The world has made much progress towards decarbonizing our electrical and transportation sectors in recent years, with tens of billions of dollars worth of investment annually. Yet heavy industry and other industrial processes, which constitute roughly 30% of global greenhouse gas emissions, have received comparatively little attention.
In particular it’s worth examining the cement and concrete industry, which is responsible for roughly 8% of global emissions. Decarbonizing cement and concrete will be challenging, but market shaping could help incentivize the low carbon innovations we need.
Challenges with decarbonizing cement
There are three major challenges to decarbonizing cement and concrete.
First, decarbonizing cement is not just a matter of decarbonizing the grid. The key ingredient for cement is calcium carbonate, which is melted down under extreme heat to make clinker (which is used to make cement, and then combined with materials like sand and water to make concrete). Not only does that thermal energy often involve fossil energy, but the calcium carbonate itself releases its trapped CO2 when heated. As a result, it’s not as simple as merely decarbonizing the grid and using greener heat sources—that would only reduce about half of cement’s total emissions. As a result, a variety of additional steps need to be taken. This could take the form of using partial substitutes for clinker to make cement, such as fly ash or slag, or using alternative chemistries that don’t have embedded carbon, like calcium silicate. Full decarbonization also requires shifting to a cleaner source of heat, and perhaps adding carbon capture & sequestration to eliminate the remaining emissions. All of those are expensive, and bringing down that cost is essential to reducing the industry’s emissions.
Second, there is little commercial incentive to undertake expensive decarbonization measures. Cement costs around $130/ton in the United States, while producing around 0.8 tons of CO2 per ton of cement. As a result, even a low cost per abated ton of CO2 could have an outsized effect on price. An additional complication is that cement is a commodity market, meaning (a) margins are sufficiently low that any price increase from added greening methods could make a product uncompetitive, and (b) there’s little ability for clean concrete to differentiate itself from traditional concrete on use cases. (There are some use cases where the blended cement outperforms traditional cement, such as underwater construction.) Adding to the challenge is lock-in: cement plants are long-lasting; one plant can be operational for 30-50 years. Decarbonization is unlikely without policies that price in carbon and costs coming down substantially.
Third, decarbonization is a global challenge and will therefore require efforts in many countries and markets. The overwhelming majority of cement production occurs in rapidly industrializing countries like China and India – the US only produces around two percent of the world’s cement (a number that is likely to continue to shrink in the future). Importantly, solutions may look different in different localities.
The role of innovation
Innovation can help tackle many of these challenges including reducing costs. This innovation could include improvements in carbon capture & sequestration, reductions in the price of alternative fuels, alternative kinds of SCMs, new cement chemistries, and beyond. These solutions are not a silver bullet: regulatory and procurement standards, for instance, would need to be updated to accommodate any changes in cement chemistry for instance, and there would need to be concomitant changes in construction industry awareness about the new blends along with the development of a robust supply chain to support the new inputs. In short, innovation is a necessary but insufficient condition for decarbonizing the cement industry. Unfortunately, existing commercial incentives for this needed innovation fall far short of its social value.
The opportunity for market shaping
Market shaping can help align the commercial incentives of innovation with its social importance. Cement is ripe for market shaping. Here’s why:
National policy incentives can make a difference: International trade in cement is limited given the costs of transport and markets are largely subnational (cement is too heavy to make it worthwhile to transport long distances). National policy incentives also have the potential to be relatively large compared to the size of the relevant market – this provides an opportunity to change the incentives of economic actors. The relatively small international trade in cement means domestic low carbon cement producers are at less risk of facing direct competition from higher carbon producers overseas.
Moreover, governments are often the largest buyers of cement. In the US, public agencies procure between 33% and 46% of cement. This creates an opportunity for procurement policy and standards to incentivize innovation.
The US is also at the technological frontier for cement innovation, with cement startups working on new cement chemistries, suggesting that market shaping in the US could result in innovation that could spillover into other countries where the bulk of global cement production takes place.
What form could these market-shaping efforts take?
Policymakers are already taking action.The Inflation Reduction Act contained billions to support demonstration facilities for lower-carbon industrial processes, which include cement, as well as funding for the General Services Administration (GSA) and Federal Highway Administration to procure low-embodied-concrete for federal construction projects. Subsequent Biden administration efforts include a Buy Clean Initiative whereby the GSA will tighten its environmental standards for the concrete its contractors can use. These efforts may help provide a commercial incentive to lower concrete-related emissions. But by primarily setting a bar slightly below traditional concrete, they do not provide sufficient incentive to innovate to create net-zero or near-zero emissions cement.
We can go further. Governments should incorporate the social cost of carbon into procurement decisions. This would provide better incentives by providing greater rewards for more emissions reduction, rather than setting an arbitrary threshold. It would also provide value for money by incentivizing low carbon innovations that do not exceed the social cost of carbon.
How might this work in practice? Suppose a public procuring agency was comparing bids from two general contractors. Suppose Bidder A’s bid is $1 million cheaper than Bidder B’s bid, but would add an extra 10,000 tons of CO2 to the atmosphere, with no other differentiating features between the two bidders. If the adopted social cost of carbon exceeds $100/ton CO2, then the procuring agency would choose Bidder B. If the adopted social cost of carbon is below $100/ton CO2, the procuring agency would choose Bidder A. Should the carbon intensity of the project increase over the lifespan of the project (perhaps the general contractor needed to change cement suppliers, or they needed to procure more cement than originally intended), penalties could be built into the contract to adjust.
High income countries should consider supporting middle income countries to adopt these approaches. As Glennerster and Jayachandran argue, there are high impact opportunities to address climate change in low and middle income countries, partly because it is cheaper to build green than retrofit green. The overwhelming majority of the world’s concrete production occurs in low- and middle-income countries. Indeed, the US produced around 95 million tons of cement in 2022 (2% of the global total), behind the 2.4 billion tons produced in China (55% of the global total), the 350 million tons produced in India (8%) and the 110 million tons produced in Vietnam (3%). So the opportunity for impact could be greater outside the US.
This is just one idea. Other tools including procurement standards and purchase commitments may also have a role to play. But shaping markets to incentivize the innovations we need is vital to decarbonizing cement and concrete.
