case-study

During my twenty five years working in the asphalt pavement industry on transportation policy, I have seen the asphalt pavement industry and its markets slowly evolve, staying relatively static over that time. From day one, highway funding (tons, tons, tons) was always a top industry issue, especially as the Interstate Highway System was nearing completion and the 18.3 cents per gallon Federal gas tax was no longer sufficient to provide the revenues to maintain the network of highway, roads and bridges that make up the National Highway System. While highway funding is a perennial issue for the asphalt industry, the passage of the Infrastructure Investment and Jobs Act (IIJA) in 2021 and the Inflation Reduction Act (IRA) in 2022 has ushered in a new industrial age for the asphalt pavement industry, an era whose objective is focused on reducing carbon emissions. The pace of change has been so profound that it was identified as a topic of concern during the State Asphalt Pavement Associations annual meeting held earlier this month(1). A paper just published in the Harvard Business Review entitled: The New Era of Industrial Policy is Here(2), by Willy C. Shih, describes how governments around the world are responding to global challenges such as climate change by intervening in the private sector through industrial policies to achieve goals that traditional markets are not likely to achieve on their own. The paper describes the various ways government can establish new industrial policies, and one of those ways is through supply-side tools. Tax credits and grants for low-carbon asphalt plant technologies included in IRA are an example of giving asphalt companies incentives to invest on such technologies. On the demand-side, another form of industrial policy, grants and incentives for low-embodied carbon asphalt mix are expected to increase the size of the market for low carbon construction materials. You can see this combination of supply-side and demand-side industrial policies in President Biden’s economic vision centered around an all-of-government strategy to combat the climate crisis through direct public procurement of low-embodied carbon asphalt and investment in industry through tax subsidies and grants(3). Through these actions the Federal government is pushing the asphalt pavement industry to work with its upstream and downstream supply change partners to achieve commercially successful outcomes aligned with President Biden’s industrial policy, a 50-52 percent reduction from 2005 levels in economy-wide net greenhouse gas pollution by 2030(4). The question then becomes, as raised by Mr. Shih in his paper; Do business leaders in the asphalt pavement industry want to (1) comply with the demand-side policy of providing low-embodied carbon asphalt mix and (2) accept the supply-side subsidies for low-embodied carbon manufacturing technologies? Anecdotally, I would say it is too early to tell, but my sense is there are some business leaders in the asphalt pavement industry who are beginning to understand the implications of this new industrial low carbon policy. These business leaders are interested in understanding the new opportunities presented by both IIJA formula programs and grants, and they are interested in applying for the IRS 48c tax credit of 30 percent to swap out aging technology at asphalt plants for newer, cleaner technologies to reduce all emissions(5). KPMG International recently released its 2023 Global Construction Survey entitled Familiar Challenges-New Approaches(6) identifies this trend. Three hundred engineering and construction (E&C) firms from around the globe participated in the survey. On the question of Environmental, Social, and Governance (ES&G) issue, the survey found 91 percent of the E&C respondents see a benefit in ESG and 54% of these are aggressively pursing the issue. Why? According to the survey, they see reputational enhancements (e.g., zoning an asphalt plant) and competitive advantage (e.g., growing market share) in doing so. And while owners such as state governments may be more concerned with reducing GHG, according to the survey, construction firms are beginning to grasp the value of giving the customer what it wants, low-embodied carbon asphalt pavement. Respondents listed energy efficiency, reducing construction waste, and more efficient use of materials as key strategies to meet the new industrial policy objectives. With “Biden Economics” ushering in a new era of industrial policy focused on addressing the climate crisis(7), and enactment of major legislation that is providing the subsidies for technology innovation and the funding the market demand for low embodied carbon asphalt mix, the rising influence of ESG is unstoppable. Addressing carbon emissions at the asphalt plant, during construction, and beyond will be a core elements in every asphalt pavement producers business strategy. Company owners need to educate themselves on the legislation and agency guidance, understand the objectives and goals of these new highway policies, and work to shape these policies into practice (e.g., Carbon Reduction Program.(8)) That is the only way asphalt pavement companies will be able to thrive in this new industrial policy era we have entered. Be ready. References: 1. https://www.linkedin.com/search/results/content/?keywords=calapa&sid=Oq%40&update=urn%3Ali%3Afs_updateV2%3A(urn%3Ali%3Aactivity%3A7096813995055067136%2CBLENDED_SEARCH_FEED%2CEMPTY%2CDEFAULT%2Cfalse) 2. https://hbr.org/2023/09/the-new-era-of-industrial-policy-is-here 3. https://www.whitehouse.gov/briefing-room/statements-releases/2022/09/15/fact-sheet-biden-harris-administration-announces-new-buy-clean-actions-to-ensure-american-manufacturing-leads-in-the-21st-century/ 4. https://www.whitehouse.gov/briefing-room/statements-releases/2021/04/22/fact-sheet-president-biden-sets-2030-greenhouse-gas-pollution-reduction-target-aimed-at-creating-good-paying-union-jobs-and-securing-u-s-leadership-on-clean-energy-technologies/ 5. https://www.irs.gov/credits-deductions/businesses/advanced-energy-project-credit 6. https://kpmg.com/xx/en/home/insights/2023/05/2023-global-construction-survey.html 7. https://www.whitehouse.gov/briefing-room/statements-releases/2023/08/16/fact-sheet-one-year-in-president-bidens-inflation-reduction-act-is-driving-historic-climate-action-and-investing-in-america-to-create-good-paying-jobs-and-reduce-costs/ 8. https://www.fhwa.dot.gov/bipartisan-infrastructure-law/crp_fact_sheet.cfm