How states can pick up the slack on industrial decarbonization

Yahoo

22-05-2025

The Trump administration appears poised to cancel billions of dollars of federal funding meant to help U.S. industries convert to cleaner alternatives to burning fossil fuels.
States can't match the federal government's spending power, but there are steps they can take to reduce industry's emissions, support jobs and economic growth in places burdened by industrial pollution, and help prepare U.S. companies for global markets increasingly demanding lower-carbon commodities and products.
So says a March report from think tank RMI and environmental advocacy organization Evergreen Action that examined the industrial decarbonization plans of 25 states and Puerto Rico. The authors came up with a list of recommendations — and warnings — for states aiming to keep up the momentum on industrial decarbonization.
To be clear, 'states can't just look at what other states are doing and copy it,' said Molly Freed, RMI senior associate and co-author of the report. 'What works in a steel and cement state is not going to be effective somewhere that's canning and bottling stuff.'
But some common lessons can be drawn, she said. The first is not to try and recreate the federal government's 'massive capital grants,' namely, the $6 billion awarded to sites from steel mills to snack factories under the Inflation Reduction Act's Industrial Demonstrations Program, which is now potentially on the Trump administration's chopping block.
'States don't have the initial funding to do that — and they have to balance their budgets every year, so it's fundamentally not a good format for them,' Freed said.
That's too bad, because many industrial companies rely on 'first mover' public financing to lower the risk of making big investments, said Melissa Hulting, director of industrial decarbonization at the think tank Center for Climate and Energy Solutions. 'Early adopters want help with these initial capital costs.' That's particularly true of certain heavy industries like steel and cement, which have massive capital assets like blast furnaces and cement kilns that will need to be replaced or significantly retrofitted to cut emissions.
But other strategies represent lower-hanging fruit — in particular, replacing fossil-fueled boilers with industrial heat pumps and electric boilers, said Jeffrey Rissman, industry program director at the think tank Energy Innovation.
These technologies are well-suited to electrifying steam heating for food and beverage processing, chemicals production, pulp and paper mills, and other low-temperature processes that make up roughly 30% of U.S. industrial thermal energy demands.
Heat pumps, especially, are far more efficient at converting energy into heat than fossil-fueled boilers, Rissman said. These technologies are already being deployed today and can save companies money compared to fossil-fueled systems in some applications.
'It's not like we need to solve fundamental engineering challenges here,' he said.
Putting some public money into the up-front costs of electrification could certainly help move things forward, Rissman said. And in some cases, states may still have access to federal dollars to make that happen.
Take the $4.3 billion issued to 25 state, local, and tribal governments through the Climate Pollution Reduction Grants program. That's one of many Inflation Reduction Act initiatives that had funding frozen in the early weeks of the Trump administration but which have since seen dollars begin flowing again after court orders demanded a restart.
The largest of the industrial decarbonization projects funded by those grants is Pennsylvania's $396 million Reducing Industrial Sector Emissions program, which is currently accepting applications for everything from electrification, energy efficiency, and process-emissions reductions to on-site renewable energy, low-carbon fuels, and efforts to cut fugitive methane emissions.
Industry is Pennsylvania's top-emitting sector, responsible for about 30% of statewide emissions, Louie Krak, infrastructure implementation coordinator at the state Department of Environmental Protection, said at a January webinar hosted by the policy institute Center for American Progress.
About 60% of that industrial climate pollution comes from the iron and steel industry, which is a much tougher sector to cut emissions from than lower-heat industrial processes, RMI and Evergreen Action's report notes. 'My advice is, take advantage of federal resources while they're still around,' Krak said.
That includes smaller-scale federal funding sources, he added. For example, the Department of Energy's Industrial Training and Assessment Centers program provides grants of up to $300,000 to help small and medium-sized manufacturers implement energy-efficiency projects. That's 'not an insignificant amount,' Krak said.
A handful of states are looking at spending their own money to boost industrial decarbonization. One way to do that is to tap into state and regional programs that collect fees from polluting industries, such as California's greenhouse gas cap-and-trade program, the Regional Greenhouse Gas Initiative encompassing 11 Northeastern states, and Washington state's cap-and-invest program, RMI and Evergreen Action's report notes.
In California, lawmakers are considering the state's greenhouse gas reduction fund as a source of money for AB 1280, a bill that proposes expanding programs that support factory electrification and thermal energy storage. One existing initiative that the bill would extend has already directed about $90 million to such projects over the last few years, said Teresa Cheng, California director at Industrious Labs, an advocacy group that supports the legislation.
'This is even more necessary now that federal support has backslid,' Cheng said. Roughly 35,000 polluting industrial facilities now pay into the greenhouse gas fund, and 'that money should go back into cleaning up those facilities, commensurate with their polluting profile,' she said.
Another funding avenue proposed by AB 1280 is low-interest loans from the state's Infrastructure and Economic Development Bank, Cheng said. RMI and Evergreen Action's report highlights the role that state-backed 'green banks' — entities tasked with lending to projects that reduce carbon emissions and air pollution — could play in reducing capital costs for industrial decarbonization.
That could eventually include part of the $20 billion in green bank funding created by the Inflation Reduction Act that has been frozen by the Trump administration and is now being fought over in court. Regardless of the outcome of that dispute, state green banks still have their own money to lend, Rissman noted.
'Buy clean' mandates now in place in nine states, which require state agencies to purchase concrete, steel, and other industrial outputs that are made via lower-carbon processes and using lower-carbon inputs, can further incentivize industries to invest in decarbonization, Rissman said.
Those programs can also provide reporting and compliance structures that companies will need to meet demands for lower-carbon products from corporate buyers, he said. And U.S. firms that export to Europe will be looking to avoid the looming Carbon Border Adjustment Mechanism fees on high-carbon imports, set to go into effect in the coming years.
States have regulatory 'sticks' they can use to back up the 'carrots' of grants, loans, and other incentives for industrial decarbonization. Cap-and-trade or cap-and-invest programs impose costs on polluting industries, for example. Or states can implement rules like the ones passed by Southern California air regulators, which require industrial and commercial customers to replace fossil-fueled water heaters, boilers, and process heating with electric systems within the next decade, Cheng said.
Colorado has both carrots and sticks in place, Wil Mannes, senior program manager of industrial decarbonization initiatives for the Colorado Energy Office, said during January's webinar. The state passed a climate law in 2021 that set emissions limits on industrial facilities, with rules mandating a 20% reduction in those emissions by 2030 compared to 2015 levels. But it has also opened a $168 million competitive tax credit program and a $25 million grant program for industrial facilities to install improvements that reduce greenhouse gases, which means Colorado is 'not heavily dependent on federal support for what we already have in the works,' Mannes said.
'Future of gas' proceedings are another way to spur industrial electrification, said Yong Kwon, senior policy advisor for the Sierra Club's Living Economy program. California, Colorado, Illinois, Massachusetts, and New York are among the states that have launched these discussions to craft long-term plans for reducing customers' reliance on fossil gas delivered through utility pipelines.
In Illinois, state regulators and other stakeholders are considering proposals for industrial pilot projects that try out different rate structures for companies that switch from gas to electricity, Kwon said. 'What if we selected a demonstration site and funded the facility to adopt the technologies, and also worked with utilities to provide them with preferential rates based on studies we've done? What would be the result of that, both on public health and on the cost to the industrial user?'
Regulations and up-front financing are both important policy levers. But widespread industrial decarbonization won't take off unless companies are confident that the investments they're making will eventually pencil out financially.
'The operational costs are really key,' Hulting said. 'If we can get those down, I think we'll see a lot of implementation happening because these electrified technologies are largely more efficient. It's an energy-efficiency boost.'
Electric industrial heating faces a core challenge in the U.S. — the spark gap, or the cost difference between fossil gas and electricity. Cheap domestic gas supplies have undercut the economics of industrial electrification over the past two decades, and while gas prices have been rising over recent months, so have electricity costs.
Underneath these broad averages lie significant regional differences, however. Low spark gaps have spurred electric industrial heating investments in certain parts of the country, according to the American Council for an Energy-Efficient Economy, which tracks such projects across the U.S. And most utilities offer industrial rates and pricing structures that can shift the balance toward electrification.
Narrowing the spark gap down to where it encourages industrial electrification relies on two important variables, Kwon said — 'making electricity cheaper and making gas more expensive.' Policies that drive up gas costs aren't exactly a political winner, however. So industrial electrification advocates have focused on making electricity cheaper.
One way to do that is to 'give industry access to wholesale electricity rates,' he said. Over the long run, increasingly cheaper renewable energy will drive down electricity costs at large, he explained. But power generated by solar and wind is already quite cheap when it exceeds grid demand. In fact, grid operators are being forced to curtail excess renewable energy at certain times of the year in sun- and wind-rich parts of the country, which sometimes see wholesale electricity prices drop into negative territory.
That's why industrial electrification proponents are eager for states to create routes for industrial customers to access these cheap wholesale prices, rather than remaining on the retail utility rates that shield customers from these price swings. Access to bulk electricity price differentials is particularly essential for making the business case for thermal-energy storage technologies, which convert electricity to heat and store it for long durations.
In return, big industrial customers can act similarly to utility-scale batteries on the grid, Kwon said — storing excess power when prices are low and using it to reduce their grid demands when power is scarce. That's already happening in Northern European countries such as Denmark, where variable electricity rates that offer inexpensive off-peak pricing encourage industries to use and store ample wind power, he said. 'That's essential — and that's a place where we hope states will pick up.'
Just how this concept can be applied depends on what kind of utility rates and energy market structures different states have, Rissman said. For decades, utilities have negotiated special rate structures with particularly large and power-hungry facilities, such as steel furnaces and aluminum smelters. And competitive energy markets like those in Texas, or across some Northeastern and Midwestern states, allow large customers to contract with retail energy providers in ways that let them access wholesale energy market prices, he said.
But these arrangements are largely kept private since they constitute a competitive advantage for the industries that are getting them, he noted. What's more, rate programs still need to protect factories or facilities from being exposed to the enormous price spikes that can occur at times of power shortage or grid emergency — at least, for all but the handful of industrial players willing to take the risks involved. At the same time, wholesale pricing structures shouldn't allow industrial customers to avoid paying their fair share of power grid investments or other costs that are bundled into retail rates.
In California, advocates have proposed regulations to allow industrial decarbonization projects to access low-cost renewable energy through some kind of exposure to or pass-through of the state's wholesale energy market, Cheng said. Last year, state regulators launched a proceeding to explore the potential for such 'flexible' rate structures for large industrial companies, she noted. But 'it's pretty early on — we don't have the answers yet.'