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Global Efforts to Achieve Carbon Neutrality in the Industrial Sector and Implications: Focusing on SMEs industrial policy, environmental policy

Author Eunmi Kim and Sunghee Lee Series 22-16 Language Korean Date 2023.05.28

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The international community has stepped up efforts to achieve carbon neutrality or net zero emissions and has begun to expand the scope of greenhouse gas management to all companies in the supply chain. In particular, the decarbonization of industries that emit large amounts of greenhouse gases is an important task for countries not only to effectively respond to climate change, but also to improve their energy security and international competitiveness. Although decarbonization can be achieved by all companies regardless of their sizes, small and medium-sized enterprises (SMEs) are struggling with a lack of resources and capabilities. Therefore, the purpose of this study is to analyze the characteristics of national and multilateral carbon-neutral strategies, identify policy demands of SMEs based on survey results, and derive implications for the decarbonization of the industrial sector and, in particular, SMEs in Korea.

 Chapter 2 mainly analyzes policies to reduce greenhouse gases in the industrial sector and cases of multilateral cooperation between both major governments and global companies. Sweden, Germany, the United States, the UK and Japan are increasing their financial support for decarbonization efforts in their industrial sectors, also rearranging relevant policies and institutions. Sweden is working closely with the EU and its local governments to support carbon reduction projects, and also subsidizes investments with greenhouse gas reduction benefits but not expected to generate a return on investment without subsidies. Germany is inducing technological innovation and international cooperation among SMEs. The United States is expanding its investment in clean energy and providing research and development funding to SMEs and startups through federal agency-level programs such as SBIR/STTR programs. The UK is promoting decarbonization particularly in high-emitting industrial clusters, and is stimulating private investment through public funding for technology innovation. Japan is expanding its financial support in this area, for instance through tax benefits for companies pursuing green transformation (GX), and helping SMEs and startups enter or expand their business in developing countries through funds including Official Development Assistance (ODA).

While introducing internal regulations to reduce greenhouse gas emissions,  global leading companies demand that their partners participate in these efforts. The steel, chemical, consumer goods, electronics manufacturing and automobile manufacturing industries focus on supply chain management to achieve their carbon neutrality goals. Suppliers of these industries are required to establish and achieve reduction targets, and are encouraged to comply with the low-carbon purchasing guidelines or environmental codes of conduct. The companies provide education programs, consultation services and financial support for subcontractors to achieve carbon neutrality. Multilateral initiatives in which companies voluntarily participate include the RE100, 24/7 CFE, the Alliance of CEO Climate Leaders, and the SME Climate Hub.

Chapter 3 reviews the policies and systems in place to support decarbonization for SMEs in Korea and analyzes the results of the survey conducted for this study. The emission data shows that SMEs in Korea produce less emissions than large corporations, but their emissions are high compared to energy consumption and the major emitting industries are diverse. SMEs remain at a relatively low level of competitiveness in climate technology, and the environmental performance of domestic SMEs measured by ESG scores also ranked at the bottom among major countries (7 countries). Domestic systems that support the decarbonization of SMEs can largely be divided into programs to introduce existing reduction facilities and fuel conversion and promotion measures for research and development of future reduction technologies. The introduction of reduction technologies and facilities is mainly carried out in a package format including site diagnosis, consulting, planning, purchase and construction, which is the biggest difference from the cases of major countries reviewed in Chapter 2. In addition, the emissions reduction technology development through cooperation between SMEs and research institutes, support for start-ups and growth, and financial support for corporate decarbonization efforts are also being carried out.

According to the results of our survey conducted on Korean SMEs, only 5.2% of 250 respondents were tracking their greenhouse gas emissions. The most common way to reduce greenhouse gases was “energy saving,” with few SMEs responding they had the ICT-based infrastructure needed for energy management. Based on the first and second cumulative responses, “lack of response funds” (21.3%) and “difficulty in determining reduction efforts best for the company” (17.5%) were representative difficulties in pursuing reduction efforts. In particular, the support policies most desired by the respondents were “expanding the use of renewable energy,” “improving energy efficiency” and “expanding new energy (green hydrogen),” in that order. It is noteworthy that each policy chosen as a priority has a different desired support method or support period, and long-term support of more than five years is required in terms of related technology development or preparation for supply chain due diligence. 

Based on the above analysis results, this study identified the following directions to promote decarbonization in the industrial sector and SMEs: enhancing policy effectiveness, promoting technological innovation, spreading the management system for decarbonization, and strengthening international cooperation. Specific implications for each direction are as follows.

First, in order to enhance policy effectiveness, the government should introduce new programs to support the entire process including searching, applying for and managing suitable programs for SMEs, and strengthen the roles of various stakeholders such as local governments, large corporations, and private investors. In particular, a large number of SMEs (77.8%) responded that they did not know much about decarbonization-related support programs. This suggests that support for SMEs is necessary from the first step of searching and applying for projects. It is also necessary to monitor and improve the overall support projects carried out by various ministries and agencies, and to closely evaluate and monitor ongoing or completed government programs. 

Second, with the goal of technological innovation for decarbonization, related ministries and public agencies should expand long-term support for more than five years, encourage private investors to participate, and strengthen the evaluation of expected effects of technological innovations toward reducing greenhouse gas emissions. It is necessary to nurture start-ups and small sized-enterprises with the capacity of developing innovative technologies with excellent reduction effects, and invest in their projects from a long-term perspective. In particular, investment support in the public sector should benchmark existing greenhouse gas reduction effects, such as realized in Sweden, when selecting recipients. It is also necessary to review policies to expand the scale of investment by attracting various partners from the private finance sector, as shown by the UK case.

Third, companies need to incorporate decarbonization into their business management system and strengthen their capabilities to collect and manage environmental data including carbon emissions. It is important to establish ICT-based infrastructure and energy management systems considering the companies’energy consumption targets. Moreover, it is also necessary to actively publicize success stories and share information so that companies do not perceive carbon neutrality or decarbonization as little more than an obligation or unnecessary burden, and rather utilize these initiatives as a new growth engine.

Lastly, active exchanges of information and cooperation between companies within and across the sectors are recommended. Korean SMEs need to pay more attention to multilateral voluntary initiatives (RE100, 24/7 CFE, SME Climate Hub, etc.) for decarbonization. Benchmarking the cases of Sweden and Japan, the government should increase the SMEs’access to participating in clean energy and energy efficiency projects in developing countries.

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