Publicly Available Master Plans Can Help Industrial Companies Accelerate Decarbonization

Coauthored by Michiel Stork, Jabbe von Leeuwen, and Jessica Miede

Driven by investor requirements and customer demands, by the end of 2023, more than 4,200 companies had set greenhouse gas emissions reduction targets and had them validated by the Science Based Targets initiative, including many industrial companies (for example, 117 chemical companies). At the same time, in order to meet their own climate commitments, governments and other regulators (e.g., the European Commission) are pushing industrial installation operators with stronger reporting and decarbonization regulations. The revised European Union Emissions Trading System (EU ETS) directive, published in May 2023, is one notable example in this space.

Mandatory Climate Neutrality Plans in the EU ETS

Among other changes, the new EU ETS directive makes climate target setting and decarbonization mandatory for those installations that fall behind. It requires the establishment and implementation of a Climate Neutrality Plan (CNP) for the 20% of installations with the highest emission intensities per benchmark. Such plans must include a roadmap toward climate neutrality under the EU ETS by 2050 at the latest. The CNP must include information on specific targeted emissions (tons of CO2 equivalent per ton of product) and detailed descriptions of decarbonization measures, including investment needs in 5-year increments as well as enabling conditions and infrastructure needs. Noncompliant installation operators risk losing 20% of their annual free allowances, which, with carbon prices ranging from around €55-€80/ton in the first two months of 2024, could lead to serious financial implications. The deadline to submit a CNP is May 31, 2024, requiring installation operators to respond quickly.

Every Industrial Installations Operator Should Establish a Decarbonization Master Plan

With regulators, investors, and customers demanding decarbonization efforts, we believe it is crucial for every industrial company—not just for the ones for which the European Commission has made this mandatory—to make a master plan to reach net-zero by 2050 at the latest. Establishing such a master plan has four benefits for industrial companies:

1. Increasing enterprise value: Investor networks (e.g., the UN-convened Net Zero Asset Owner Alliance or Climate Action 100+) ask for a holistic master plan. Such a plan can enable:
   
   • A lower risk premium due to reduced transition risks (stranded assets, carbon and fuel prices, etc.) and enhanced supply chain resilience
   • A lower cost of capital due to enhanced access to capital (e.g., via green bonds and reduced interest rates)
2. Growing revenues: A master plan can help companies increase market shares—for instance, via stronger customer loyalty—or provide opportunities for new market entries (e.g., green products), as well as increase competitiveness by driving innovation.
3. Raising margins: A master plan can contribute to long-term cost savings, raise pricing power, enhance employee engagement, and increase productivity—for example, by helping companies plan future investments and avoid investments in stranded assets, as well as by reducing energy costs and taxes (e.g., via power purchase agreements).
4. Enabling long-term success: A holistic master plan fosters long-term action that helps companies strategically lead sectoral transformation. This prepares companies for current and future regulations, drives innovation, supports maintaining a license to operate, and reduces litigation risk.

Building an Effective and Feasible Decarbonization Master Plan

A decarbonization master plan should be comprehensive and outline a company’s transition holistically, with consideration for its value chains, the industrial cluster it belongs to, and its environment, employees, and neighbors. The Association of the Dutch Chemical Industry’s roadmap argues in favor of covering the full value chain, including feedstocks and end-of-life emissions, in a company’s decarbonization strategy, because this:

1. Expands the number of emissions reduction options (e.g., recycling)
2. Avoids investment in stranded assets (e.g., investing in scope 1 and 2 emissions reductions for plants that may become obsolete in a few years when feedstocks are switched)
3. Ensures an earlier start for the complete transition, rather than beginning with just scope 1 and 2 emissions
4. Is a more straightforward approach to options affecting multiple scopes, such as:
   
   • Replacing fossil feedstocks with renewable alternatives, reducing both production and end-of-life emissions
   • Bio-based processes, which sometimes trade off higher energy consumption to eliminate fossil end-of-life emissions

The figure below summarizes the elements to consider in a master plan, noting where they correspond with the minimum requirements of a CNP. The Guidehouse report Navigating the Decarbonization Journey provides further insights into the most urgent decarbonization question for every master plan: How?

A Holistic Master Plan Is Multifaceted and Iterative

(Source: Guidehouse Insights)

Publishing a Master Plan Can Accelerate Progress and Reduce Costs

Given the complexity of resources and partners required to implement identified decarbonization measures, organizations are advised to publish the main ingredients of their master plans and proactively discuss them with key stakeholders (while considering confidentiality and competition law restrictions). This will enable them to:

1. Reach milestones and targets more quickly
   
   • Informing suppliers and policymakers of future needs for renewable energy and alternative feedstocks allows timely planning of future business, support, or policy needs.
   • Planning required infrastructure is a key factor given the typically long lead times of 2.5 years to up to 15 years (see the Roadmap for the European Fertilizer Industry). Publishing infrastructure needs facilitates discussions with relevant stakeholders around the timing of required infrastructure for a company or cluster as soon as possible.
   • Timely planning and involvement from the broader society are needed to reskill the current workforce and change the curriculum for the new generation (see Chemelot Circular Hub’s Circular Economy Action Plan).
2. Achieve more cost-effective decarbonization
   
   • Pooling and timely identification of infrastructure demands can help governments, transmission system operators, private pipeline operators, and project developers as well as investors better plan investments.
   • Publishing a plan may also lead to more competition among suppliers, which may have a positive influence on price development for organizations.

Public availability of master plans helps with the identification of development pathways for industries and clusters. The clarity on the pursued options that a master plan provides enables the development of supporting policies and infrastructure (see the Analysis for Sustainable Industry Program report). Given that 20% of EU installations will be making master plans already, the creation of voluntary master plans by the remaining 80% helps ensure the entire industry reaps the benefits.