Our daily lives depend on manufactured products. Recent crises disrupted the supply of many of these, leaving supermarket and warehouse shelves bare. Painkillers, fertilizers, energy and face masks have all at times been difficult to find. And the pain extends to our pockets, as scarcity leads to soaring prices for these items.
Manufacturing is the backbone of many regional economies
Manufacturing plants and clusters are often regionally concentrated. Think of car manufacturing in Southwest Germany or Eastern Slovakia, or paper production in Finland and northern Sweden. These clusters allow people to more easily develop their skills through learning, sharing networks and infrastructure, and mobility between firms, driving innovation and regional development.
The past has taught us, often painfully, what it means when these regions face major industrial transformations which can put their manufacturing base at risk.
Experiences in Northern England, in the US rust belt or in the German Ruhr, in the second half of the 20th century come to mind. Some regions stay depressed for decades. Firms and people leave, unemployment and crime go up and property prices plummet.
US rustbelt cities such as Buffalo, Cleveland, Detroit and Pittsburgh have each lost more than 40 percent of their populations in four decades. In Detroit, household incomes fell by 35% between 1970 and 2006.
Anticipating and supporting industrial transformations is essential to protect people and places. And we now face industrial transformations of unprecedented scale to address global environmental challenges, notably to halt global warming, ideally at 1.5 degrees.
Almost all OECD countries have recognised they need to move climate neutrality, or net-zero GHG emissions by 2050. With early action, we can create new economic opportunities while improving environmental outcomes as well as the well-being of citizens and workers.
Citizens, governments, workers and firms need to be ready to do so. And that begins by recognising which places need to act firmly and first, and to make the transition fair for them.
We need to transform industry at an unprecedented depth and speed
Our societies have undergone broad and profound industrial transformations before. The industrial revolution generated technological, demographic and environmental upheaval. The advent of steam and electricity-powered engines, urbanisation, and a massive increase in materials processing were drivers of this disruption. And it took more than a century. This time we have just 25 years…
The transition to climate neutrality in a few key sectors at the foundation of value chains will be critical as they produce the materials needed for the goods that are part of our daily lives, such as plastics, steel or cement. Yet even these products, and the way we use them, will require transformations from top to toe if we are to reach climate neutrality.
What are these key sectors?
Many of these key sectors are highly greenhouse gas (GHG) emission and energy intensive. And they are among the most difficult economic activities to make climate neutral. To reach climate neutrality, manufacturing will require new forms of production without fossil fuels and with much less energy. Challenges for each region will differ depending on the sectors they host:
- Oil refining is essential for transport fuels and to produce basic chemicals. Their activity will need to be largely phased out, simply because we need to do without fossil fuels in our future climate-neutral economies.
- Basic chemicals are needed to produce everything, from food packaging to cars, clothes or fertilizers to grow food.
- Basic metals, especially steel and aluminium are essential for infrastructure, such as electric transmission masts. Chemicals and steel can do without CCS. This reinforces the need to transform production processes more fundamentally. “Green” emission-free hydrogen are expected to serve as raw material and for high-temperature heat.
- Cement and other non-metallic materials the construction of infrastructure and buildings. Climate neutral cement production is the most likely to require the capture and storage of its CO2 emissions (CCS).
- Paper and paperboard, not only for books and newspapers, but also for packaging. Producers will face increasing competition for biomass as wood and wood products will increasingly be used to replace fossil fuels.
- Car production is less emissions or energy intensive but needs to pivot production to lighter electric vehicles, and to less individual car use, especially in urban contexts
Regional transformation challenges are likely to be most challenging on places most dependent on these activities. The map below shows these regions for Europe, highlighting key vulnerabilities in central and eastern Europe.
Regions most exposed to the transition to climate neutrality in key manufacturing sectors are mainly in central Europe
The transition needs to start now
Key sectors use long-lived and expensive equipment, such as furnaces to make steel. It is therefore important to align investment decisions with climate neutrality to avoid stranded assets from now onwards. It is also important for policy makers to smooth the path for workers.
As a result of the upcoming industrial transition, some regions will lose employment, while new activities will create employment in other regions. In all these regions, workers will need support and develop new skills.
Today we know that if we anticipate and shape the industrial transformations in these regions we can turn challenges into opportunities. We also know the long term scars that may result from failing to do so.
Read the new report published by the OECD: Regional Industrial Transitions to Climate Neutrality
Andrés Fuentes Hutfilter is senior economist in the OECD and head of the Regional Outlook and Environmental Economics unit in the Economic Analysis, Data and Statistics Division of the Centre for Entrepreneurship (CFE), SMEs, Regions and Cities in the OECD. He has lead the work on the 2021 OECD Regional Outlook and works on territorial aspects of reaching net zero greenhouse gas emissions by 2050 in OECD countries and their economic analysis. Before joining CFE he worked in its Economics Department. He holds a DPhil in Economics from Oxford University.
Valentina Ventricelli is a Junior Policy Analyst in the Economic Analysis, Data and Statistics Division in the OECD Centre for Entrepreneurship, SMEs, Regions and Cities. Her work focuses on environmental transitions to climate neutrality at a regional and local level. She holds a Master in Economics and Policy of Energy and the Environment from UCL.