Clean and Competitive: Opportunities for U.S. Manufacturing Leadership in the Global-Low Carbon Economy

The United States needs an integrated national strategy to address the twin challenges of bolstering its manufacturing sector and averting climate change. Timely federal RD&D and deployment policies targeted to specific manufacturing industries could create comparative advantage, expanding domestic investment and employment.
Clean and Competitive: Opportunities for U.S. Manufacturing Leadership in the Global-Low Carbon Economy

Introduction

An Integrated Climate-Manufacturing Strategy: Setting the Stage

Preliminary Screening of High-Opportunity Sectors

Opportunity: Hydrogen Production

Opportunity: Heating, Cooling, and Drying Equipment

Opportunity: Chemical Production and Recycling

Opportunity: Biotech-Based Alternatives to Meat and Dairy Products

Conclusion

Appendix: Widening the Lens Workshop Series

Endnotes

This report is a collaborative product of ITIF, BU ISE, and Fraunhofer USA CMI

Introduction

Majorities of Democrats and Republicans—in Washington, DC, and around the country—agree on the goal of rebuilding the nation’s manufacturing sector. This sector has historically been a key job creator, with spillovers rippling across broad regions of the country and helping to lift many workers without a college education into the middle class. A strong manufacturing base creates a more resilient and equitable economy, accelerates innovation, strengthens international competitiveness, and improves national security.[1]

At the same time, a growing majority of Americans (along with the vast majority of scientists) are alarmed or concerned about climate change and perceive it to be an important priority for the federal government, although public opinion is less unified on this issue than on manufacturing.[2] If the world is to meet the targets set by the Paris Agreement, the United States, along with other major world economies, will have to reduce its greenhouse gas (GHG) emissions dramatically over the next three decades. The quest for net-zero emissions will touch every sector of the global economy.[3]

Until very recently, these two national challenges have been treated largely within their own policy silos. Policies that sought to address the decline in U.S. manufacturing were not motivated by or centered on the need to transition to a net-zero economy. Climate policies focused primarily on the electricity system, even though that sector accounts for only about 25 percent of total U.S. emissions, and devoted little energy to addressing manufacturing, which may soon become the largest emissions sector.[4]

Manufacturing must play a central role in any successful climate policy.

This division between manufacturing and climate policy is counterproductive for both, and it overlooks a crucial opportunity to create an integrated national strategy. From the standpoint of manufacturing, a net-zero commitment constitutes a requirement that many products and processes be upgraded or replaced with unprecedented speed. If managed effectively, this shift in demand could bolster U.S. manufacturing and disrupt global markets for end products, from electric cars to packaged goods, and for intermediate goods, such as construction materials and agricultural technologies. With such rapid capital turnover, lagging domestic industries may have a chance to retool and improve their competitive standing, and leading industries may be able to push further out in front. Climate policies could also open new markets for new products, several of which are explored in this report.

Symmetrically, manufacturing must play a central role in any successful climate policy. Ideally, domestic producers, with appropriate policy support, will find innovative ways to drive down the costs of new and reformulated products rapidly. If they fall short of this ideal, the nation may face difficult trade-offs, either lagging behind competitors that are able to shift to cleaner, cheaper production more quickly or bearing higher costs. These risks and costs could ultimately put at risk public support for policies driving the low-carbon transition. That, in turn, would impose on the world the very consequences that climate policy seeks to avoid.

While there is a clear basis for integrating U.S. climate and manufacturing policies, developing specific joint strategies that are effective and achievable requires much additional work. First, analysts must identify the broad panoply of low-carbon technologies needed for net-zero emissions and the pathways they are likely to follow in each market. Second, because no country will be self-sufficient in a low-carbon global economy, policymakers must identify industries that present the best opportunities to become successful domestic and global suppliers. Finally, all stakeholders, including the affected industries, must work together to develop policies that leverage entrepreneurship, public and private capital, and the U.S. ecosystem of universities, national labs, and firms of all sizes, to catalyze innovation.

This report seeks to take a first step toward creating an integrated manufacturing and climate strategy. Through a series of workshops and interviews as well as documentary research, we examined a broad swath of technologies in order to identify sectors in which the United States might find opportunities for domestic manufacturing with a high potential for economic growth and emissions reductions. While much more work must be done to fully develop an integrated strategy, the report illustrates the potential of pursuing this approach and the nature of the more detailed work that lies ahead.

The next section of the report discusses the nexus of manufacturing, climate, and trade policies in greater depth to flesh out the motivation for an integrated strategy that includes a focus on specific industries. It also briefly reviews the state of U.S. manufacturing as the global transition to a low-carbon economy gets underway in earnest.

The bulk of the report describes four industries that exemplify potential opportunities for U.S. competitive advantage in clean manufacturing and recommends policies that could realize that potential. These industries—hydrogen production; heating, cooling, and drying equipment; chemicals production and recycling; and protein alternatives to meat and dairy products—have received less attention from the policy community than many others. The report explains why each industry matters, sets out potential pathways to net-zero emissions, examines the comparative position of U.S. manufacturers, assesses opportunities and gaps, and lists policy recommendations.

This report is by no means the last word on this vast and complex subject. The opportunities it identifies are not the only ones out there. Better evidence may reveal flaws in its assessment of them. But if it accelerates the conversation that the United States must have at the intersection of climate and manufacturing policies, it will have succeeded in its task.

An Integrated Climate-Manufacturing Strategy: Setting the Stage

The Paris Agreement calls for the signatory nations to raise their ambitions for emissions reductions over time. Increasingly dire observations and forecasts, notably the Intergovernmental Panel on Climate Change’s (IPCC) 1.5 Degree report, have reinforced this imperative. As a new round of negotiations in the fall of 2021 in Glasgow approaches, 131 countries, covering 73 percent of global GHG emissions, have adopted or are considering net-zero targets. President Joe Biden has proposed that the United States join the nations of the European Union, Japan, South Korea, and others targeting net zero by 2050, while China has pledged to hit that target by 2060.[5]

Fulfilling such pledges will require significant progress across the entire landscape of emissions, including industrial emissions, which account for more than 30 percent of the U.S. and global totals. Major industries for which there are currently few feasible solutions and even fewer cost-effective ones, such as steel and chemicals, must be targeted for innovation, scale-up, and deployment in the coming three decades. Indeed, the drive to reduce industrial emissions will be so pervasive that it will amount to a nearly complete retooling of global manufacturing.

Opportunities to create new manufacturing industries that reduce or offset emissions in other sectors, including industry and agriculture as well as transportation and electricity, are also emerging. As we detail, biotechnologies have the potential to displace emissions from livestock, a major source of agricultural emissions that is set to grow rapidly as increasingly affluent societies consume more meat and dairy products. Heat pumps and related equipment must be manufactured to enable building and industrial electrification. In addition, to offset those slices of the emissions pie that prove to be intractable, negative emissions technologies such as direct air capture will need to be manufactured and deployed at scale.

U.S. Manufacturing at a Crossroads

The looming transformation of global manufacturing comes at a challenging moment for the United States. China’s emergence as the world’s factory, along with determined efforts by manufacturing powers such as Japan and Germany to sustain their industries, shrank the U.S. share of global manufacturing activity from 28 percent in 2002 to 18 percent in 2016. Real manufacturing value added fell by 20 percent as a share of the U.S. economy between 2007 and 2019 (from 12.1 percent to 9.7 percent), once the statistical overstatement of output growth in the computer industry is corrected. U.S. manufacturing employment fell off a cliff during the 2000s and recovered more slowly than the rest of the economy in the ensuing years; it now accounts for just 8.5 percent of the workforce.[6]

To remain strong economically, the United States needs to rebuild its manufacturing sector. The sector’s small share of the workforce is deceptive. Each manufacturing job generates about five to seven others in the supply chain and through spillovers, far more than a comparable job in the service sector.[7] Manufacturing is intimately connected with innovation as well. Manufacturing firms account for the vast majority of private research and development (R&D) spending and patents in the United States.[8] And manufacturing is crucial to the U.S. position in the global economy. Goods far exceed services in international trade, and the United States’ weakness in manufacturing contributes greatly to its chronic trade deficits.[9]

Seizing the Opportunity

U.S. policymakers must therefore fashion an integrated response to both the climate imperative and the manufacturing challenge. A manufacturing policy that fails to trigger radical emissions reductions could lead to the United States’ increasing economic isolation and worsening competitiveness if the rest of the world shifts toward clean production. Worse, such a policy could undermine global progress toward net-zero emissions, while leaving the United States far short of that goal.

This moment of challenge is also a moment of opportunity. History teaches that transformations in the core technologies and business models of major industries can radically alter the international competitive positions of companies, regions, and nations. The rise of the German chemical industry in the late Nineteenth century, which fused science and engineering for the first time, foreshadowed the decline of British economic hegemony. In the 1970s, Japanese auto firms challenged Detroit’s “Big 3” and became symbols of “Japan as #1” by implementing new production methods and winning over new markets opened by the oil crisis. China today recognizes that the replacement of internal combustion vehicles with electric vehicles could shake up the global auto industry once again.[10]

The United States should seize the opportunity to alter the trajectory of its manufacturing sector while converting it to clean production. To do so, it must leverage the nation’s most valuable asset: its strength in science and technology. Although other nations, including China, lead the world in specific domains, including important areas of manufacturing, the United States remains at the core of the global innovation system, with the broadest array of strengths. The United States invests more in R&D than any other nation in absolute terms and remains the preferred destination for many of the world’s brightest scientists, engineers, and technology managers.[11]

Acting Strategically

U.S. leadership in these input indicators for discovery and innovation, however, does not always translate into meaningful outputs, such as emissions reductions or domestic manufacturing jobs. Scaling up an innovation to commercial production can cost hundreds or thousands of times more than proving it at the laboratory bench. Many promising ideas expire in the “commercialization valley of death” because they are unable to secure scale-up financing from investors who prefer to put their money in safer, more “bankable” deals.[12]

Many other U.S.-devised innovations are scaled up elsewhere in the world, where investors are more patient and governments underwrite some of the risk. Complex, capital-intensive hardware technologies, including manufacturing systems, are particularly prone to this “innovate here, produce there” pattern, as William B. Bonvillian has labeled it. Mercantilist policies, especially those of China, including state-sponsored industrial espionage and forced technology transfer, have amplified the pattern, while further deterring U.S. investors. Meanwhile, the U.S. economy has emphasized financialization over investment in productive capacity.[13]

Policymakers will need to carefully target federal investment toward industries and technologies wherein domestic producers are most likely to succeed against international competitors.

To make the most of the clean manufacturing opportunity, the federal government will have to act more strategically and forcefully than it has in the recent past (outside the realm of national defense, which even today accounts for about half of federal R&D funding). It must adopt policies that have comparatively long time horizons and pursue them consistently. Federal policymakers must implement methods to ferry innovations across the valley of death, by providing timely public support for technology demonstration and early deployment, in collaboration with private sector partners.

Crucially, policymakers will need to carefully target federal investment, concentrating resources on industries and technologies wherein domestic producers are most likely to succeed against international competitors. “Advanced industry and technology strategies,” as the Information Technology and Innovation Foundation’s (ITIF) Robert D. Atkinson calls this approach, are not monolithic central plans.[14] They engage industry, labor, the states, and communities around the country to play important roles with significant autonomy, and they mobilize the awesome power of markets to inspire innovators and rapidly scale up innovations.

An Evolving Climate of Opinion

Atkinson points out that the United States has implemented advanced industry and technology strategies in one form or another since the 1st Congress established federally owned munitions factories in 1799. Since the Korean War, such strategies have been justified primarily on national security grounds and funded through the Department of Defense (DOD).[15]

But mainstream opinion within both political parties is evolving. Biden administration economic advisor Brian Deese has alluded to both climate change and Chinese competition in touting his new “openness to … targeted efforts to try to build domestic industrial strength.”[16] On the other side of the aisle, while not endorsing the climate justification, Republican Senator Marco Rubio of Florida has stated that “existing characterizations of ‘industrial policy’ do not apply cleanly in the 21st century” and has called for revising U.S. policy to support high-wage manufacturing in response to state-subsidized competition from China.[17] And, as David Adler chronicled, Operation Warp Speed, the crash program that led to the development of vaccines for COVID-19, is a very recent example of a highly successful drive led by the federal government not only to create new products but rapidly bring them to scale.[18]

Complementary Economy-Wide Policies and New Capacities

It is important to note that advanced industry and technology strategies complement smart policies that have an impact across the entire economy. The success of the former depends on the success of the latter, such as education and training and infrastructure policies.

Advanced industry and technology strategies can be fully compatible as well with a rules-based global economy. International trade (along with international cooperation in many areas of R&D) is vital to improve efficiency and foster innovation. National strategies must be constrained by global rules to avert unfair competition from state-subsidized firms. (Ironically, China’s failure to abide by the rules since its accession to the World Trade Organization helped precipitate the changing political mood in the United States.)

Economy-wide climate policies such as carbon pricing and border adjustment mechanisms bear a similar relationship to clean manufacturing strategies that the “framework” policies previously described do to advanced industry and technology strategies in general. These policies are necessary to ensure that innovation in clean manufacturing accelerates to meet global competition and sustain domestic jobs, but are far from sufficient.[19]

The United States appears to be moving toward adopting advanced industry and technology strategies, but it is far from being prepared to carry them out. The federal government lacks the detailed information and specialized analytical capabilities it will take to make such strategies effective. Yet, neither the climate nor international competition will wait. We have to do the best we can to finish building the plane while we taxi down the runway and prepare for takeoff.

Preliminary Screening of High-Opportunity Sectors

Atkinson’s framework for devising national advanced industry and technology strategies sets out four criteria for selecting industries to support. One is intrinsic to this project: the industry must contribute to the achievement of key national goals, in this case averting climate change while securing U.S. manufacturing. We have relied primarily on another of Atkinson’s criteria to identify prospects: whether the United States has some potential for success because of its existing assets and strengths. Our research sought expert opinion to gain insights into these assets and strengths and to shed light on Atkinson’s final two criteria: whether active government policy support would dramatically strengthen the industry’s performance, and whether the industry wants such support and is willing to share the costs of the effort.

We gathered this information through three major activities. First, we carried out an extensive review of the academic and trade literature. Second, we conducted over 40 interviews with experts in industry, government laboratories, and academia to learn about emerging technologies, stakeholder efforts, and existing and potential policies.

Third, we organized a series of four expert workshops, which brought together scientists, engineers, industry leaders, and representatives of nongovernmental organizations that are working on new industrial processes with high emissions-reduction potential. (Appendix A lists the speakers and participants at the workshops.) Each workshop was built around a technological challenge common to several industries:

  • High-temperature heat: A wide variety of chemical and metallurgical processes require large quantities of heat above 150 degrees Celsius.
  • Low-temperature heat: Heating and cooling buildings, agricultural and food processing, and papermaking are among the sectors that use heat below 150°C.
  • Bio-manufacturing: Food, chemicals, and fuels might be made through biotechnology-based processes with much lower emissions than current production methods.
  • Alternative material solutions: Engineered materials with dramatically improved functionality made using low-emission, low-cost methods may substitute for traditional materials.

The next four sections, which highlight specific industries worthy of serious consideration in a U.S. advanced industry and technology strategy, reflect our synthesis of insights from these workshops, along with gleanings from the literature and interviews. They do not represent a consensus among the workshop participants, and we fully recognize that deeper empirical analysis and stakeholder engagement, which we plan to carry out in the next phase of our project, will be required in order to assess them more fully.

Opportunity: Hydrogen Production

Hydrogen, the lightest element, is a versatile energy carrier with the potential to perform many functions in a low-carbon economy. It is already in wide use as an input to the chemical and refining industries. This use could be extended into combustion for heat or electricity generation as well as making synthetic fuels. Hydrogen can be used as well in fuel cells that produce electricity through chemical processes to power vehicles or other equipment. And it can function as a stable energy storage medium, residing indefinitely in a tank or cavern until its energy is needed.[20]

Hydrogen’s versatility leads many energy and climate experts to expect that its production, transport, storage, and use will become core economic sectors in the not-too-distant future. Right now, though, hydrogen production is very carbon-intensive, emitting on a global basis as much as the United Kingdom and Indonesia combined (equivalent to about 830 million metric tons of carbon dioxide (MMT CO2-e) per year).[21] Hydrogen production must therefore be decarbonized regardless of whether the element’s emerging end uses scale the way experts foresee. Its potential to decarbonize other sectors will only be realized if hydrogen production itself is cleaned up. Combustion of hydrogen, especially when blended with natural gas, may raise local air pollution concerns that must be addressed as well.[22]

Why This Industry Matters

The United States currently produces about 15 percent of the world’s hydrogen (about 10 MMT per year). The primary domestic end uses are oil refining and fertilizer and biofuel production.[23] A majority of U.S. production is “captive;” in other words, it is produced by the user at the site of use, such as a fertilizer plant or oil refinery. “Merchant” hydrogen is made at a central facility and delivered to customers by pipeline, tanker, or truck. The U.S. market for merchant hydrogen exceeds $4 billion annually and is growing about 7 percent per year.[24]

This market could grow dramatically if hydrogen becomes a major input for hard-to-decarbonize sectors. A recent National Renewable Energy Laboratory (NREL) report estimates that the technical potential for hydrogen use in the United States is an order of magnitude larger than today’s, about 106 MMT per year, across a range of industrial, transportation, and storage applications.[25] An “ambitious” scenario in an industry roadmap finds that hydrogen demand in the United States could grow to 17 MMT per year by 2030 and 63 MMT per year by 2050, results that are consistent with several scenarios in Princeton University’s Net-Zero America Project.[26]

An expansion of this magnitude would provide a significant opportunity for the United States. The industry roadmap estimates that it would generate $140 billion annually across the value chain in 2030. Like many other capital-intensive energy infrastructure sectors, hydrogen production on this scale would create many high-skill, high-wage jobs. However, like other climate solutions, the expansion of hydrogen use may also displace existing jobs, including some in the domestic natural gas industry, which employs over 600,000 people.[27]

Pathways to Clean Hydrogen Production

Two major pathways to clean hydrogen production emerge as the most promising from the modeling literature. The first, sometimes called “blue” hydrogen, applies carbon capture and sequestration (CCS) technology to methane reforming, the dominant production process today. The second, labeled “green” hydrogen, uses electrolysis to split water, drawing on electricity generated from low-carbon resources. (A third pathway, bio-based production, has been developed, but studies such as NREL’s [email protected] find that it will likely play a negligible role in any future net-zero system, so we do not treat it here.[28])

Each pathway combines a hydrogen feedstock (methane or water) and a conversion technology (reforming or electrolysis). This section focuses on the potential for innovation in conversion technologies. However, the viability of either production method will also hinge on the cost and availability of the feedstock as well as the price of energy used in conversion, which are beyond the scope of this report.

Methane reforming uses natural gas as its main feedstock. There are two types. One, steam methane reforming (SMR) uses steam to provide the heat and pressure needed to extract hydrogen from methane. The other, autothermal reforming (ATR), relies on carbon monoxide to react with the methane to release hydrogen as well as heat. Both types of methane reforming emit large volumes of carbon dioxide, which may be captured with chemical or physical techniques. If the captured carbon dioxide is permanently sequestered, GHG emissions from hydrogen production would be dramatically reduced, although methane emissions may persist due to leakage in natural gas production, transmission, and processing. Although SMR is cheaper than ATR without CCS, ATR is cheaper than SMR with CCS, because it produces a more concentrated stream of carbon dioxide. Most models of net-zero pathways therefore prefer this method for blue hydrogen production.

Electrolysis splits water molecules into their elemental constituents: hydrogen and oxygen. The use of electricity from a source such as a nuclear or renewable power plant makes it “green.” There are three main types of electrolyzers: alkaline, proton exchange membrane (PEM), and solid oxide electrolysis cells (SOECs).[29] Alkaline electrolyzers are the most mature of the three, with relatively long lifetimes and low capital costs, but opportunities for further cost reduction and performance improvement along this pathway appear limited. Alkaline electrolyzers also require more space than the other types. PEM electrolyzers, by contrast, currently have higher capital costs and shorter lifetimes than alkaline electrolyzers, but they are more compact and easier to integrate with variable power sources such as renewables. Experts generally agree that PEM electrolyzers have the potential to improve rapidly.[30] SOECs are an emerging technology that require further R&D to become commercially viable.[31]

Figure 1: Hydrogen production costs by method[32]

Figure 1 (drawn from work by Resources for the Future) compares the unit costs of hydrogen production in the United States (not including the social costs imposed by pollution) using various methods now and in the future. Blue hydrogen (SMR with 89 percent carbon capture) cost about $2 per kilogram in 2020. Green hydrogen, whether relying on solar or wind power, is far more expensive today. But, according to this model, the gap is expected to close considerably by 2030 and disappear by 2050.

It is worth noting that hydrogen can be efficiently transported as ammonia (a molecule composed of nitrogen and hydrogen). Ammonia is an important industrial feedstock in its own right, especially for fertilizer production, and it may be used as a fuel. Adding ammonia to the hydrogen value chain involves another layer of conversion technology, with its own technical, environmental, and cost challenges—but also the potential to further expand domestic manufacturing opportunities.

U.S. Positioning and Capabilities

The United States has historically been a world leader in the development and deployment of hydrogen production technologies. Over the past 20 years, the Department of Energy (DOE) has invested more than $4 billion in hydrogen production, delivery, storage, and conversion technologies, including fuel cells and turbines. This investment has resulted in over 330 U.S. patent applications for hydrogen production and delivery technologies alone, aiding cost declines in electrolyzer technologies.[33]

The DOE office that has funded most of this work, the Hydrogen and Fuel Cells Technologies Office, is a unit within the department’s Vehicle Technologies Office, and its work has focused heavily on transportation end uses. Although some forms of heavy-duty transportation may ultimately shift to hydrogen fuel cell propulsion, battery electric vehicles seem likely to dominate the light-duty market (cars, SUVs, and pickups) in the coming years. End uses that are more likely to grow have received relatively less attention from DOE in the past, as has hydrogen production.

Partly as a result of this focus, U.S. hydrogen policy has lagged behind just as demand for clean hydrogen is beginning to ramp up dramatically. Many high-income countries have adopted national hydrogen strategies and are coupling production targets with investments and incentives to catalyze near-term deployment and scale-up. The European Union, for example, plans to deploy 6 gigawatts (GW) of green hydrogen electrolyzers by 2024, rising to 40 GW by 2030. Australia, which is moving to utilize its vast renewable resources and strategic position relative to Asian customers to become a major hydrogen exporter by 2030, is another case in point.[34]

Blue Hydrogen: World Leadership, For Now

Although it lacks a national target, the United States is a world leader in blue hydrogen production. Four U.S. facilities that make hydrogen via methane reforming and capture the resulting carbon dioxide emissions are in operation. They include a refinery in Texas and fertilizer plants in Kansas, Louisiana, and Oklahoma. The Great Plains Institute has identified 34 hydrogen production facilities and 3 ammonia facilities—which together emit over 15 MMT of carbon dioxide per year—as potential near-term candidates for carbon capture retrofits. Congress has incentivized blue hydrogen production with the 45Q tax incentive, which provides a credit of $35 or more for each ton of carbon dioxide a facility permanently sequesters.[35]

With an abundance of near-term opportunities for carbon capture, cheap natural gas, large reservoirs for underground sequestration, and a relatively mature policy framework, the United States has many of the ingredients needed to maintain its lead. Nonetheless, key barriers remain. Captive hydrogen producers have no incentive to retrofit their facilities with carbon capture in the absence of a policy that fully addresses the high cost of cleaner production. Merchant producers face the same cost differential and also lack a mechanism to distinguish clean from dirty hydrogen in sales. All producers face infrastructure barriers, particularly access to pipelines that will carry captured carbon dioxide to sequestration sites. The existing hydrogen pipeline system is modest and concentrated in a few regions, such as the Gulf Coast. Fugitive emissions could offset reductions if the natural gas and carbon dioxide pipeline systems are not well maintained and operated. Given these barriers, the U.S. Fuel Cell and Hydrogen Energy Association (FCHEA) finds that the 45Q tax incentive alone may stimulate only a few projects.[36]

Green Hydrogen: Back in the Pack

The United States is less well positioned for green hydrogen production than it is for blue, although it is home to several leading electrolyzer and hydrogen component and system manufacturers as well as large multinational hydrogen producers. The largest announced domestic project for green hydrogen is a partnership between Nel (a Norwegian hydrogen company) and Nikola (a U.S. designer of zero-emissions trucks) that will supply 1 GW of electrolyzers to 30 hydrogen fueling stations across the country.[37]

Developments abroad, particularly in Europe, account for the majority of electrolytic hydrogen capacity planned by 2025, as figure 2 shows. These plans aim to support the scale-up of electrolyzer manufacturing and de-risk investment in the supply chain. John Parnell of Greentech Media noted in February 2021 that, spurred on by targets set by the EU and its member states, “major [European] utilities like RWE and Iberdrola have joined oil majors Shell, BP and Total in developing substantial early-stage green hydrogen projects.”[38]

Figure 2: Global installed/expected capacity of electrolyzers[39]

Opportunities and Gaps

Although blue hydrogen production technology has not been widely deployed, the low cost of natural gas and the availability of existing hydrogen production facilities for retrofit make this technology an attractive near-term opportunity in the United States. As figure 1 suggests, green hydrogen may overtake it on a cost basis over the longer run. Market analysts, including Bloomberg New Energy Finance, IHS Markit, and Wood Mackenzie, find that the unit costs of blue and green hydrogen will be roughly comparable by 2030. Declining capital costs of electrolyzers, improvements in conversion efficiency, and cheap electricity generated by renewables are likely to give green hydrogen the edge in the ensuing decades.[40] Demand for hydrogen is also rising rapidly, as governments and businesses increasingly turn to it to cut emissions. Taken together, falling costs and rising demand for clean hydrogen should spur greater deployment and investment in hydrogen production technology and its supporting supply chain.

How much of this investment occurs in the United States will depend on bridging gaps in support for technology scale-up and integration. The federal government has supported R&D with grants on the order of $1 million–$2.5 million per project, but this scale is too small to demonstrate and validate low-cost, high-volume production. Other countries are already investing large sums in commercial-scale demonstration projects, which are intended to attract even greater private sector investment. For example, the state of South Australia has put the equivalent of US$26 million (out of a total project cost of $173 million) into the world’s largest green ammonia plant, including a 75 MW electrolyzer.[41] Similarly, the EU and many of its member states are making major investments in the electrolyzer supply chain as well as in prototype and demonstration production plants.[42]

Policy Recommendations for Spurring Clean Hydrogen Production

A federal policy agenda for clean hydrogen production should set ambitious cost reduction targets and prioritize research, development, and demonstration projects aimed at realizing these targets. The federal government should also support deployment by encouraging its own agencies to become early adopters of clean hydrogen and enacting policies that bridge, narrow, and ultimately eliminate the cost differential between dirty and clean hydrogen. Key steps include:

Research and Development

  • Shifting the focus of DOE’s Hydrogen and Fuel Cells Technology Office away from light-duty vehicles and toward hydrogen production and end-use applications in hard-to-abate sectors, such as industry, energy storage, and heavy-duty transportation. The office’s authorization should be expanded to include these applications.[43]
  • Increasing appropriations for R&D funded by DOE’s Hydrogen and Fuel Cells Technology Office by 150 percent over five years. This investment should be embedded in a broader effort to build strong linkages across DOE’s hydrogen innovation pipeline from basic research supported by the Office of Science on one end to commercially oriented demonstration projects managed elsewhere in DOE or by other federal agencies on the other.[44]
  • Working with industry and state and local governments to establish a new Manufacturing USA innovation institute to carry out cost-shared R&D on PEM electrolyzer manufacturing and systems integration. Such an institute could support problem-solving projects of broad interest across the hydrogen value chain, provide shared infrastructure, and develop programs to train skilled workers and support small and medium manufacturers.

Demonstration

  • Authorizing and providing public funding for a portfolio of pilot- and commercial-scale demonstration projects or clean hydrogen “hubs” that are cost-shared with private investors and operated by commercial firms. These projects could encompass both blue and green hydrogen production in a range of configurations as well as diverse end uses, informed by a strategic analysis of the competitive advantage of U.S. locations.[45]
  • Authorizing and encouraging federal agencies to become early adopters of clean hydrogen by executing long-term contracts to buy the output of demonstration projects. DOD and the General Services Administration (GSA), for instance, manage large fleets of buildings and heavy-duty vehicles that might be converted to hydrogen technologies in the coming decades.
  • Trialing a contract-for-differences model to support demonstration projects. This model would create a bidding process to establish the lowest price that clean hydrogen producers are willing to offer and then fund the difference between that price and the market price for high-emissions hydrogen.

Deployment and Market Expansion

  • Adopting a “Moon Shot” production cost target for clean hydrogen of $1 per kilogram, with additional specific cost targets for storage and distribution. That level is 50 percent lower than the current DOE target and the current price of dirty hydrogen and in line with market-based projections of green hydrogen production costs in 2050 (see figure 1).[46] (Just as this report went to press, DOE announced a target of $1 per kilogram for clean hydrogen by 2030.[47])
  • Establishing production tax incentives (beyond the existing credit for hydrogen fuel cells) that are authorized through at least 2035, are eligible for some form of direct payment, are received by producers based in part on the amount of hydrogen produced, and have maximum life-cycle carbon-intensity limits for eligibility, with greater incentives for cleaner production methods.[48]
  • Expanding the range of hydrogen production, infrastructure, and end-use technologies that are explicitly eligible for assistance from the DOE Loan Programs Office. Loans, loan guarantees, and other federal assistance can help worthy borrowers that are not able to secure full financing from risk-averse private lenders to establish the “bankability” of clean hydrogen production.[49]

Innovation Ecosystem and Technical Assistance

  • Expanding initiatives to evaluate the potential of the existing natural gas infrastructure to transport hydrogen, while controlling local air pollution as well as GHG emissions. Blending modest amounts of hydrogen with natural gas could allow the existing infrastructure to serve as a bridge to a dedicated hydrogen infrastructure as volumes rise over the longer term.[50]
  • Ensuring that federal safety standards for hydrogen pipeline and distribution systems are adequate, and developing standards and guidance for the safe integration of hydrogen, ammonia, and other hydrogen carriers with industrial, heating, transportation, and other end-use infrastructure. Hydrogen is corrosive as well as inflammable, and any dramatic expansion in its production, transportation, and use will entail risks that must be managed.[51]
  • Updating measurement and improving modeling of the hydrogen value chain across production pathways, including both merchant and captive producers. Significant gaps mar the current understanding of job and value creation in this rapidly changing industry.[52]

Opportunity: Heating, Cooling, and Drying Equipment

Heating, cooling, and dehumidifying buildings, and the provision of low-temperature heat to industrial processes for drying, separations, and other purposes, are responsible for significant GHG emissions. The firms that make the equipment that provides these services are major employers. The installation and maintenance of these systems also support jobs throughout the country. Climate policy may lead to rapid growth in demand for their products and services.

Why This Industry Matters

Heating, clothes drying, and water heating consume about 12 percent of all U.S. energy, and about 3 percent more is used to dehumidify air in the process of cooling residential and commercial buildings.[53] Another 4 percent is used in the chemicals, refining, paper, and food industries in processes that use heat at temperatures below 150°C. A rough estimate suggests that about 16 percent of U.S. emissions arise from systems that require temperatures that could be provided by heat pump technologies.[54]

At the global level, income growth, climate change, and climate policies are likely to sharply increase demand for heating, cooling, and dehumidification in buildings in the coming decades. It is abundantly clear that people desire these services. Air conditioning, for instance, is one of the first purchases households make when their incomes rise enough to afford it. While 90 percent of U.S. and Japanese households have air conditioning, only 18 percent do in Mexico and Brazil, and just 5 percent in India.[55]

Moreover, climate change is raising average temperatures and humidity in the most populated parts of the world, which will accelerate demand (see figure 3). According to the International Energy Agency (IEA), “Cooling is the fastest growing use of energy in buildings…. Without action to address energy efficiency, energy demand for space cooling will more than triple by 2050—consuming as much electricity as all of China and India today.”[56]

Figure 3: Projected demand for cooling[57]

Like the global demand for cooling, energy use in industrial processes that use low-temperature heat is growing rapidly. IEA projects that heat below 200°C will account for approximately two-thirds of the projected increase in energy used by industry for process heat by 2040.[58] Figure 4 lists some of the most common industrial processes to which innovative electricity-powered heating, cooling, and drying technologies might be applied.

Figure 4: Common industrial low- and medium-temperature processes[59]

The 2020 Princeton Net-Zero America study estimates that spending for new heating, cooling, and drying equipment could increase by $160 billion–$180 billion over the next decade.[60] Firms manufacturing residential and commercial heating, refrigeration, and air conditioning equipment employ about 128,000 workers today at a mean wage of $46,690.[61] Installation and maintenance of this equipment employs another 344,020 workers at a mean annual wage of $53,410.[62] (These figures do not include indirect or induced jobs.)

Pathways to Net Zero

It is unlikely that on-site emissions associated with distributed heating and cooling can be captured and sequestered at a competitive cost for any but the largest facilities. The most likely emissions solutions for many locations will therefore be devices powered by zero-carbon electricity, such as heat pumps.[63] These devices will probably predominate for residential and commercial space heating and cooling and hot water equipment, and may also play a significant role in providing heat to and removing water from low-temperature industrial processes. (However, some of these applications may prove to be better-suited to combustion equipment powered by zero-carbon fuels.)

Heat Pumps

Heat pumps are among the most versatile devices for heating, cooling, and drying (see box “What Is a Heat Pump?”). Although their basic principles were introduced in 1803, heat pumps have progressed rapidly in the past decade. Recent innovations have improved their performance in cold weather and incorporated variable-speed motors that provide high performance across a wide temperature range.[64] Researchers have identified new refrigerants that promise to boost efficiency further in small units.[65]

What Is a Heat Pump?

A heat pump is a device that removes thermal energy from a cooler material (such as the air in a room) and transfers (“pumps”) it to a warmer material (such as the air outside of a building). An air conditioner is a heat pump that pumps heat from a cooler indoor space to a warmer outdoor space. During the heating season, a heat pump system can be reversed to remove heat from outdoor air and pump it indoors. Heat pumps require energy to transfer heat, and most today use electricity to power a compressor that moves refrigerant between the warmer and cooler spaces. Refrigerants typically change from a liquid to a gas in the process. The refrigerant releases heat when it condenses from a gas to a liquid and absorbs heat when it evaporates from a liquid to a gas. Innovative heat pump systems under development use alternatives to refrigerants to move heat, such as materials that absorb and release heat when magnetic or electric fields are applied or released or when the material is flexed. The efficiency of a heat pump is measured by the ratio of the heat energy moved to the electric energy consumed; typical commercial refrigerant-based heat pumps transfer approximately three units of energy for each unit of electricity consumed, which is about a third of their theoretical maximum efficiency. 

If the federal government adopted policies that all space heating in U.S. residences were to be provided by heat pumps by 2050, heat pump sales would increase by a factor of six. Heat pump water heater sales would need to increase by even larger factors since they represent only about 1 percent of current water heater sales.[66] More than 110 million water heaters and 104 million home heating systems would be impacted by such a policy. (These devices would replace air conditioners in most homes as well.) Additional market growth would come from commercial buildings wherein heat pumps currently heat only about 15 percent of all floor space (90 percent of commercial floor space is air conditioned).[67]

Even though heat pump deployment, particularly for residential space heating, is growing rapidly, the technology will need to improve much further in order to achieve these projected penetration levels over the long run. Key challenges include:

  • initial costs that are well above competing units that run on natural gas,
  • locations with high electric rates and low natural gas rates make operating costs for heat pumps higher than gas systems,
  • lower heating efficiency in cold climates,
  • potential winter electric grid peaking concerns,
  • refrigerants that present environmental hazards or safety concerns, and
  • inability to reach temperatures above 100°C required in some industrial processes.[68]

Some of the most promising innovations on the horizon that could resolve these challenges and unlock new markets include:

  • Novel refrigerants: Alternative refrigerants (which may include supercritical carbon dioxide, water, hydrogen, and other materials) may provide heat pump options for industrial processes. These refrigerants are inexpensive and nontoxic. One already-commercialized product can heat air to 120°C while simultaneously cooling water to 25°C, and prototypes have pushed temperatures up another 20 to 30 degrees. Novel approaches that compress hydrogen using membrane technologies similar to those used in fuel cells look promising as well.[69]
  • Cascading systems: Cascading systems use a series of heat pumps optimized for different temperatures. The first lifts the working fluid from ambient temperature to an intermediate temperature for which the next heat pump is optimized, and so on. Although the heat exchange between systems incurs an energy penalty, this architecture is capable of reaching higher temperatures more efficiently than a single-stage heat pump can. Hybrid systems that combine heat pumps with electric resistance heating may be able to provide very precise process control that is attractive to industrial producers.
  • Non-Vapor-Compression Cycles: Vapor compression has been the main mechanism for heat transfer in heat pumps for over a century, but alternative approaches are proliferating. These include using electrons and holes, magnetic and electric dipoles, and smart metal alloys that take advantage of magnetocaloric, electrocaloric, thermoelectric, and elastocaloric properties. While none of these approaches yet meet commercial cost and performance requirements, they promise environmentally benign, safe, efficient heat pumps that are capable of serving a wide range of building and industrial markets.[70]
  • Geothermal systems: The temperature two to three meters below the surface of the Earth (and large bodies of water) is usually significantly warmer than the ambient air in winter and cooler in summer. Heat pumps that take advantage of this differential can be more efficient and have a smaller architectural footprint than heat pumps exchanging heat with ambient air. To date, however, these “geothermal” systems have been too expensive to be competitive—particularly in retrofits—since trenching or drilling is typically required to install the pipes needed for the heat exchange. Community systems that share a heat source such as a lake or a shared underground pipe loop may help reduce costs in some sites.[71]

Industrial Drying and Separations

The removal of water from industrial materials, mostly by heating, accounts for 10 percent of the process energy consumed in U.S. manufacturing. Drying is particularly significant in papermaking and food processing. While advanced heat pumps may be applied in some of these processes, a variety of innovative technologies offer the potential for much higher efficiency. The options include mechanical systems (e.g., by using ultrasound), infrared, shock electrodialysis, electrostatics, and dielectrics. Heat is also used in separations that divide mixtures into components. Separating ethanol from fermented mash is an ancient example.[72] (A shift to bio-based chemicals production, described in the next section, would further expand demand for low-temperature separations.)

The optimal drying technology will depend on the specific application; removing water from clothing is very different from removing it from a food product, for instance. Drying technologies may also be integrated in hybrid systems that include pre-drying. Hybrid systems may improve system control and efficiency without compromising product quality. Alternatives to heat pumps for removing water from air could improve energy performance as well. For instance, the use of membranes that selectively pass water vapor and not dry air could raise the efficiency of these processes.[73] Nonthermal separation technologies could help prevent complex heat-sensitive molecules from undergoing side reactions.[74] Yet, in spite of the enormous potential benefits, research in this area has been virtually nonexistent.

System Components and Integration

Heat exchangers are often the most expensive, and certainly the bulkiest, components of heating, cooling, and drying systems. Despite continuous improvements over the last several decades, many opportunities to further their performance remain. New materials and designs as well as advanced manufacturing techniques are enabling important optimization opportunities. In particular, large improvements in the air side of liquid-to-gas heat exchangers that do not appreciably increase cost or the rate of fouling could significantly enhance the effectiveness of these devices.[75]

The integration of components into systems will require careful assessment of the application. In buildings, heating, cooling, and drying systems will be installed as a part of systems that include advanced controls, windows with controllable optics, and other innovations. Innovative industrial systems (including those that use advanced heat pumps to reach higher temperatures than today’s units provide) must fit well into the broader production processes of which they are just one important part.[76] Advanced simulation and analysis tools and improved sensors and controls will be critical for designing and operating these systems.

In many cases, system efficiency may be improved by using lower-temperature heat in applications in which, historically, higher temperatures were used simply because fossil fuels were available and not because they were needed to meet manufacturing requirements. This approach should expand the market for heat pumps, although other factors will also play a role in technology choice, including potential control problems arising from greater size and complexity. System redesigns must also include evaluations of productivity, safety, and waste reduction as well as potential reductions in GHG and other emissions.

U.S. Positioning and Capabilities

Global markets for heat pumps are highly competitive. Top heat pump manufacturers spanning both domestic and international firms include Carrier, UTC, and Trane, as well as Mitsubishi Electric, Fujitsu, Daikin, and Panasonic (Japan) and LG (South Korea).

U.S. manufacturers are not yet well positioned to capture the rapidly growing domestic and international markets for heat pumps and other advanced electric heating and drying equipment. U.S. demand for these products is weak, in large part because low U.S. natural gas prices have maintained strong markets for conventional equipment. In 2015, only about 10 percent of U.S. households used heat pumps for heating (although this figure was up from 2 percent in 2001).[77] Corporate investment in heat pump innovation may also have been limited by the fact that the United States has been much slower than most of the rest of the developed world to phase out refrigerants that contribute to climate change. Innovations leading to inexpensive heat pumps with high performance, however, could give U.S. producers a significant advantage in both domestic and international markets.

The European Union and its member states have made advanced heat pumps and related technologies a priority both to meet their own needs and to capture international markets. This effort focuses on both building and industrial applications. A recent roadmap for the industry outlines a goal of building 36 heat pump megafactories (each with a capacity of approximately 150,000 units per year) by 2030. Sites are already under consideration in Northern Italy and Poland. The European Heat Pump Association has been very active in innovation, with 12 major R&D and demonstration projects involving a variety of European industries.[78] Japan is home to world-leading manufacturers of heat pumps as well and undertakes appreciable applied R&D in heating, cooling, and drying technologies.

Opportunities and Gaps

A program to accelerate adoption of high-efficiency electric heating systems in the United States can build on recent trends. Energy efficiency programs operated by states, cities, and electric utilities have promoted heat pumps. Utilities in the United States provide close to $110 million in energy efficiency funding for heat pump installations, targeting roughly 80,000 participants. These programs, coupled with improved technology, have accelerated market adoption. Heat pump sales exceeded sales of natural gas furnaces in 2020, with sales up 10 percent year on year.[79] In 2020, a third of U.S. air conditioning sales were for units that also provide heat pump heating.[80]

Electric water heaters (though not necessarily heat pump water heaters) are also increasing in popularity among residential and commercial building owners. Sales of electric water heaters for commercial buildings were 75 percent higher than sales of natural gas units in 2020. In residential markets, electric and gas water heater sales were nearly equal in 2020.[81]

Policy Recommendations

While DOE has supported heat pump and dehumidification technologies for decades, given their importance for meeting climate goals and expanding U.S. manufacturing, much greater investment is needed. Detailed roadmap and investment plans should focus on developing high-efficiency, low-cost, highly reliable heating, cooling, and drying systems for buildings and industry. It may be useful to establish ambitious, specific goals for heat pump cost and performance, such as a residential heat pump with a seasonal COP of at least 4.5 in all major U.S. climate zones with an installed cost of $1,000 per ton (or $1,500 per ton if the house lacks ductwork).

R&D

Key focus areas include:

  • new refrigerants and highly innovative alternate cycle technologies such as electrocaloric and elastocaloric systems for heat pumps;
  • next-generation heat exchangers exploring new materials, new designs, new fabrication techniques, and new design and simulation software;
  • innovations that could cut the cost of drilling and piping for geothermal heat pump systems;
  • novel electric drying systems such as those that use mechanical methods and design software needed to achieve system efficiencies;
  • redesigning and reengineering low-temperature industrial processes to take advantage of the characteristics of heat pumps;
  • innovative separation technologies with a focus on membranes; and
  • new sensors, simulation, and modeling tools for designing and operating zero-emission production systems in specific industries, such as food processing and paper manufacturing, including redesigning processes to incorporate heat pumps and novel drying techniques.

Demonstration

  • In conjunction with industry, the federal government should fund pilots and first-of-a-kind demonstrations of zero-emission industrial processes that use innovative heating, cooling, and drying equipment.
  • Federal loans and other financial assistance should be provided for manufacturing advanced heat pumps domestically.

Deployment and Market Expansion

  • Appliance standards should be expanded to include a wider range of commercial and industrial equipment and consideration of system efficiency, such as the costs of grid integration and efficient dehumidification.
  • Highly efficient electric heating and cooling equipment should be mandated for all new buildings constructed in the United States and become an integral part of any building efficiency retrofit program.
  • Congress should provide incentives for retrofits that assist with the installation cost of high-efficiency and low-emissions systems, while minimizing replacement of conventional units that have not reached their design lifetimes. Where appropriate, Congress could provide incentives for local geothermal piping loops.
  • All federal buildings, including those owned by DOD as well as civilian agencies, should replace fuel-fired space and water heating water systems with efficient electric systems.

Opportunity: Chemical Production and Recycling

Worldwide demand for chemicals made from oil and gas is growing rapidly, driven in part by increases in demand for plastics.[82] Chemical manufacturing, (which in addition to plastics includes fertilizers, synthetic fabrics, paints, and many other products) is responsible for about 18 percent of global carbon dioxide emissions from industry and about 2 percent of all GHG emissions.[83] It remains a major U.S. industry, employing nearly 10 percent of the domestic manufacturing workforce.[84]

GHG emissions from chemical production result from two distinct types of sources. About half of the coal, oil, and gas used in this sector is combusted during the production process.[85] The other half is used as feedstocks, and their derivatives are embodied in the final products, such as the polymers in plastics.[86] A portion of these products is recycled, but much of it is not, meaning embodied GHGs are eventually released to the environment, particularly if they are incinerated as a means of waste disposal—though more work is needed to understand these flows.

Why This Industry Matters

While growth in demand for chemical products is strong worldwide, plastic demand has grown exceptionally fast: three times as fast as the economy as a whole since 1970. Plastics are cheap, versatile, and durable. They perform a wide and growing variety of functions, ranging from packaging to insulation to lightweight, corrosion-resistant structural components of products such as automobiles and airplanes. The emissions and water use associated with plastics manufacturing is significantly lower than many of the materials they have replaced, such as aluminum and steel.[87]

Climate policies could accelerate growth by driving demand for lightweight vehicles and renewable energy equipment made in part from plastic, such as wind turbines. Some projections find that petrochemicals will be responsible for more than a third of the growth in petroleum demand by 2030, and nearly half by 2050.[88] (The United States is an exception because low U.S. natural gas prices mean most domestically produced plastic is made from gas.) As is the case for most materials, global demand is growing much faster than domestic demand. U.S. chemical sales stagnated between 2000 and 2019, while growth worldwide averaged 3.9 percent per year. Growth in China was nearly three times that rate.[89]

Of course, the oil and gas industry is itself under pressure. If some or all of the roughly two-thirds of oil and gas that is converted into fuel for transportation or power systems today is displaced in order to reduce GHG emissions, feedstock for the production of chemicals will become an even larger part of the industry’s future. Fatih Birol, executive director of IEA, called petrochemicals “one of the key blind spots in the global energy debate … they will have a greater influence on the future of oil demand than cars, trucks and aviation.”[90]

Pathways to Net Zero

Eliminating GHG emissions from the production of chemicals poses a unique set of challenges. The industry is highly diverse, entangled with the production of transportation fuels, and reliant on fossil fuel feedstocks. Major reductions are, however, clearly possible. A recent European study concludes that by 2050 creative policies could cut GHG emissions from chemical production by 76 percent.[91]

Such cuts will require greater efficiency in the end uses of chemicals (using them only when, and as much as, needed) as well as replacing traditional fossil fuel inputs, which we focus on here, exploring three potential replacements:

  • Recycled materials, including materials designed for recycling
  • Materials produced from biological resources
  • Materials produced through artificial photosynthesis

The share of global markets captured by using these innovations will depend on whether they can compete with systems that capture and permanently sequester carbon dioxide from the combustion of fossil fuels. CCS systems cannot eliminate emissions that arise from carbon embedded in chemical products that eventually find their way into the atmosphere. (Emissions from chemical production can also be lowered by designing products with longer lifetimes and better performance per unit of material to reduce net demand, reducing losses in production processes, and replacing chemicals in end uses with lower-carbon materials such as engineered wood.)

Innovations in Recycling

Only about 10 percent of plastics in the United States are made from recycled materials, compared with nearly 70 percent of steel. Most other chemical products (such as paints, textiles, and lubricants) are difficult to recycle with current processes. Although plastics’ end uses are more dispersed than those of steel, which is used mainly in automobiles and other big-ticket items, a recent European study suggests that up to 60 percent of plastics now made from raw materials could be replaced if recycling improves.[92]

Technologies that cut the cost of recycling and increase the quality of the resulting products would help capture this potential. Five classes of polymers comprise 91 percent of recycled plastic and should be targeted.[93] Promising approaches would:

  • develop plastics and other products that are easily disassembled for recycling, as many existing plastics lose desirable properties after being recycled several times;[94]
  • improve processing systems for disassembling chemicals into components that can be remade without loss of performance and at lower cost than production from virgin materials, using tools such as selective catalysts and nonselective gasification technologies;[95]
  • use synthetic biology to accelerate the evolution of microbes to produce both new, easily recyclable chemicals and facilitate the recycling process itself, as plastics have not been in the environment long enough for microbes to evolve to recycle them;[96] and
  • develop systems that combine conventional mechanical recycling (sorting, washing, chopping) with advanced chemical recycling methods.

Innovations in Bio-Production

For generations, people have been using microorganisms to make chemicals. Recent advances now make it possible to manufacture virtually any chemical product using biotechnological techniques.[97] It is also possible to manufacture chemicals from air and water with artificial photosynthetic processes that are more efficient than natural photosynthesis. However, before these approaches can become climate solutions at scale, additional progress must be made on feedstocks, fermentation processes, and artificial photosynthesis.[98]

Feedstocks

Feedstocks are the raw materials that biological systems such as engineered bacteria convert into chemicals. Bio-feedstocks may actually sequester carbon dioxide, since the plants from which they derive remove it from the air, or they may be carbon-neutral if the carbon dioxide is ultimately released at the end of a product’s life. However, such calculations omit emissions caused by growing or processing them.[99] There are limits to the availability of bio-feedstocks, and chemical production could compete with other uses for biological resources, including biofuels for transportation and electricity generation and serving as “offsets” that draw down atmospheric carbon dioxide.[100]

The largest bio-based chemical product is ethanol, which is blended into gasoline in the United States and elsewhere. U.S. ethanol is made almost entirely from corn, consuming roughly 40 percent of the nation’s corn crop.[101] A growing portion of this resource would become available for other purposes if electric vehicles gain market share, displacing gasoline. Even so, the bio-resources used for ethanol production represent only about 10 percent of the energy the United States uses to produce all chemicals.[102] A significant shift to bio-based chemical production would require other feedstocks, such as waste materials or crops grown on land not suitable for conventional agriculture. Research suggests that such a shift would be feasible in the United States without competing with food production.[103]

Such feedstocks will generally be inedible plant material such as corn stalks and woody materials.[104] While organisms exist in nature that can break down such materials into precursors for chemical production, replicating this ability at a reasonable cost has frustrated inventors for decades.[105] Computational systems biology and other biodesign tools as well as new gasification methods may well overcome these barriers, given adequate investment.[106]

Fermentation

Fermentation is the process by which microorganisms transform feedstocks into chemicals under controlled conditions. Advances in biotechnology have made it possible to engineer organisms that can produce virtually any chemical by fermentation.[107] This production method allows for efficient production facilities to be built on a much smaller scale than do current methods. Biological feedstocks may also be more widely distributed than fossil fuel feedstocks, motivating further decentralization. Ultimately, bio-based chemical plants may get on a learning curve such as that for ethanol plants between 1981 and 2006, when unit capital costs fell by a factor of four.[108]

A number of commercially promising bio-based chemicals have already been introduced (box lists examples recognized by the European Union). However, only high-value specialty and pharmaceutical products have gained substantial market share. The massive markets for commodity chemicals, which are the largest emissions sources in this industry, have not yet been touched due to the relatively high cost of bio-based alternatives.

Examples from the European Union’s “Top 20 Innovative Bio-based Products”[109]

• Guayule rubber

• Microfibrillated cellulose

• Thermoplastic biopolymers reinforced with plant fibers

• Self-binding composite nonwoven plant (alternative to glass or carbon)

• Biolubricants

• Biodegradable plastics/technical plastics

• Lignin-based nanofibers (alternative to PAN-based carbon fibers and composites)

• Lignin-based resins

• Aromatic hydrocarbons and PHAs (chemical feedstock)

• Bio-based polyurethanes, polyamides, polycarbonates

• Bacterial biosurfactants (medical, personal care)

The skills required to design, build, and operate high-volume, low-cost commercial production facilities are quite different from the scientific skills needed to develop organisms in a laboratory setting. Commercial production also faces a number of vexing process development problems including breaking cells into broth and removing spent cells, concentrating products by removing water, and purifying products through crystallization.[110]

Artificial Photosynthesis

The use of solar power to provide electricity for large-scale fermentation is clearly one way sunlight can be used as the major energy input into bio-based chemical production. But plants themselves are living proof that sunlight, air, water, and nutrients drawn from the environment can be converted into complex chemicals. Photosynthesis is the source of all biomass, and the ultimate source of fossil fuels as well. Although the theoretical efficiency of photosynthesis is about 16 percent, natural photosynthesis in crops operates with an efficiency of only about 1 percent.[111] If this gap could be closed, improved crops grown as feedstocks could make bio-based chemical production much more cost effective.

One possibility is to use the tools of synthetic biology to remove some of the inefficiencies of natural photosynthetic processes. (The evolution of plant chemistry was not driven entirely by the efficiency imperative.) A competing approach uses catalysts in an “artificial” or “bionic” leaf (see figure 5) to produce hydrogen from water, which is then fed to a microorganism that combines it with carbon dioxide from the air to make a feedstock. Such systems have been demonstrated that are 10 times as efficient at converting solar energy into chemical energy as typical crops are. Several other approaches also look promising.[112]

Figure 5: The Bionic Leaf[113]

U.S. Positioning and Capabilities

The United States enjoys enormous strengths in chemical manufacturing. With capabilities spread across universities, national laboratories, and chemical industry research centers, the United States probably leads the world in the skills and know-how that are most relevant for this aspect of the low-carbon transition. The U.S. chemical industry also has decades of production experience and excellent access to material inputs, including bio-feedstocks. But this leadership position is in jeopardy. In 2007, for instance, U.S. chemical companies invested twice as much in research as did their Chinese counterparts. Today, Chinese firms spend 36 percent more (see figure 6).

Figure 6: Corporate research and development spending globally, 2007 and 2017 (EUR billion)[114]