rethink sustainability
Challenge or opportunity? Rethinking hard-to-abate sectors
For many who care about achieving net zero, hard-to-abate sectors are a headache they would rather avoid thinking about. However, headaches can be treated and prevented from reoccurring. And the methods used could, in fact, offer a significant source of hope in our quest to achieve net-zero emissions.
For many sectors, what is required to achieve net zero is relatively obvious: transitioning to 100% carbon-free energy suppliers to power their operations and, if applicable, away from making products that burn fossil fuels. The term ‘hard-to-abate sector’ refers to any sector for which the transition is not nearly so straightforward, because they either lack the technology or its cost remains prohibitive.
Sectors can be hard to abate for many different reasons. For instance, many heavy industries, such as the steel, cement, and aluminium sectors, employ extremely high-temperature processes that can, as of today, only be achieved in a cost-effective way by burning fossil fuels. Some sectors, including chemicals, also produce emissions from non-energy sources—the production of ammonia, for instance, requires natural gas as a feedstock. Many of these industrial processes are also highly integrated and complex, making the challenge of finding new, carbon-free approaches just as complicated as well as expensive—which, with so much cost having already been sunk into refining these processes, can make many industries reluctant to pursue change. Meanwhile, other sectors cannot be electrified because they require high-density, local energy sources—a need that is still best fulfilled by fossil fuels. The most famous of these is heavy-duty transportation, which includes shipping, trucking and aviation. While jet fuel can easily carry a plane over very long distances, you simply cannot cram enough solar panels or batteries onto a plane to keep it in the air for long unless it carries virtually no passengers or cargo.
Of course, the fact that these sectors are so hard to abate wouldn’t be so bad if their relative contributions to global emissions were low, or we could simply phase these industries out altogether. Unfortunately, the former is not the case, while the latter is neither desirable nor realistic. Most hard-to-abate sectors produce things that we will continue to need in a net-zero world, including steel, cement, aluminium, industrial chemicals and heavy-duty transportation. Nonetheless, together these industries are responsible for nearly a third of global CO2 emissions1. As such, if we are to have any hope of achieving net zero, we cannot afford to either ignore them or wait for alternatives.
Reframing the challenge
No wonder, then, so many take a pessimistic view of hard-to-abate sectors—assuming, that is, they can bring themselves to consider the problem in the first place. But while there’s no shortage of other emissions challenges that we must overcome, we must tackle all of them if we are to have any hope of achieving net-zero emissions—including the challenge of hard-to-abate sectors.
However, where some see a cause for pessimism, others see a cause for hope. For if hard-to-abate sectors are responsible for such a significant proportion of global emissions, then their successful decarbonisation would represent an equally significant step towards achieving net zero. And, happily, these sectors are merely hard to abate—not impossible.
At Lombard Odier, we believe that it is far more impactful and rewarding to invest in credibly transitioning companies in high-emitting and hard-to-abate sectors today, than to invest in only low carbon sectors.
Building on our in-house expertise, we have built sophisticated capabilities to gauge the decarbonisation trajectories of over 23,000 companies. Specifically, our approach allows to us to identify what we call ‘ice cubes’: companies in high-emitting and hard-to-abate sectors with credible, radical decarbonisation plans and which, therefore, have the most potential to cool our planet back down.
Meanwhile, we see those companies in high-emitting and hard-to-abate sectors that refuse or neglect to transition as belonging in the ‘burning logs’ category—worth avoiding not only because they will ultimately hinder our efforts to achieve net zero and mitigate climate change, but also because they aren’t positioned for long-term success in the context of what we believe to be the inevitable Sustainability Revolution and the transition to a CLIC™ economy—one that is Circular, Lean, Inclusive and Clean.
In short, ‘ice cubes’ tend to be good investments, while ‘burning logs’ tend to be bad ones—in financial as well as environmental terms. And, aside from policy interventions designed to incentivise these sectors to find ways to transition their processes to low- or zero-carbon alternatives, investors have a vital role to play in fuelling the innovation these transitions will require.
For instance, hydrogen has the potential to enable many hard-to-abate sectors that, for various reasons, cannot electrify, to still make the move to net zero. Hydrogen burners could be used in conjunction with electric heating to generate the high temperatures required in many heavy industrial processes, which would enable them to do so without burning fossil fuels2. Meanwhile, the aviation industry could one day decarbonise by swapping jet fuel for hydrogen fuel.
Meanwhile, carbon capture utilisation and storage (CCUS) technologies could enable heavy industries that have yet to find a way to decarbonise to avoid producing carbon emissions. First, depending on the industrial process, technologies such as chemical looping combustion, membrane gas separation or gas hydration could be used to capture waste CO2 before it enters the atmosphere. Then, the carbon can be sequestered using, for instance, mineral or geological storage methods, or even used to make products such as plastics, concrete or biofuels.
These are just two of the ways in which hard-to-abate sectors might achieve net zero in the future. That said—and as evidenced by the fact that there is still such a thing as hard-to-abate sectors—problems remain with each of these methods. For example, carbon-neutral hydrogen production remains too expensive to be commercially viable, a problem that—along with the fact that they remain unproven at scale—also plagues CCUS technologies.
But, even here, necessity is the mother of invention. And since achieving net zero and, in turn, decarbonising hard-to-abate industries are necessities, invention is sure to follow—provided that investors see the hope that these sectors represent and have the vision to fuel that innovation. At Lombard Odier, we aim to identify and invest in the ‘ice cubes’ that are the high-emitting, hard-to-abate sectors setting out concrete roadmaps to net zero, as well as the pioneering companies that are stepping up to bring the technology they need to life.
We do this because it is our responsibility to favour companies that are transitioning to generate returns for our clients. In a world that is waking up to the inevitability of The Sustainability Revolution and the need to achieve net zero, these are the investments that will stand the test of time.
1 Energy Transitions Commission (2018) ‘Mission Possible: Reaching Net-Zero Carbon Emissions from Harder-To-Abate Sectors by Mid-Century’.
2 Hydrogen Council (2017) ‘How hydrogen empowers the energy transition’.
Important information
This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.
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