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Day 6 of 815 minutes

Day 6: Transition Finance for Hard-to-Abate Sectors

Financing decarbonisation in steel, cement, chemicals, and other hard-to-abate industries

Steel is everywhere you cannot see it. It holds up the hospitals and schools that appeared in Day 5's discussion of Great British Energy's solar rollout. It forms the towers and foundations of the offshore wind turbines that the Contracts for Difference scheme — from Day 3 — makes financially viable. It carries the electricity those turbines generate across the grid upgrades the National Wealth Fund is helping to finance. And yet steel itself — along with cement, chemicals, aviation, and shipping — presents a decarbonisation problem of an entirely different order. These are not sectors that can simply swap a fossil fuel boiler for a heat pump and call the job done. Their emissions are baked into the chemistry of the production process itself, into the heat required to smelt iron ore, calcine limestone, or crack hydrocarbons. They are called "hard-to-abate" not as an excuse, but as a precise technical description: electrification alone cannot reach them.

Today's module focuses on the financial architecture being built to fund decarbonisation in these sectors — the instruments, institutions, and market signals that can make first-of-a-kind industrial transformation commercially viable. This is where the public-private partnership logic established in Day 1 is most severely tested. The investment sums required are large, the technologies are genuinely unproven at commercial scale, the policy signals are not yet fully coherent, and the sectors involved are globally traded — meaning any solution that makes UK producers cleaner but less competitive simply exports both jobs and emissions.

The Daily Brief (5 mins)

The Cost of the Carbon Gap

On 19 March 2026, the UK government published its Steel Strategy, committing up to £2.5 billion through the National Wealth Fund and related routes to support the transition of the domestic steel industry to electric arc furnace (EAF) production. The strategy set a target to raise the UK's domestic share of its own steel consumption from approximately 30% back toward 40–50%, and from 1 July 2026, cut overall steel import quotas by 60% and raised maximum tariffs to 50%, framing domestic green steel production as simultaneously a net-zero and a national security priority.

That same week, the Transition Finance Council (TFC) — launched in February 2025 by the UK government and the City of London Corporation — published an exposure draft of its Transition Finance Guidelines, a voluntary framework to help banks, asset managers, and institutional investors assess whether their lending and investment into high-emitting companies genuinely supports credible decarbonisation. More than a dozen major financial institutions, including NatWest, Standard Chartered, Lloyds Banking Group, and Santander, had begun testing the guidelines before publication. Barclays confirmed it would incorporate the final guidelines into its own Transition Finance Framework.

The proximity of these two events in the same month is not coincidental. They represent the same problem approached from two angles: the government trying to send an investment signal strong enough to move private capital, and the financial sector trying to build the credibility infrastructure that lets it respond to that signal without accusations of greenwash.

The central question for Day 6 is whether these two pieces — industrial policy on one side, financial market integrity on the other — are moving fast enough, and in enough alignment, to fund the transition of sectors that together represent a substantial share of UK industrial emissions.

The Deep Dive (7 mins)

1. The UK ETS as a Foundation — and Its Limits

The UK Emissions Trading Scheme (UK ETS), which replaced the country's participation in the EU ETS after Brexit and formally launched in May 2021, is the primary market-based mechanism for putting a price on industrial carbon emissions. Approximately 1,000 industrial and power installations are covered, along with around 400 aircraft operators. In 2026, the scheme expanded further: domestic maritime emissions from vessels of 5,000 gross tonnes or above joined the UK ETS from 1 July 2026, and the waste sector began a voluntary monitoring and reporting period ahead of full inclusion in 2028.

The scheme operates as a cap-and-trade system. A declining annual cap of total allowances creates scarcity, and covered entities must surrender one UK Allowance (UKA) for every tonne of CO₂-equivalent they emit. Companies with insufficient allowances must buy them from other participants or at government auction. The government set the 2026 Auction Reserve Price — the minimum below which allowances cannot be sold — at £28 per tonne, up from £22 in 2025, inflation-proofed and set to rise with GDP deflator data from 2027. The civil penalty price for 2026, calculated as the average 2025 secondary market price, was confirmed at £49.41 per tonne. The cap itself is on a trajectory to fall from 156 million tonnes in 2021 to approximately 50 million tonnes by 2030.

The theory is sound: a rising carbon price increases the relative economics of clean production and creates an incentive to invest in decarbonisation ahead of the compliance curve. But the practice has been messier. The UK ETS price spent most of 2023–2025 trading in the £30–£60 range — well below the levels seen in the EU ETS, where reforms after 2018 pushed prices above €80 per tonne. The Institute for Energy Economics and Financial Analysis (IEEFA) estimated that the UK's lower carbon pricing relative to the EU resulted in over £2.9 billion in lost government revenues over two years, revenues that could otherwise have been recycled into industrial decarbonisation support. The cause was in part structural: the UK ETS issued more free allowances than the tight supply conditions of the EU ETS, suppressing demand for purchased allowances.

The implications for hard-to-abate sectors are direct. A carbon price of £49 per tonne is meaningful but not yet sufficient to shift the investment calculus in sectors where the alternative — continuing with existing processes — remains relatively cheap while carbon budgets are still accumulating free allocation headroom. The Green Alliance has estimated that full carbon pricing, without free allocation shielding, would make EAF steelmaking clearly cheaper than relining a blast furnace even at current electricity prices. The free allocation regime delays that crossover.

The government is aware of this tension. From 2027, free allocations for sectors covered by the UK Carbon Border Adjustment Mechanism (CBAM) — which launches on 1 January 2027, covering aluminium, cement, fertilisers, hydrogen, iron, and steel — will begin a gradual phase-out lasting approximately nine years. The CBAM replaces free allocation as the primary protection against carbon leakage (the risk that producers move operations to countries with weaker climate policy). Once the CBAM is fully operational, there will be less justification for shielding domestic producers from the full carbon price, and the price signal to decarbonise will strengthen accordingly. The UK and EU also announced in May 2025 that they are working toward linking the two ETS systems, which, if realised, would raise the effective UK carbon price toward EU levels and materially shift the investment case across all covered sectors.

2. CCUS and the Cluster Sequencing Programme

For sectors where electrification alone cannot eliminate process emissions — cement, chemicals, certain power generation applications — Carbon Capture, Usage and Storage (CCUS) is not an optional extra. The Climate Change Committee considers it essential to meeting Carbon Budget 6 (2033–2037) and net zero by 2050.

The UK government's approach is organised around industrial clusters: geographic concentrations of heavy industry that share common CO₂ transport and storage infrastructure. The logic is that CCUS only becomes commercially viable at scale, when multiple emitters can share pipeline and geological storage costs. Two Track-1 clusters were selected in 2021: HyNet, covering Merseyside and North Wales, with CO₂ transport and storage operated by Eni; and the East Coast Cluster, covering Teesside and Humberside, led by the Northern Endurance Partnership (BP, TotalEnergies, and Equinor). In October 2024, the government committed £21.7 billion over 25 years to support the first five projects across these clusters. The 2025 Spending Review confirmed funding for the build-out of both HyNet and the East Coast Cluster, and provided development funding for two Track-2 clusters: the Acorn Project in Scotland (targeting 5 million tonnes of CO₂ storage per year by 2030) and Viking CCS in the Humber (aiming for 15 million tonnes per year by 2035). The government's total parliamentary CCUS commitment, including contingent liabilities, stands at up to £34 billion.

The CCUS framework includes specific business models for each stage of the value chain — capture, transport, and storage — with government providing both capital grants and "top-up" revenue payments to make projects economically viable against the low current carbon price. By early 2026, contracts had been signed for the first two East Coast Cluster projects: Net Zero Teesside (a gas-fired power station with carbon capture) and the Northern Endurance Partnership transport and storage network, both expected to begin operations in 2028. At HyNet, the Protos energy-from-waste facility and the Padeswood cement plant — operated by Heidelberg Materials UK — reached financial close, marking the UK's first carbon-capture-enabled cement plant. These are genuinely first-of-a-kind projects, and the CCUSA's Delivery Plan Update 2025 identified over 100 projects in development with a potential combined capture capacity of 77 million tonnes of CO₂ per year in the pipeline across the UK.

But the pace of delivery remains slower than originally planned. The National Audit Office noted in its scrutiny of the programme that the government's original ambition — to capture 20–30 million tonnes per year by 2030 — is no longer considered achievable. The NAO also flagged that the CCUS programme involves a high-risk approach to unproven technologies backed by large amounts of public money, and that value-for-money assessments will need to be revisited as the technology evolves. The key risk is dependency: if the Seventh Carbon Budget's requirement for industrial decarbonisation is not met because CCUS clusters delivered late, there is no simple substitute technology waiting in reserve for sectors like cement.

3. Green Steel — and the Structural Constraint

The March 2026 Steel Strategy is the most detailed example of what sector-specific transition finance looks like in practice. The strategy's core technology choice is the Electric Arc Furnace (EAF): a production method that uses high-intensity electric current to melt recycled scrap steel, rather than smelting virgin iron ore using coking coal in a blast furnace. EAFs are not new technology, but their adoption in the UK is now accelerating through necessity. The last blast furnace at Tata Steel's Port Talbot site closed in September 2024, with construction on a £1.25 billion EAF — part-funded by the government's £500 million grant — beginning in July 2025 and targeting operations by end-2027. The new facility will produce approximately 3 million tonnes of steel per year with a 90% reduction in on-site CO₂ emissions, equivalent to roughly 1.5% of UK total direct emissions.

The NWF's £2.5 billion commitment to the steel sector — above and beyond the Port Talbot grant — can be deployed using the full range of instruments established in Day 2: senior loans, mezzanine debt, guarantees, equity, and credit enhancements. The strategy's ambition is to raise the UK's domestic steel production share to 50% of consumption, with EAFs explicitly confirmed as the future of British steelmaking for the medium term.

But the strategy contains a tension it acknowledges only partially. EAFs depend on scrap steel as their primary feedstock. The UK generates approximately 10 million tonnes of scrap per year — but currently exports approximately 80% of it. A future in which multiple large EAFs operate at scale requires either a dramatic shift in domestic scrap retention or the development of an alternative primary production route. The strategy's long-run answer is direct reduced iron (DRI), a process that uses hydrogen to reduce iron ore into metallic iron without coke, which can then be processed in EAFs. But DRI in the UK is entirely dependent on a green hydrogen supply chain that does not yet exist at commercial scale. The government commissioned the Materials Processing Institute to review DRI viability, but the strategy deferred the investment decision, stating that DRI is the long-run pathway while committing only to a cross-government scrap working group from May 2026.

The hydrogen question connects directly to the NWF's £500 million allocation for green hydrogen — a figure that was established at the fund's launch and has not been revised upward despite growing evidence that the hydrogen economy requires substantially larger public investment to get off the ground. The July 2025 announcement of £500 million to support one regional hydrogen transport and storage network — with HyNet and the East Coast Cluster in direct competition in a 2026 allocation round to determine which network proceeds first — illustrates the scarcity of public capital relative to the scale of infrastructure needed.

4. The Transition Finance Council and the Credibility Problem

The financial sector's challenge in hard-to-abate sectors is not primarily a capital shortage. Institutional capital exists in abundance. The challenge is the credibility problem: how does a bank or asset manager distinguish between a steel company that is genuinely transitioning — investing in EAFs, building scrap supply chains, planning for eventual hydrogen-DRI — and one that is borrowing under a "transition" label while continuing business as usual? Without a credible classification framework, the label becomes meaningless, and institutional investors — already sensitive to greenwashing litigation risk — pull back from the whole category.

The Transition Finance Market Review (TFMR), published in October 2024, identified this as the primary structural barrier to transition finance at scale. Its central recommendation was to establish the Transition Finance Council, which launched in February 2025, housed within the City of London Corporation. The TFC's exposure draft guidelines, published on 26 March 2026, are a voluntary framework designed to help capital providers assess whether an entity in a high-emitting or hard-to-abate sector meets a credible transition standard. The framework is structured around entity-level assessment rather than project-level — meaning it evaluates the company's overall transition trajectory, not just a specific green bond or sustainability-linked loan.

The guidelines distinguish between three types of transition finance: financing specific transition activities (individual projects), financing climate solutions companies, and financing transitioning entities — the last being the most complex and the most important for hard-to-abate sectors. A cement producer is not a climate solutions company. But if it is credibly decarbonising — installing CCUS, switching fuels, developing lower-carbon product lines — it should be able to access capital on terms that reflect that trajectory. The TFC guidelines are intended to make that distinction legible to capital markets.

Over 80 senior leaders from finance, industry, policy, and civil society sit on the TFC, and more than a dozen institutions — including NatWest, Lloyds, Santander, and Carlyle Group — began testing the guidelines before the exposure draft was published. The TFC also published a set of policy requests to government alongside the guidelines, including: clarifying fiduciary duties to make clear that transition finance falls within pension trustees' mandate; strengthening the market for transition-labelled instruments (transition bonds and sustainability-linked loans with credible covenants); and scaling the use of government-backed guarantees to reduce first-loss risk on transition investments.

The interaction with the UK SRS S2 requirement for transition plan disclosure — covered in Day 4 — is direct: once companies in hard-to-abate sectors are required to publish credible transition plans under UK SRS S2, those plans become the primary input into TFC-style assessments. The disclosure stack and the transition finance framework are designed to reinforce each other.

The Designer's Corner (3 mins)

Design Challenge: Making Transition Pathways Legible

Day 1's Designer's Corner identified "temporal compression" as a foundational problem in green finance interfaces — the mismatch between financial dashboards built around quarterly cycles and infrastructure assets with 25–40 year lifespans. Hard-to-abate sector transition finance intensifies that problem. A steel company's pathway from blast furnace to EAF to DRI-hydrogen is a technology stack that unfolds over decades, with investment decisions made now that only deliver their full emissions impact in the 2030s and 2040s. For a product designer working on transition finance platforms, institutional investor tools, or industrial sustainability dashboards, the core challenge is: how do you show a pathway rather than a point-in-time position?

Problem 1: The binary trap. Most ESG data tools classify companies as "green" or "not green" — included in or excluded from a sustainable finance classification. This binary works well for pure-play renewables but is actively misleading for transitioning heavy industry. A cement company operating dirty plants today but committed to CCUS by 2030 looks identical to a cement company with no plan at all, if your interface only shows current carbon intensity. Design implication: Build "trajectory views" that display current emissions against a disclosed or modelled pathway, with milestone flags (e.g., "CCUS contract signed," "EAF construction started") shown as events on a timeline. The Transition Finance Council's framework is explicitly built around forward-looking assessment; your interface needs a forward axis, not just a snapshot.

Problem 2: Instrument complexity. The financial instruments available for transition finance — senior loans, mezzanine debt, guarantees, sustainability-linked bonds with step-up coupons, government-backed first-loss tranches — create a capital structure that most users of investment platforms cannot parse. A pension fund manager assessing a NWF-backed transition loan to a steel plant needs to understand not just the headline risk-return profile, but where in the capital stack the NWF sits, what the guarantee structure covers, and how the sustainability covenants interact with credit events. This echoes the "blended finance literacy" problem in Day 2's Designer's Corner — but the instrument mix in transition finance is even more complex. Design implication: Develop waterfall diagrams specific to transition finance structures, showing the order of loss absorption from NWF first-loss through mezzanine to senior debt. Include plain-language annotations of sustainability covenants and what triggers them. Treat the capital stack as a navigable information object, not a static term sheet footnote.

Problem 3: The hydrogen dependency cliff. Multiple sectors — green steel via DRI, shipping via ammonia or hydrogen propulsion, CCUS-enabled blue hydrogen as a bridge fuel — share a common dependency: the availability of affordable, large-scale green or low-carbon hydrogen. If that dependency is not surfaced in portfolio risk tools, investors in these sectors may be collectively underpricing a correlated technology risk. A green steel fund and a sustainable shipping fund may both look diversified by sector but share a single point of failure: the hydrogen supply chain. Design implication: Build shared dependency maps that sit above sector classifications, showing which otherwise-distinct investments share underlying infrastructure, technology, or policy preconditions. This is the institutional literacy problem from Day 1 — but at the supply-chain level. The dependency map should update as preconditions are met (e.g., "HyNet hydrogen network allocation announced"), making risk reduction legible as it occurs.

Key Terms

TermDefinition
Hard-to-Abate SectorsIndustries — including steel, cement, chemicals, aviation, and shipping — where emissions arise directly from production chemistry or fuel combustion at temperatures that cannot yet be cost-effectively electrified, requiring alternative decarbonisation pathways such as CCUS, hydrogen, or process redesign.
Electric Arc Furnace (EAF)A steelmaking technology that melts recycled scrap steel using high-intensity electric current, rather than smelting virgin iron ore in a blast furnace using coking coal. EAFs can cut on-site CO₂ emissions by up to 90% compared to blast furnace routes, but require abundant scrap feedstock and low-cost electricity.
Direct Reduced Iron (DRI)A primary steelmaking process that uses hydrogen (or natural gas) to chemically reduce iron ore into metallic iron, which is then processed in an EAF. Green hydrogen-based DRI eliminates CO₂ emissions from the ironmaking step, but requires a large-scale, low-cost hydrogen supply chain.
Carbon LeakageThe risk that carbon pricing or regulation causes industrial producers to relocate operations to countries with weaker climate policy, shifting emissions abroad rather than reducing them globally. Addressed in the UK ETS through free allocation (phasing out from 2027) and the UK CBAM (launching January 2027).
Carbon Border Adjustment Mechanism (CBAM)A carbon pricing instrument that applies a charge to imported goods — initially aluminium, cement, fertilisers, hydrogen, iron, and steel — equivalent to the cost of complying with domestic carbon pricing. The UK CBAM launches 1 January 2027 and is designed to level the competitive playing field as domestic free allocation is phased out.
Transition FinanceCapital deployed to finance the decarbonisation of companies in high-emitting or hard-to-abate sectors, based on a credible transition plan. Distinct from green finance (which targets already-clean activities) and defined by the UK Transition Finance Council's March 2026 guidelines as entity-level assessment of a company's overall transition trajectory.

Sources

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