Draft climate change plan: draft third report on policies and proposals 2017-2032

11. Industry

This sector includes all industrial activity and manufacturing in Scotland, including the energy-intensive industrial sectors covered by the EU Emissions Trading System.

11.1 Where we are now

11.1.1 The industry sector has seen a 10.6 M tCO ₂e (50.5 %) fall in emissions between 1990 and 2014. Much of this decrease occurred between 1990 and 2000 - linked to a decline in emissions from manufacturing and the iron and steel industry over this time period. There has been a further smaller decrease between 2008 and 2009, coinciding with the recession. Figures have then been more level in recent years, albeit with small fluctuations in emissions from this sector since 2009. There was another decrease (0.8 MtCO ₂e; 7.3 %) in emissions in this sector between 2013 and 2014. This has been driven by a number of factors, which include a reduction in emissions from combustion in the petrochemicals industry, and from the space heating of offices, which is partly linked to external temperatures. There was also a smaller drop in emissions from pulp and paper making.

Figure 17: Industry historical emissions

11.2 Our ambition

Figure 18: Industry carbon envelopes

11.2.1 Scotland's industrial sector has already delivered substantial emissions reduction. The Scottish Government wants to ensure that further decarbonisation between 2017-2032 will be achieved by supporting industry to make the investments in measures that will enhance its productivity, improve its competitiveness, and realise new manufacturing opportunities in global markets. Set in that productivity and growth context, there are two key policy outcomes that the Scottish Government wants to see for industry under this Climate Change Plan:

• Industrial emissions fall by around 19% between 2014 and 2032, through a combination of fuel diversification, cost saving energy efficiency and heat recovery and participation in EU carbon markets. This will mean by 2032, industrial emissions will be in total, 60% lower than 1990.
• Technologies critical to further emissions reduction are demonstrated at commercial scale by 2030.

11.2.2 We will work with businesses and others to achieve these outcomes through two principal means:

1) By ensuring a continued level playing field for regulation through EU and UK frameworks for industrial decarbonisation

11.2.3 The regulatory environment is underpinned by existing and planned EU and UK regulatory frameworks - the EU Emissions Trading System Phase III (2014-2020) and Phase IV (2021-30), and UK carbon taxes and related reliefs (e.g. Climate Change Levy, Climate Change Agreements, Energy Intensive Industries package) ^[64] . These regulatory frameworks ensure continuing access to the level-playing field for industry across the UK and EU, and support investment in the industrial decarbonisation pathways necessary to meet the EU and UK's contributions to the Paris Agreement, including continued access where required to free allocation of allowances for those sectors at risk of international carbon leakage ^[65] . The Committee on Climate Change has already confirmed that it expects that "available rules for future phases of the EU ETS will imply a reduction in Scottish net emissions in these sectors of 34% from 2013 to 2030" ^[66] . The ETS cap will therefore make a major contribution to the 19% emissions reduction envelope for industry from 2014 to 2032 ^[67] .

• At the EU level:
  1. By 2020 - Industrial Emissions covered by the EU Emissions Trading System cap will be 21% below 2005 levels, consistent with the EU's 2020 emissions reduction target and commitment to the Kyoto Protocol second period.
  2. By 2030 - Industrial Emissions covered by the EU Emissions Trading System cap will be 43% below 2005 levels, consistent with the EU's 2030 emissions reduction target and commitment to the Paris Agreement.
  3. By 2050 - Industrial Emissions, covered by the EU Emissions Trading System cap would be 90% below 2005 levels, which would be consistent with the EU's 2050 emissions reduction target.

2). By providing incentives and business support via our manufacturing action plan ( MAP),
A Manufacturing Future for Scotland, and Scotland's Energy Efficiency Programme ( SEEP).

11.2.4 These programmes use a combination of existing support from the Scottish Government, Scottish Enterprise, Highlands and Islands Enterprise (and their partners), and will develop new financial products for industry to invest in energy efficiency and decarbonisation through approaches such as industrial heat recovery to district heating networks. This policy framework builds on the existing ESOS (Energy Savings Opportunity Scheme) audits which set out cost-effective energy efficiency and decarbonisation measures that will save industry money, maximising substantial economic opportunities through improved productivity. The policy on 'Delivery of our suite of waste reduction, recycling and landfill diversion targets and regulation up to 2025', in the waste chapter of this Climate Change Plan, summarises our approach to delivering those targets. Our circular economy strategy, Making Things Last' sets out our ambitions and priorities to keep products and materials in high value use for as long as possible, reducing waste and carbon emissions and delivering economic benefits through improving productivity, opening up new markets and improving resilience. This includes achieving a 70% recycling rate by 2025 - increasing the supply of recycled materials on the market which, when used by industry in place of virgin materials, will also provide significant 'upstream' energy efficiency savings for Scottish industry.

11.3 Policy outcomes, policies, development milestones and proposals

11.3.1 There are two policy outcomes for industry.

Policy outcome 1: Industrial emissions fall by around 19% between 2014 and 2032, through a combination of fuel diversification, energy efficiency and heat recovery and participation in EU carbon markets.

There are four policies and three policy development milestones which will contribute to the delivery of policy outcome 1.

Policies which contribute to the delivery of policy outcome 1

1) EU Emissions Trading System ( EU ETS) cap delivers a 43% reduction on 2005 EU emissions levels by 2030 and we will argue for a share of that cap in line with meeting Scotland's domestic ambitions.

2) UK Climate Change Levy ( CCL) and Climate Change Agreements ( CCAs) incentivise shift from gas to alternative fuels, and deliver agreed energy efficiency and emission reduction targets for energy intensive industrial sectors.

3) Non-domestic Renewable Heat Incentive (ends 2020/21) and associated Scottish Government supportive programmes will continue to encourage the uptake of renewable heat technologies.

4) Our manufacturing action plan ( MAP) A Manufacturing Future for Scotland - industrial energy efficiency and decarbonisation workstream supports investment in energy efficiency and heat recovery.

Policy development milestones which contribute to the delivery of policy outcome 1

1) National Infrastructure Priority for Energy Efficiency - Scotland's Energy Efficiency Programme ( SEEP) - regulation delivery route.

2) Our manufacturing action plan ( MAP) A Manufacturing Future for Scotland - Energy Saving Opportunities Scheme ( ESOS) audit pilot.

3) EU- ETS beyond 2030.

Policy outcome 2: Technologies critical to further industrial emissions reduction (such as carbon capture and storage, carbon capture and utilisation, and production and injection of hydrogen into the gas grid) are demonstrated at commercial scale by 2030.

There is one proposal which will contribute to the delivery of policy outcome 2.

Proposal which contributes to the delivery of policy outcome 2

1) Our manufacturing action plan ( MAP) A Manufacturing Future for Scotland, - sets out our industrial policy for energy efficiency and decarbonisation workstream.

11.3.2 Full details of policies, policy development milestones and proposals are set out in the tables below. The delivery of these will be tracked through the monitoring framework (see section 6).

11.4 Wider impacts

Co-benefits to be realised

11.4.1 There are potential co-benefits for business competitiveness and energy productivity of investment in industrial energy efficiency, which reduces operating costs and can protect against any rise in energy prices, and industrial heat recovery, which could provide an income stream. These enhancements in the competitiveness and productivity of Scotland's manufacturing sector will complement wider investment in innovation and skills to contribute to the Government's wider objectives of sustainable economic growth, and will ensure that high quality manufacturing jobs continue to be located in Scotland, benefiting all people across Scotland, in both urban and rural areas.

11.4.2 Demonstration at commercial scale of industrial emissions reduction technologies such as CCS or hydrogen would protect Scottish business against future carbon price rises. It could also secure economic benefit in the supply chain for knowledge transfer of technology expertise to other businesses in international markets. In addition, support for industrial clustering will help businesses to reduce costs through shared infrastructure such as district heating networks and through co-location of production processes and where industry is currently a producer of waste heat deployment of district heating creates new revenue streams to help competitiveness of the business.

11.4.3 The Scottish Government will maximise these co-benefits through working with our public sector partners and industrial trade associations to support the investment necessary for these improvements in energy efficiency and productivity through our manufacturing action plan ( MAP) A Manufacturing Future for Scotland, and through SEEP, which will deliver our national infrastructure priority for energy efficiency.

Adverse side effects to be managed

11.4.4 Reducing global emissions to a level consistent with the Paris Agreement will require a significant reduction in the carbon intensity of the global economy - and comparative effort from other major economies. The pathway set out in this Plan is broadly consistent with the level of emissions reduction expected in the EU ETS cap out to 2030, and with the EU's contribution to the Paris Agreement. By remaining within EU and UK regulatory frameworks, we ensure that industry in Scotland retains the EU-wide and UK-wide level playing fields for emissions reduction, which avoids the risk of 'carbon leakage'. This is where business relocates from one country to another where there is more liberal emissions control. The net effect is to leave global emissions unchanged whilst damaging the economy of the country from which industry relocated.

11.4.5 Provisions to protect sectors at greatest risk of carbon leakage are included within the EU ETS, and hence this is why it remains our major regulatory instrument for tackling industrial emissions in the fairest way possible, as part of collective effort with our EU partners. Those working in the manufacturing sector would be at severe risk if industries were to close or relocate from Scotland as a result of carbon leakage. Energy intensive businesses, that were not required to make similar emissions reductions in other locations outside Scotland, would potentially see Scotland as an unattractive location for new investment in manufacturing.

11.4.6 To help businesses decarbonise within the EU ETS cap and under UK carbon taxes, we will support investment in energy efficiency and heat recovery, and also support business in accessing EU funding necessary for demonstration of significant technologies, such as CCS or hydrogen, that can drive further decarbonisation of manufacturing beyond the 2020s.

11.5 Summary of policies, development milestones and proposals

Policy outcome 1: Industrial emissions fall by around 19% between 2014 and 2032, through a combination of fuel diversification, energy efficiency and heat recovery and participation in EU carbon markets.

Table 11-1: Policies that contribute to policy outcome 1 ^[68]

Policy	EU, UK or Scottish policy	Public sector partners	Delivery route
EU Emissions Trading System ( EU ETS) cap delivers 43% reduction on 2005 EU emissions levels by 2030 and we will argue for a share of that cap in line with meeting Scotland's domestic ambitions	EU	SEPA Scottish Government UK Government Welsh Government Northern Ireland Executive Environment Agency	The EU ETS will continue to cover energy intensive industries from present to 2030 under proposed ETS Phase IV, (steel, cement, paper, chemicals, glass, ceramics, refining etc), with a steeper annual linear reduction factor (from 1.74% p.a. in 2013-20 to 2.2% p.a. in 2021-30). Many of these sectors will still benefit from high levels of free allocation of allowances in order to protect them from carbon leakage risk and to avoid decarbonisation by deindustrialisation in the absence of any comparative effort from other major economies under the Paris Agreement. Delivery of the EU ETS in Scotland will continue to be a partnership between the Scottish and UK Governments, and the other devolved administrations, with SEPA as the major enforcement body [68] .
UK Climate Change Levy ( CCL) and Climate Change Agreements ( CCAs) incentivise shift from gas to alternative fuels, and deliver agreed energy efficiency and emission reduction targets for energy intensive industrial sectors	UK	UK Government	Carbon taxation is a reserved matter, and the UK Government has set out that it will concentrate its carbon taxation in a single instrument ( CCL) from 2019 onwards, with a stated intention that it will rebalance rates, working towards a ratio of 1:1 (electricity: gas) by 2025 (from the current 2.9:1 ratio where electricity contributes almost 3 times as much to the CCL tax take as gas). The UK government has said that it intends that this will more strongly incentivise reductions in use of gas by business, in support of UK climate change targets. For those sectors that benefit from a Climate Change Agreement, in return for a commitment to reduce energy use and carbon dioxide emissions, operators receive a discount on the CCL of 90% on electricity bills, and 65% on other fuels. CCAs are available for a wide range of industry sectors from major energy-intensive processes such as chemicals, paper and supermarkets to agricultural businesses such as intensive pig and poultry farming.
Non-domestic Renewable Heat Incentive (ends 2020/21) and associated SG supportive programmes	UK	UK Government	The Renewable Heat Incentive is a UK-wide scheme created by the UK Government (with the agreement of the Scottish Government). The non-domestic scheme helps businesses, public sector and non-profit organisations meet the cost of installing renewable heat technologies such as biomass, heat pumps (ground source, water source and air source), deep geothermal, solar thermal collectors, biomethane and biogas, combined heat and power ( CHP) systems. Payments are made over 20 years and are based on the heat output of the system. There is no commitment to funding the RHI beyond 2020/21 and during the development of SEEP we will consider what sort of funding mechanisms are needed into the 2020s and 2030s to enable continued take-up of these technologies by business.
Our manufacturing action plan ( MAP) A Manufacturing Future for Scotland,- industrial energy efficiency and decarbonisation workstream supports investment in energy efficiency and heat recovery	Scottish	Scottish Government Scottish Enterprise Highlands and Islands Enterprise Scottish Manufacturing Advisory Service Resource Efficient Scotland SEPA Skills Development Scotland	The manufacturing action plan ( MAP) A Manufacturing Future for Scotland, commits the Scottish Government and its partners to a programme of activity to support industrial energy efficiency and decarbonisation: Advice and support: Develop expert advice for Scotland's energy intensive companies to develop feasible and cost effective business plans to implement ESOS (Energy Savings Opportunities Scheme) audit recommendations. This may include support to achieve ISO 50001. Energy efficiency and heat recovery: As part of the new energy efficiency national infrastructure priority, consider how to best incentivise additional energy efficiency and heat recovery opportunities within businesses. Work with the UK Government to develop new incentive or regulatory mechanisms to deliver this. Benchmarking performance: Establish a more detailed baseline of Scottish industrial energy, heat and emissions performance, to benchmark against EU standards. Low carbon technology demonstration: Explore the scope for supporting and accessing finance for cross-sector technology demonstrator projects identified in UK roadmaps ( CCS, heat electrification, industrial biomass etc), including EU ETS Innovation Fund and support for industrial clustering, in key sites such as the Grangemouth area, to realise co-location and shared infrastructure benefits.

Table 11-2: Policy development milestones which contribute to policy outcome 1

Policy development milestone	Delivery route
National Infrastructure Priority for Energy Efficiency - Scotland's Energy Efficiency Programme ( SEEP) - regulation	The Programme for Government commits the Scottish Government to significant policy development on heat and energy efficiency improvements in all buildings across Scotland through the national infrastructure priority. Scotland's Energy Efficiency Programme will improve the energy efficiency and reduce the environmental impact of Scotland's domestic and non-domestic buildings through a programme of measures including: regulation, financial Incentives, advice and support. This will enable building owners and tenants to make extensive fabric improvements e.g. loft and wall insulation and investment in decarbonisation of their heat supply such as through expansion of and connection to district heating, installation of heat pumps, biomass boilers, or repurposing of the gas grid for new technologies such as hydrogen or biogas, where feasible. For industrial buildings, this could include support for investment in industrial energy efficiency in processes and equipment, and industrial heat recovery to district heating networks through a combination of: potential development of new financial products for industry to invest in energy efficiency, heat recovery, and decarbonisation; alongside support, where eligible or available, via existing financial mechanisms of Scottish Ministers and Scottish Enterprise. We will consult on regulation of district heating alongside development of the Energy Strategy, in January 2017, in response to the recommendations of the Expert Commission on District Heating Regulation in 2016, which includes recommendations on regulation of industrial heat recovery. SEEP is currently under development and consultation, and once this is complete, it will offer the range of policies necessary to improve the energy efficiency and decarbonise the heat supply of non-domestic buildings.
Our manufacturing action plan ( MAP) A Manufacturing Future for Scotland - Energy Saving Opportunities Scheme ( ESOS) audit pilot	Existing ESOS audits set out cost-effective energy efficiency and decarbonisation measures that will save industry money and improve productivity. The manufacturing action plan ( MAP) A Manufacturing Future for Scotland, commits Scottish Enterprise and HIE to build on the existing pilot of follow-up to audits, with the roll-out of a Scotland-wide programme of targeted advice to industry, to offer relevant investment support and access to finance through existing funds or new funds developed under SEEP. Further development could include consideration of the potential to require mandatory implementation of ESOS audit findings where they are demonstrated to be cost-effective and save industry money and improve productivity, if this is within devolved competence. Stakeholder engagement would be undertaken to inform any further development of the ESOS scheme.
EU- ETS beyond 2030	Figures for Phase V of the ETS (post-2030), covering the Scottish carbon budget to 2032 are not available, since the EU's contribution to the Paris Agreement is currently only set out to 2030. We can expect further tightening of the ETS cap beyond 2030 to meet the EU's 2050 target of 80% emissions reduction, and the European Commission has said that under the ETS continuing, by 2050, emissions would be reduced by around 90% compared to 2005 levels - though this is subject to further provision in EU law to extend the ETS beyond 2030 [69] .

Policy outcome 2: Technologies critical to further industrial emissions reduction (such as carbon capture and storage, carbon capture and utilisation, and production and injection of hydrogen into the gas grid) are demonstrated at commercial scale by 2030.

Table 11-3: Proposals which contribute to the delivery of policy outcome 2

Proposal

Delivery route

Our manufacturing action plan ( MAP) A Manufacturing Future for Scotland - industrial energy efficiency and decarbonisation workstream

The MAP commits the Scottish Government and its partners to explore the scope for supporting and accessing finance for cross-sector technology demonstration projects identified in UK industrial decarbonisation roadmaps. This includes carbon capture and storage, heat electrification and the diversification of fuel supplies and feedstocks to new sources such as hydrogen. This includes support for industrial decarbonisation technology demonstration under the proposed EU ETS Innovation Fund which is expected to operate from 2020 to 2030. MAP partners will work with energy intensive businesses and trade associations to develop potential demonstration projects in Scotland.

Table 11-4: Policy outcome 2 over time

Policy outcome 2	2017	2018	2019	2020	2021	2022	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Industrial emissions fall by around 19% between 2014 and 2032				7%					19%							19%
Technologies critical to further industrial emissions reduction (such as carbon capture and storage, carbon capture and utilisation, and production and injection of hydrogen into the gas grid) are demonstrated at commercial scale by 2030					ETS Innovation Fund becomes available for application by industrial sectors for demonstration of industrial emissions reduction technologies at commercial scale				Industrial CCS demonstration begins in EU for sectors that need it (oil refining, chemicals, steel, cement)					Industrial CCS is proven at commercial scale in the EU and adoption begins, driven by EU carbon price and level of free allocation under Phase IV.

11.6 Progress since RPP2

Table 11-5: Progress on RPP2 policies

RPP2 Policies

Summary of progress

Renewable Heat incentive ( RHI - Non Domestic

The Renewable Heat Incentive is a UK-wide scheme created by the UK Government (with the agreement of the Scottish Government). The non-domestic scheme helps businesses, public sector and non-profit organisations meet the cost of installing renewable heat technologies such as biomass, heat pumps (ground source, water source and air source), deep geothermal, solar thermal collectors, biomethane and biogas, combined heat and power ( CHP) systems. Payments are made over 20 years and are based on the heat output of the system. There is no commitment from UK Government to funding the RHI beyond 2020/21 and during the development of SEEP we will consider what sort of funding mechanisms are needed into the 2020s and 2030s to enable continued take-up of these technologies.

Table 11-6: Progress on RPP2 proposals

RPP2 Proposals

Summary of progress

Low Carbon Heat (Non Domestic)

The Scottish Government published the Heat Policy Statement in June 2015, setting out our heat hierarchy and the actions and policies we are taking to reduce demand for heat and ensure its decarbonisation. The development of SEEP will continue to deliver the actions set out in the HPS, alongside development of the new Energy Strategy, including ongoing support for the Heat Network Partnership and funding for district heating via the District Heating Loans Fund. We will consult on the regulation of district heating during 2017 as part of the wider consultation on the Energy Strategy, and this will include consultation on industrial heat recovery.