Industrial Innovation: The Wins & The Work Still Ahead

Introduction  

I3 published its first consensus policy blueprint for decarbonizing the U.S. industrial sector in November of 2021. Since then, the political and legislative landscape has changed significantly and the opportunities for industrial decarbonization have never been greater. Through recent industrial innovation policies, including Executive Orders, the Bipartisan Infrastructure Law (BIL), and the budget reconciliation package, known as the Inflation Reduction Act of 2022 (IRA), the movement to cut climate damaging emissions from our industrial sector secured several monumental wins – but there is still work to be done. Now is the time to capitalize on the current momentum and ensure proper implementation of these victories from the last year.  

The industrial decarbonization solutions set forth by recent legislation can be broken into the following categories:

  • Carbon Management
  • Clean Hydrogen
  • Low Carbon Procurement
  • Electrification and Energy Efficiency

Carbon Management 

Carbon management is an important solution in an “all of the above” toolkit for industrial decarbonization, and a priority solution for I3. These policies, including capture, beneficial utilization, and geologic storage, is especially critical for removing heavy industry’s hard-to-avoid process emissions. Solutions that manage carbon will be necessary at scale if we are to achieve the midcentury climate goal of net-zero emissions, economy-wide. 

The Wins 

The 45Q tax credit is a key financial driver for the deployment of carbon management solutions in the industrial sector. The IRA delivered many critical enhancements to this credit, including extension of the commence construction window through 2032; direct payment for the first 5 years after the carbon capture equipment is placed in service; enhanced credit values for industry and power – provided prevailing wage requirements are met – increased to $85/metric ton of CO2 stored and $60/metric ton of CO2 utilized, up from $50 and $35, respectively; and significantly lower capture thresholds – as low as 12,500 metric tons of CO2/taxable year – to allow for greater participation across facilities.  

Other financing and tax incentives have been reformed, complementing 45Q and expanding program eligibility to include carbon management applications. The BIL adds qualified CO2 capture facilities, including industrial carbon dioxide facilities, as recipients of tax-exempt facility bonds. Under IRA, the 48C Advanced Manufacturing Tax Credit also received an additional $10 billion in allocations and was expanded to allow for applications which equip industrial or manufacturing facilities with carbon capture, utilization, and storage.  

I3 participants advocated for the responsible acceleration of CO2 transport and storage infrastructure buildout. The BIL included foundational investments for the SCALE Act; $310 million for CO2 utilization; $100 million for FEED studies and the Carbon Capture Technology Program; $2.1 billion for CO2 transport infrastructure; and $2.5 billion for the development of geologic storage sites. These investments will help support regional and national transport and storage projects, developing the interconnection necessary to scale this solution.  

Increasing federal investment in research, development, commercial-scale demonstration, and deployment is also a priority within the blueprint, as advancing decarbonization technologies can be a slow and capital-intensive process. To help alleviate the risk associated with investing in early commercial-scale demonstration projects, the federal government has a pivotal role to play. The infrastructure law (BIL) dedicated $937 million for large-scale carbon capture pilot projects; $2.54 billion for carbon capture demonstration programs; and $3.5 billion for the establishment of regional Direct Air Capture hubs.  

Clean Hydrogen 

Hydrogen holds great promise as a low- and zero-carbon fuel and chemical feedstock that can be flexibly produced from available energy resources, utilize existing workforces and infrastructure, create jobs, and achieve the high-temperature heat that industrial processes require. Hydrogen has gained mainstream attention over the last year thanks to the significant hydrogen funding in both the infrastructure law (BIL) and the budget reconciliation package (IRA).  

The Wins 

Hydrogen Hubs or clusters have been a central priority of I3 and were realized in the Bipartisan Infrastructure Law, with $8 billion allocated for their development. This provision requires a diversity of feedstocks, geographic siting, and end uses, including for industrial applications. In requiring such diversity among hubs, the Department of Energy (DOE) is demonstrating the viability of a domestic hydrogen market at scale, while kick-starting the clean hydrogen economy, lending support across the value chain, from production through off-takers. I3 hosted a convening of industrial decarbonization stakeholders on June 8th in Washington D.C., to discuss the latest developments and announcements from the DOE and gain insights from the states and regions hoping to establish a hub under this law. The Initiative will continue to monitor and inform the implementation of these hubs as the award process continues.  

Production and investment tax credits greatly defray the upfront and operating costs associated with the development of clean hydrogen. To scale clean hydrogen quickly, the Initiative recommends that tax credits be technology neutral and award credit amounts based on carbon intensity. The IRA does just that with the Clean Hydrogen Production Tax Credit (45V).

The credit is scaled, such that the lower the carbon intensity of the hydrogen produced, the greater the credit value. Clean hydrogen produced with a carbon intensity of less than 0.45kg CO2e/ 1kg H2 is eligible for the full credit value – up to $3/kg H2 provided prevailing wage requirements are met – while hydrogen produced with a carbon intensity greater than 4kg CO2e/1kg H2 is not eligible for the credit. Hydrogen produced with a carbon intensity within that range receives a percentage of the credit value, based on greenhouse gas lifecycle assessments. This “all of the above” approach will help spur clean hydrogen production and provide a critical boost to this nascent economy.    

While these financial measures will do much to reduce the cost of producing clean hydrogen, there are many innovations that could further improve production efficiency. Funding for research, development, demonstration, and deployment (RDD&D) is critical to ensure the cleanest, most efficient methods of production achieve market competitiveness. The BIL sets aside $1.5 billion for Clean Hydrogen RDD&D, including $1 billion to reduce the cost of hydrogen production through electrolysis and $500 million to advance innovative approaches to increase reuse and recycling of clean hydrogen technologies.  

Low Carbon Procurement 

Given the need to accelerate market transformation in the near term to achieve midcentury decarbonization, I3 participants have prioritized procurement policies where the government leads by example. This approach will help increase the deployment of new market-ready low-carbon technologies and products through purchase incentives or requirements for the public sector.  

The Wins 

Procurement of low-embodied carbon materials requires the reporting of easily comparable information across products, financial mechanisms to lower the “green premium” and approach parity with traditional materials, and standards to underpin incentives and provide a measure of market certainty to producers.  

In December of 2021, the Biden Administration issued the Executive Order on Catalyzing Clean Energy Industries and Jobs Through Federal Sustainability (E.O. 14057). This order calls for Agencies to reduce emissions through sustainable acquisition and procurement of environmentally beneficial products; reduce contractor and embodied emissions in products for federal projects; track and disclose greenhouse gas emissions, climate risk, and emissions reduction targets for federal suppliers; and establish the Buy Clean Task Force, whose responsibilities include a process for auditing and verifying the accuracy of Environmental Product Declarations (EPDs) and supporting financing for domestic manufacturers to report the embodied emissions in the materials they produce. This Order touched lightly on reporting, financing, and standards, marking a significant first step and signaling the intent of the Administration to support low-embodied carbon procurement. 

This intent was realized more fully in the Inflation Reduction Act. Reporting measures like Environmental Product Declarations (EPDs) can be prohibitively costly, making it difficult to acquire a clear and comparable dataset for emissions intensity benchmarking and low-carbon materials procurement. The IRA allocates $250 million for development and standardization of EPDs and $100 million for low-embodied carbon labeling for construction materials. This funding will help allow low-embodied carbon materials to be accurately compared, labeled, and make procurement simpler for construction and building projects. Widespread assessments and labeling of carbon intensity will also prepare the market for any potential carbon border adjustment measures that may be included in future legislation. Investments such as these are critical to meaningfully reduce the carbon intensity of the built environment.  

The Inflation Reduction Act also provides financial mechanisms to support the procurement of low-carbon materials. Of the $5.475 billion in support of low-embodied carbon materials development under IRA, $2 billion is allocated for the Federal Highway Administration to cover the cost differential between low-carbon transportation building materials and traditional building materials. The Federal Buildings Fund secured another $2.15 billion for the procurement of low-embodied carbon materials and products for the use in the construction or renovation of federal buildings, with $975 million for low-carbon materials investment and emerging sustainability technologies.  

The General Services Administration has taken the lead in implementing a new national low-embodied carbon standards for the design and construction contract awards for all GSA projects, big and small. Low-embodied carbon concrete and environmentally preferable asphalt are the first to receive such standards, with a required 20 percent reduction in embodied carbon from the model code language, applying to paving upgrades, modernizations, new construction, privately financed projects, and all Bipartisan Infrastructure Law projects.  

Electrification & Energy Efficiency  

Many industrial processes can be electrified to reduce their direct emissions without impacting the final product. Clean electricity will also be crucial in the production of hydrogen via electrolysis, which can decarbonize the high heat processes we cannot electrify directly. The associated increase in electricity demand with these energy switches will require the support of a modernized and increasingly clean grid to ensure reliability and indirect emissions reductions. It is also important to pursue energy efficiency improvements in parallel with electrification to partially offset expected increases in overall electricity demand. 

The Wins 

While industrial facilities may want to electrify, knowing where to start can be an early challenge. The BIL has several provisions in place to support RDD&D for emerging technologies and assist facilities in conducting efficiency assessments. The law sets aside $600 million for energy efficiency research, the establishment of industrial assessment centers, and support for smart manufacturing, with another $50 million for an energy efficiency materials pilot program. These programs will help build, exemplify, and assess opportunities for implementation of emerging technologies to decarbonize industrial processes. 

Financial assistance will help industrial facilities make the step to purchase and implement the technologies that will increase efficiency and electrify their processes. The most significant boon to industrial electrification comes from the Advanced Industrial Facilities Deployment Program within the IRA. This program allocated $5.812 billion for projects to purchase, install, or implement advanced technologies designed to accelerate greenhouse gas emissions reductions at eligible facilities. This funding is designed as a 50 percent cost share to help defray the upfront costs of upgrading these facilities as they strive to achieve net-zero emissions.  

Both the Bipartisan Infrastructure Law and the Inflation Reduction Act make significant investments in strengthening and modernizing U.S. electricity grids. The BIL secured $5 billion in grants for grid hardening and weatherization, $6 billion for grid reliability and resilience RDD&D, $3 billion for the Smart Grid Investment Matching Grant Program to enhance grid flexibility, and $2.5 billion for the Transmission Facilitation Fund and the Transmission Facilitation Program. This $16.5 billion package will make significant strides toward ensuring our grids are reliable, flexible, and interconnected as energy demand reaches unprecedented levels.  

The IRA continues this investment by allocating $9.7 billion in grants to connect rural transmission to renewable energy systems, $5 billion for grid and energy transportation infrastructure funding, $2 billion to enhance transmission through the electricity corridor and analyze project impact and siting considerations, as well as $100 million for planning related to transmission of offshore wind. With energy demand ever increasing and the need to connect renewable energy sources to the grid at large, these investments will be critical to establishing a cleaner, more reliable energy system.  

As with the deployment of any new technology, establishing a workforce to install and maintain electric and efficient retrofits, as well as making contractors comfortable with suggesting such technologies, will require significant workforce development. The IRA will make $200 million available in grants through 2031 for states to develop and implement energy efficiency workforce training.  

The Work Ahead  

With so many programs, projects, and funding opportunities on the table, all eyes are on agencies as they begin implementation of the BIL and IRA. Time is short as we look toward reaching net-zero economy wide emissions by 2050. The swift rollout of these provisions should be prioritized so the industries looking to deeply decarbonize can start doing so in the next few years. Fairness, effectiveness, and transparency should be central to any implementation plan.  It will also be imperative that the implementing agencies are sufficiently funded and staffed, to prevent mismanagement and delays.  

2021 and 2022 have seen critical down payments in the solutions and technologies needed for a cleaner and more prosperous industrial sector. Congress has further demonstrated a commitment to securing a safe and livable climate future for Americans. Now is the time to continue this momentum, to think creatively about solutions, and act to deploy them at scale.