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The outlook for the UK chemical industry is “worrying” without a plan to eliminate virgin fossil fuels

Credit: BASF SE

BASF

7 min read Partner content

New report says the chemical sector needs a vision to help deliver its net zero ambitions and growth

From vital medicines and foods to batteries and heat pumps, the chemical industry produces materials for a vast range of products that we depend on in our daily lives.

Chemicals and their derivatives are used in more than 90 per cent of manufactured products and materials – everything from construction and automotive products to everyday items like cleaning products and medical devices.

But sector stakeholders have warned that the outlook for the UK chemical industry is “worrying” without a plan to remove virgin fossil fuels from its supply chain and modernise for a green economy.

 

A critical moment for the UK chemical sector

Research by Green Alliance, an independent think tank, has found that 140,000 jobs in the chemical industry are at stake in the long term if the sector remains heavily dependent on fossil fuels and if policymakers fail to facilitate plans for its decarbonisation.

The number of people employed in the UK chemical sector is two and a half times the number employed in the steel industry, which has been in the news recently due to job losses and decarbonisation. Most jobs in the chemical sector are located outside London and the South East.

The Green Alliance report says that the chemical industry, the nation’s second-largest manufacturing exporter, contributes 19 per cent of the UK’s industrial emissions and is heavily reliant on fossil fuels – both as a feedstock for making chemicals and as an energy source.

But the sector also “underpins the economy’s ability to decarbonise” because it is key to many products necessary for the low-carbon transition, such as batteries, heat pumps and wind turbines. This means that while the industry needs to move away from virgin fossil fuels to support net-zero across the supply chains, chemicals are required to deploy technologies for net-zero. A competitive and resilient chemical sector is therefore crucial.

The Green Alliance researchers point out that the UK chemical industry has shrunk in recent years. Its output and employment figures contracted by 9 per cent and 7 per cent respectively in 2023. The main challenges include competition from cheap imports and uncompetitive energy costs.

But the UK’s chemical industry remains vitally important to the country’s future. “Retaining it will give the UK greater power to eliminate virgin fossil resources from the value chain, and provide opportunities for growth,” says the report.

Above all, it stresses the need for a vision to help the sector deliver its net-zero ambitions and growth – and to transition towards net-zero itself.

Challenges and opportunities for decarbonisation

The report details six “critical” areas that are key to reducing the climate impact of the industry – carbon capture and storage (CCS) and hydrogen fuel, electrification, resource efficiency, the development of alternative feedstocks, innovation and an increased focus on skills. It offers a series of recommendations for each policy improvement.

An infographic showing what the net-zero chemical industry needs
Click image to enlarge

So far, the government’s strategy to cut emissions in the chemical industry has largely focused on CCS, backed by a promise of £20bn in investment, and a switch from natural gas to hydrogen, supported by £240m in capital expenditure. However, the report says there “is overreliance on too narrow a strategy and that a more diverse set of solutions is needed to match the sector’s needs”.

Looking at other solutions in turn, the Green Alliance researchers found that government support for electrification has been “poor” compared to that for CCS and hydrogen. Barriers to electrification include the price of electricity (industrial electricity prices in the UK have been consistently higher than the EU average) and grid connectivity. The report recommends solutions like expanding eligibility for the British Industry Supercharger scheme and investing in cutting grid connection delays.

As for alternative feedstocks, while there is impetus for change from industry and consumers, these are expensive, with no strategy or policy incentives for businesses to switch to them. The report suggests measures such as a green carbon mandate (this would require a certain amount of carbon in chemicals to come from greener sources), better product standards and labelling, the introduction of incentives and stimulating market innovation via public procurement.

Skills are another area of concern. If the chemical industry is to thrive through the transition to a green economy, it needs to employ “the right people with the right skills”, but barriers include the UK’s STEM skills shortage, negative perceptions of plastics and fossil fuels, poor on-the-job training and inadequate funding of apprenticeships. Solutions suggested in the report range from enhancing industry investment in training to increasing funding for apprenticeships.

On innovation, the report says that while a wealth of ideas are generated in the UK, “only a tiny fraction lead to products domestically manufactured at scale”. It points out that funding pots are complex, overly prescriptive and often too short-term, and recommends restructuring the funding available and prioritising simplicity and adaptability.

The report also highlights a number of areas where addressing regulatory barriers would provide the industry with greater certainty. The sector would like to see a clear commitment from the government towards addressing these. 

The need for a comprehensive vision

Stakeholders believe that the chemical sector should play a significant role in the government’s Industrial Strategy. If plans for a greener, modernised chemical industry are written into the strategy, it could help the transition to net-zero, realise opportunities for growth and generate crucial economic activity in our industrial regions.

Another issue is the complexity of the industry. As well as operating in a huge number of segments – from pharmaceuticals to the automotive industry – it ranges from small and medium-sized enterprises to vast multinational companies. It also has very complex and highly integrated supply chains.  

“Because of the chemical industry’s diversity, but also the fundamental challenge that reaching net-zero poses – switching away from virgin fossil fuels which are the core raw materials for the industry – there is no silver bullet solution,” said Daphne Vlastari, Head of Communications and Government Relations, UK & Ireland, at the multinational chemical company BASF.

“Yes, CCUS [carbon capture, utilisation and storage] and hydrogen as feedstock, not just as an energy vector, will work for a lot of places, but they will not be panaceas. They will not be something that you can deploy everywhere – which is why it's important that we look at alternative feedstocks and at electrification too.

“The sector needs a vision because there's not going to be one solution that makes sense for everyone and that we can seamlessly switch to. We need a suite of mechanisms to support the sector’s net-zero transition.”

A sustainable future within reach

In spite of the challenges and policy shortcomings facing the UK chemical industry as it moves towards a more sustainable future, the Green Alliance researchers found that there are “plenty of opportunities” for the government to make tangible changes to reduce the industry’s climate impact and enhance its competitiveness.

“What has been so good about talking to lots of stakeholders within the sector is that, yes, there is concern but in the end all these people are very invested in wanting the chemical industry to flourish in a sustainable way,” said Will Carr, a policy analyst for Green Alliance.

“The chemical industry is important. It employs a lot of people and it’s important for the future of this country and for the future of the industries that are going to allow us to decarbonise. So let’s make it part of a strategy that makes sense.”

The Policy barriers to greening the chemical industry report was funded by BASF but Green Alliance retained all editorial independence and final approval of the publication. Green Alliance researchers interviewed representatives from the industry, trade and professional associations, academics and civil servants to compile the report.

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