company is seen to be ignoring its environmental responsibilities by failing to align with the EU Taxonomy. Remember also that social performance indicators are included in the EU Taxonomy.

 Finally, a company’s workers are the lifeblood of its operations; its ability to recruit and retain employees is therefore essential. This is particularly so for those workers who are more highly educated and who also tend to be more mobile. In an ageing sector such as the EU cement industry, attracting new and diverse talent is necessary simply to keep the lights on—let alone to tackle the new challenges facing the industry.

But these younger, highly-skilled workers are generally more climate-conscious and likely to consider a wider range of factors in their employment decisions than simply the financial benefits. The cement industry is already thought of as old fashioned and dirty: aligning with the EU Taxonomy could therefore be an important factor in changing perceptions of the industry and attracting the necessary talent.

 

THE STICK

In many respects, the EU Taxonomy is the carrot by which the EU is hoping to encourage companies to align with its climate goals; there is however also a stick. Reform of the EU ETS is happening alongside the introduction of the EU Taxonomy with big implications for the cement industry, which is set to lose the free emissions allowances it has long enjoyed.

It is clear that the EU is charting a course that could see turbulence in the cement industry. And while we welcome the ambition being shown in both the EU Taxonomy and reforms of the EU ETS; we also acknowledge the substantial challenges ahead.

The reality is that researchers and industry experts have come a long way in solving the emission challenges so inherent in cement production, but there is no “one-size fits all” solution or quick fix. To optimise its production, cement producers need to evaluate their options based on local availability of alternative fuels such as municipal solid wastes or biomass, replacing the resource-intensive clinker with clay or recycled concrete, or venturing into carbon capture. •


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