What it takes to transform core sectors
Decarbonizing industry, building and transport
While electricity often headlines the energy transition, the real test lies in decarbonizing the sectors we use every day – industry, buildings, and transport. These systems account for the majority of global fossil energy use and remain stubbornly difficult to transform. Their complexity, scale, and dependence on legacy infrastructure demand a broader, deeper transition strategy.
In the past year, energy efficiency has re-emerged as a powerful lever across sectors, driven by high prices and supply chain vulnerabilities. Circularity is gaining traction in packaging and construction, while clean heating and electrified mobility continue to grow – but unevenly, and not fast enough. Challenges like upfront costs, policy fragmentation, and material constraints persist.
The industry, buildings, and transport sectors remain among the largest consumers of fossil energy and materials and are widely recognized as priority areas for accelerated decarbonization. Recent analyses have identified three urgent action areas: improving energy efficiency (e.g. through process optimization and retrofits), embedding circularity by reusing materials and reducing waste, and decarbonizing heat via electrification, district heating, hydrogen, and bio-based solutions. These levers are essential not only for reducing direct emissions but also for enabling cross-sector integration and systemic change. In the transport sector, the shift to electric drivetrains is advancing, especially in passenger transport, while hard-to-abate segments like freight, aviation, and shipping require a broader mix of low-carbon fuels, highlighting the diversity of solutions needed to fully decarbonize mobility. In addition, strengthening resilience and securing access to critical raw materials and goods are becoming key drivers of the transition, reinforcing the importance of reducing dependence on fossil resources and single supply sources.
What has changed in the past year
In the industry sector, energy efficiency re-emerged as a key focus amid persistently high energy prices and growing energy security concerns. Process optimization and equipment upgrades gained renewed attention, supported by strengthened policy frameworks such as the EU’s revised Energy Efficiency Directive and a €350 billion investment package. Circularity advanced in select value chains, including construction materials and packaging, but remains limited across most industrial processes. Meanwhile, decarbonization technologies, such as fossil-free steel, low-carbon cement, and green chemicals, remain largely in pilot or early scale-up stages. Regulatory drivers are evolving, with updates to the Corporate Sustainability Reporting Directive (CSRD), although concerns persist around reduced transparency and climate accountability.
In the buildings sector, efficiency improvements and retrofits gained renewed importance in response to elevated energy costs. In Nordic and Western European markets, deployment of heat pumps and district heating continued, contributing to lower emissions from space and water heating. However, progress remains uneven: adoption in Eastern Europe and many regions outside Europe is lagging due to high upfront costs, grid capacity constraints, and policy uncertainty. Without targeted incentives and regulatory clarity, expectations for future heat pump deployment remain subdued.
In the transport sector, electrification continues to advance, especially for passenger vehicles. However, short-term momentum has slowed in some regions due to declining oil prices, economic uncertainty, and flattening EV sales, particularly in Europe and the US. Meanwhile, China’s rapid progress in electrification and EV production is giving it an increasingly dominant role, putting competitive pressure on other major markets. Electrification of public and freight transport faces infrastructure bottlenecks and regulatory delays, particularly for heavy-duty vehicles. At the same time, sustainable fuels are gaining strategic importance: the EU adopted binding mandates for sustainable aviation fuels (SAFs), and green shipping corridors and pilot projects using ammonia and methanol are advancing, though commercial deployment remains limited.
Outlook and key action points
Across sectors, the transition must move beyond incremental gains toward system-wide transformation. In industry, this includes scaling energy and resource efficiency, electrifying process heat, and embedding circular design. In the buildings sector, accelerating retrofits, expanding clean heating solutions, and strengthening building codes are essential. These efforts require stronger carbon pricing, targeted regulation, and increased funding for innovation.
Public-private partnerships will be critical to share transition costs and derisk first-of-a-kind
investments, especially for capital-intensive industrial and infrastructure projects. Sustained policy support for energy efficiency and circularity must be reinforced through effective implementation of instruments such as the Energy Efficiency Directive, CSRD, and the EU Taxonomy. In the transport sector, key priorities include accelerating modal shift, electrification of road and rail, and rapid deployment of zero-emission infrastructure. Policy actions should align fuel taxation with climate targets, expand public transport and rail freight, and provide clear frameworks for battery-electric and hydrogen-powered heavy-duty vehicles. For aviation, sustainable fuels must be scaled via blending mandates and investment incentives, while in shipping, progress depends on supporting green corridors and early adoption of zero-carbon fuels such as ammonia and methanol.
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