One hundred and thirty-six countries, covering 83% of global carbon emissions, have committed to net‑zero greenhouse gas emission targets in the coming decades, including almost all OECD countries. As the OECD International Programme for Action on Climate (IPAC) has stated, climate risks will only be significantly reduced if net-zero carbon emissions in 2050 are reached. The challenge is turning country commitments and ambitions into actual outcomes and pathways to carbon neutrality.

Some of the economic activities that are most difficult to make climate neutral are in manufacturing and these activities are regionally concentrated. Industrial transitions to climate neutrality, therefore, have regional development implications. Since regions differ in their socio-economic conditions, understanding the regional development implications also helps prepare a just transition.

This chapter describes the challenges in moving manufacturing to climate neutrality. It identifies manufacturing sectors subject to the biggest challenges and describes the transformations they require. Manufacturing activities are typically regionally concentrated and the transformations they need to undertake will therefore have implications for regional development. Five sectors – non-metallic minerals (notably cement), basic metals (notably steel), chemicals, oil refining and coke, as well as paper and pulp – stand out in terms of greenhouse gas (GHG) emissions and energy use. Key actions for reaching climate neutrality include reducing energy consumption and moving away from fossil energy use towards electrification. These industries often require high temperatures in their production processes, increasing energy needs and making electrification difficult. Circular economy practices help reach climate neutrality with less pressure on energy and material needs with co-benefits for other environmental outcomes and human health. The motor vehicle industry, which is also included in the analysis, generates few emissions and is not energy intensive but faces challenges from the move to electric, lighter and fewer vehicles the transition is likely to imply.

This chapter identifies European regions that are most vulnerable to industrial transitions to climate neutrality in the key manufacturing sectors that will face the biggest transformations. These sectors refine coke and oil, and manufacture chemicals, basic metals, non-metallic minerals, paper and pulp, as well as motor vehicles. The most vulnerable regions are selected using employment shares and per capita emissions in each of the corresponding key manufacturing sectors. Regions with high employment shares and high emissions per capita face the largest transformational challenges in the transition to climate neutrality. They will have to decarbonise production assets and infrastructure whilst also protecting the workers in the key manufacturing sectors to ensure a just transition. The most vulnerable regions, spread throughout all of Europe, with a particular concentration in Central and Northern Europe, will also have to be ready to benefit from the opportunities that arise from the transition. Their distribution varies depending on the key manufacturing sector.

Making the key manufacturing sectors described in Chapter 1 climate neutral requires infrastructure. This chapter shows how access conditions and costs may differ across regions. Both hydrogen, needed for chemicals and steel production, and captured CO2 emissions, most generally needed for cement production, are best transported via pipelines. Pipelines are subject to scale economies: clustered production sites will face lower costs. The first hydrogen transport network will therefore likely be laid out in Northwest Europe. In some regions, local renewable electricity production potential will not be sufficient or too costly to produce the needed hydrogen and will require imports. Good connection to ports also matters: hydrogen or hydrogen-derived products may also be shipped. Moreover, transport to and from ports plays an important role to provide the basic materials key industries produce to downstream industries. Any costs from decarbonising road transport could impact transport costs in inland production locations the most.

This chapter assesses the socio-economic characteristics of the regions most vulnerable to the transformations needed for the transition of key manufacturing sectors to climate neutrality. The chapter considers regional, worker and firm characteristics. These point to the specific vulnerabilities of each region and lay the basis for regional policy action for a just transition. The most vulnerable regions tend to underperform on key regional socio‑economic indicators, including gross domestic product (GDP) per capita, wages and net migration. Workers employed in the key manufacturing sectors in the most vulnerable regions often have low educational attainment, work in low-skilled occupations and tend to have temporary contracts. Some firms in these regions underperform on productivity, reinforcing challenges to incorporate new technologies and finance needed investment.