CO₂ pricing and subsidies alone are insufficient: Create lead markets for industrial transformation

For the industrial transformation to succeed, CO₂ pricing and subsidies must be complemented by instruments that create a market for climate-friendly basic materials, otherwise known as “lead markets”. However, it remains unclear how these should be designed and implemented, depending on the industry sector and its requirements. In a new analysis, Ariadne researchers propose instruments for the emission-intensive basic materials cement, steel and ethylene.

Lead markets are markets, in which climate-friendly basic materials are purchased despite higher cost due to their product property. They can support industrial transformation by providing investment incentives and ensuring planning certainty. According to Ariadne researchers at the Fraunhofer Institute for Systems and Innovation Research, Guidehouse Germany and the Potsdam Institute for Climate Impact Research, they can ensure that the additional costs of climate-friendly basic materials are passed on to consumers without placing an excessive burden on them.

In their analysis, the researchers set out recommendations for establishing lead markets for the climate-friendly basic materials cement, steel and ethylene. For cement, binding requirements for public construction projects based on the industry sector’s label appear to be a viable option. Financing could be secured through the German government’s special fund for infrastructure and climate neutrality. For steel, a market-based ramp-up mechanism for distributors at the European level would be effective, while public procurement could provide short-term support in the form of minimum requirements and pilot projects. For ethylene, low but increasing minimum content requirements for climate-friendly ethylene in packaging would be particularly suitable. These would have to be accompanied by labelling in the future.

The authors recommend driving these proposals forward by building on the existing foundations at national and European levels. The medium-term goal must be to stimulate demand for climate-friendly basic materials along their value chains. This could provide a long-term competitive advantage over emission-intensive basic materials.