NEOS Advisory: Decarbonization pathways for power, transport, industry and buildings

Decarbonizing the economy is a central objective of national transformation agendas, with some sectors prioritized over others. Accounting for around 65% of total greenhouse gas emissions, the power, transport, industry, and buildings sectors are justifiably at the forefront of decarbonization efforts.

Together, these four sectors are responsible for roughly three-quarters of global greenhouse gas (GHG) emissions, underscoring the urgency of translating ambition into tangible action.

Experts from NEOS Advisory outline how each of these sectors can be decarbonized, applying a shared decarbonization framework and a common analytical lens centered on three key questions:

• What are the main decarbonization pathways in each sector?
• Which enabling conditions are necessary for these pathways to scale?
• What constraints and risks may slow progress or generate unintended consequences?

Across sectors, the fundamental levers of decarbonization can be grouped into four broad categories:

Energy efficiency and demand reduction
Reducing the amount of energy required to deliver services (for example: insulating buildings, optimizing industrial processes, modal shifts in transport).

Electrification
Substituting direct fossil fuel use (coal, oil, gas) with electricity in end-uses such as heating, mobility, and industrial processes, on the assumption that electricity becomes progressively low-carbon.

Fuel switching and low-carbon energy carriers
Transitioning from high-carbon fuels to renewables, low-carbon hydrogen and its derivatives, sustainable bioenergy, and other synthetic fuels.

Carbon management
Applying carbon capture, utilization and storage (CCUS), nature-based solutions, and emerging carbon removal technologies to capture residual emissions from hard-to-abate sources.

Alongside these levers, there are also several important enablers of decarbonization, such as storage (batteries, pumped hydro, thermal and mechanical storage), smart grids and digitalization (sensors, smart meters, data analytics), demand management (dynamic tariffs, market signals, certificates of origin), incentives (feed-in tariffs, power purchase agreements, net metering), and decentralization of energy systems.

1) Power Generation

Electricity and heat production remains the single largest source of energy-related emissions, responsible for close to 30% of global GHG emissions. Despite rapid growth in renewable energy, fossil fuels – especially coal – remain deeply embedded in many power systems. The IPCC and IEA both conclude that unabated coal generation must be phased out rapidly by mid-century, and new coal projects without CCUS are incompatible with 1.5-2 degrees Celsius pathways.

At the same time, electricity is expected to become the central “backbone” of decarbonization, as transport, buildings, and industry increasingly electrify. This implies a substantial increase in electricity demand even as the sector decarbonizes.

Decarbonization Pathways in Power
The power generation pathways can be organized around three main technology families: renewables, fossil fuels, and nuclear, with CCUS as a cross-cutting option.

Non-dispatchable renewables
Solar PV, onshore and offshore wind, tidal and wave energy form the core of most net-zero scenarios. Their costs have fallen dramatically; solar PV and wind are now the cheapest sources of new bulk power in many markets. However, their variability requires complementary flexibility resources.

Dispatchable renewables
Hydropower, geothermal, concentrating solar power (CSP) with thermal storage, and sustainably sourced bioenergy can provide firm capacity and grid stability. Many systems already rely on hydropower as their main flexible renewable, although climate-driven droughts can undermine this role.

Nuclear
Existing nuclear fleets provide low-carbon baseload power in several countries. New large-scale reactors and small modular reactors (SMRs) are considered in some pathways, though issues of cost, lead time, safety perception, and waste management remain contentious.

Fossil fuels with CCUS
In scenarios allowing residual fossil use, gas- or coal-fired plants with CCUS can provide flexibility and firm capacity. However, deployment lags far behind what is modeled in 1.5-2 degrees Celsius pathways, and concerns persist about cost, storage integrity, and the risk of prolonging fossil dependence.

A practical decarbonization strategy for power systems typically combines:

• rapid deployment of wind and solar;
• reinforcement and digitalization of grids;
• a portfolio of storage solutions and flexible demand; and
• targeted use of dispatchable low-carbon generation (hydro, geothermal, nuclear, or fossil + CCUS) to ensure reliability.

Enablers: Storage, Smart Grids, Demand Management, and Market Design
Decarbonized power systems require a suite of enablers beyond generation technologies. These include:

Electricity storage
Batteries (lithium-ion and emerging chemistries), pumped hydro, thermal storage, flywheels, and gravity-based systems are needed to accommodate variable renewables and to maintain system stability. Short-duration storage can manage diurnal patterns, while longer-duration options are necessary to bridge multi-day or seasonal gaps.

Smart grids and digitalization
Advanced metering, sensors, and automated control systems enable real-time balancing of supply and demand, coordination of distributed energy resources (DERs), and integration of electric vehicles and flexible loads. Digital twins, forecasting tools, and AI-based control systems further enhance resilience and efficiency.

Demand management
Dynamic tariffs, demand response programs, and flexibility markets allow consumers to adjust consumption according to system conditions, effectively turning demand into a resource. Corporate and consumer demand for “green electricity” can be tracked through certificates of origin, enabling voluntary markets and contract-based decarbonization.

Incentive mechanisms and market access
With appropriate regulation, feed-in tariffs (FiTs), competitive auctions, net metering schemes, and long-term power purchase agreements (PPAs) can de-risk investments in renewable generation and storage, especially in markets with limited track records. Competitive retail markets can further support innovation and customer-centric services.

Decentralization
Distributed generation – rooftop solar, community-scale storage, microgrids – can reduce losses, improve resilience, and empower consumers. However, it also requires upgraded network infrastructure and new regulatory models.

Constraints: Grids, Net Load, and Mineral Supply
Decarbonization of power systems faces significant constraints.

First, grid infrastructure often emerges as the bottleneck. Transmission and distribution networks were designed for one-way flows from large centralized plants to passive loads. High shares of variable renewables and distributed generation create bi-directional flows, congestion, and voltage control challenges. These issues can lead to curtailment of renewable output and undermine investment signals.

Second, the concept of “net load” – the difference between total demand and variable renewable generation – becomes central. Systems with high solar penetration experience pronounced “duck curves” where net load falls sharply during midday and ramps steeply in the evening. Managing net load requires flexible generation, storage, and responsive demand; failure to do so can compromise reliability and raise costs.

Third, critical minerals and supply chains present emerging risks. Technologies such as batteries, wind turbines, and solar panels depend on minerals including lithium, cobalt, nickel, and rare earths, raising concerns about geopolitical concentration, environmental and social impacts of mining, and recycling infrastructure.

Finally, policy uncertainty and market dominance by incumbent fossil-fuel generators can slow investment in new technologies. Ensuring transparent, stable regulatory frameworks and fair access to markets is essential for mobilizing private capital at scale.

2) Transport

Global CO2 emissions from transport reached nearly 8 Gt, about 3% more than in the prior year, as aviation rebounded from the pandemic. Road transport alone accounts for roughly 12% of global emissions. Without strong policy intervention, transport demand growth would push emissions far above levels compatible with 1.5-2 degrees Celsius pathways.

Pathways by Mode
Different modes of transport require distinct organizational and technological solutions

Road transport – light-duty vehicles (LDVs)
Battery electric vehicles (EVs) are now the primary decarbonization pathway for cars and light vans. Global EV sales exceeded 17 million in 2024 and have continued to grow, accounting for 20% of car sales that year and a higher share since. Fuel cell vehicles using hydrogen and internal combustion engines running on low-carbon synthetic or biofuels may serve specific niches, but most net-zero scenarios rely on EVs to decarbonize LDVs.

Road transport – buses and trucks
For urban buses and short-haul trucks, battery electric drivetrains are increasingly cost-competitive, especially where charging can be centralized. For long-haul trucking, both battery electric and hydrogen fuel cell trucks are under development and deployment. Synthetic and sustainable biofuels may be used in existing fleets, but their availability is constrained and they are also needed in aviation and shipping.

Rail
Rail is relatively easy to decarbonize, as most new lines can be fully electrified and run on low-carbon electricity. Hydrogen or battery trains can substitute for diesel locomotives on non-electrified or remote lines where electrification is not economical.

Aviation
Aviation is one of the hardest sectors to decarbonize because of strict weight and energy density constraints. For short-range flights, hybrid-electric and fully electric aircraft, as well as hydrogen fuel cell concepts, are being piloted.

For medium and long-haul aviation, the primary pathway relies on sustainable aviation fuels (SAF) – advanced biofuels and synthetic e-fuels produced from green hydrogen and captured CO2. These fuels can be blended into existing jet fuel and used in current aircraft, but their cost and availability remain major challenges.

Maritime shipping
Shipping currently contributes about 3% of global GHG emissions but could rise to 5-8% by 2050 if left unchecked. Decarbonization will likely rely on a combination of green ammonia, e-methanol, biofuels, battery-electric ferries, and wind-assisted propulsion.

Recent studies suggest that low-carbon fuels could reduce shipping emissions by over 70% by mid-century, especially if accompanied by carbon pricing and efficiency measures such as hull optimization and digital weather-routing.

Enablers: Policy, Charging Infrastructure, Smart Grids, and Market Signals
There are several transport enablers: policy and regulation, R&D, charging infrastructure, smart grids and digitalization, market signals, and retail competition.

Policy and regulation
Fuel economy standards, CO2 performance standards for vehicles, zero-emission vehicle mandates, renewable fuel blending mandates, and carbon pricing all play critical roles. For shipping and aviation, international institutions such as the IMO and ICAO are central, though recent delays in IMO’s net-zero framework highlight the fragility of multilateral progress.

Charging and refuelling infrastructure
Reliable, ubiquitous charging is essential for EV adoption. This includes fast-charging corridors for long-distance travel and depot charging for fleets, as well as grid-friendly “smart charging” that shifts demand to off-peak periods. Hydrogen and e-fuel infrastructure – encompassing pipelines, bunkering facilities, and refueling stations – must be developed in parallel for heavy transport and shipping.

Smart grid integration and digitalization
EVs can become flexible loads and even distributed storage assets. Vehicle-to-grid (V2G) technologies, coordinated charging platforms, and digital fleet management systems can minimize grid stress and enhance system reliability.

Market signals and retail competition
Time-of-use tariffs, congestion charges, and differentiated road pricing can accelerate shifts to low-emission modes and optimize charging behaviour.

Constraints: Grids, Minerals, and Cost
The main constraints are grid capacity, critical minerals, and cost.

Large-scale EV adoption increases power demand and can overload local distribution networks if charging is unmanaged. Reinforcing networks, deploying smart chargers, and incentivizing off-peak charging can mitigate this, but require capital and careful planning.

Battery and motor technologies depend on critical minerals, raising concerns about supply security, environmental impacts, and labour conditions. This calls for diversified supply chains, improved recycling, and research into alternative chemistries with lower critical mineral intensity.

Finally, while the total cost of ownership of EVs is falling and can already be lower than internal combustion engine vehicles in many segments, upfront purchase costs and lack of financing options remain barriers for many consumers, especially in lower-income markets. Similar cost issues arise for hydrogen trucks, SAF, and green shipping fuels, which are currently substantially more expensive than fossil alternatives.

3) Industry

Industry – including steel, cement, chemicals, refining, and other manufacturing – is responsible for a large share of global emissions. The World Economic Forum’s Net-Zero Industry Tracker highlights that many industrial processes require high-temperature heat above 500 degrees Celsius, making direct electrification technically challenging with today’s commercial technologies. For example, high-temperature heat represents about 83% of energy use in steel and 45% in cement.

Cement alone is responsible for 7% to 8% of global CO2 emissions, driven by both fuel combustion and process emissions from the calcination of limestone. Demand for cement and steel is expected to grow, particularly in the Global South, which complicates decarbonization.

Decarbonization Pathways in Industry
Industrial pathways can be grouped into electrification, alternative heat and fuels, process redesign and alternative feedstocks, and fossil fuels with CCUS.

Energy efficiency and digital optimization
Before switching fuels or technologies, industries can often reduce energy demand through improved process control, waste heat recovery, advanced materials, and digital optimization (for example: AI-driven control systems). These measures often have short payback periods and can prepare facilities for deeper changes.

Electrification of low- and medium-temperature heat
For processes below ~400–500 degrees Celsius, industrial heat pumps, electric boilers, and electric furnaces can substitute for fossil fuel combustion. As with buildings, the decarbonization impact depends on the carbon intensity of electricity; hence, industrial electrification must be coordinated with power sector decarbonization.

Green hydrogen and alternative fuels for high-temperature heat
For high-temperature processes, green hydrogen (produced from renewable electricity) can replace fossil fuels either in combustion or as a reducing agent. For example, direct reduced iron (DRI) using hydrogen instead of coal-based blast furnaces is a leading pathway for low-carbon steel. In cement and chemicals, hydrogen, bioenergy, and synthetic fuels can provide high-grade heat where electrification is not yet practical.

Process redesign and alternative feedstocks
Deep decarbonization often requires re-engineering core industrial processes. In cement, this includes developing clinker-efficient or clinker-free cements, using supplementary cementitious materials (SCMs), and exploring novel binders such as calcined clays or bio-based materials. In chemicals, it involves shifting from fossil feedstocks to bio-based or CO2-derived inputs and adopting electrified processes such as electric crackers.

CCUS for process and residual emissions
Some industrial emissions – particularly from calcination in cement – are intrinsic to the chemical process and cannot be eliminated by fuel switching alone. CCUS is therefore considered indispensable for near-complete decarbonization in cement and certain chemical processes. Demonstration projects, such as large-scale CCS on cement plants in Europe, are under development, though costs remain high.

Enablers and Constraints
Policy and regulation, incentives, R&D, and grid investment are considered as critical enablers, while cost, waste management, and social acceptance serve as key constraints.

Industrial decarbonization in practice requires:

• Stable, credible policy signals. Carbon pricing, performance standards, public procurement of low-carbon materials, and border adjustment mechanisms can create demand for low-carbon industrial products. Public–private partnerships often play a role in early projects.
• Infrastructure for hydrogen, CO2, and electricity. Multi-user hydrogen and CO2 networks can reduce costs and risks for individual plants and create industrial clusters or hubs that benefit from shared infrastructure.
• R&D, demonstration, and scaling support. Many industrial decarbonization technologies are at pilot or early commercial stages. Grants, contracts for difference, and risk-sharing mechanisms are often needed to move from RD&D to large-scale deployment.

Cost remains the central constraint. Early projects can be significantly more expensive than conventional technologies, and cost pass-through to consumers is often politically sensitive. Waste management and material supply issues – such as sourcing sustainable biomass, ensuring responsible mining of critical minerals, and managing new waste streams like used hydrogen infrastructure – also pose challenges.

In addition, social acceptance is crucial where industrial transitions are linked to employment and regional development; poorly managed transitions can trigger resistance from communities and workers.

4) Buildings
The buildings sector – encompassing residential, commercial, and public buildings – accounts for around one-third of global final energy consumption and over one-third of energy-related CO2 emissions when indirect emissions from electricity are included.

Building emissions arise from two main sources: (i) direct combustion of fossil fuels for space and water heating, cooking, and, in some regions, onsite power; and (ii) electricity use for cooling, appliances, lighting, and services, produced upstream in the power sector.

Because of this dual role, building decarbonization is both a demand-side and supply-side story. On the demand side, efficiency and better design reduce energy needs. On the supply side, electrification and modern heat networks enable clean energy to displace fossil fuels.

Decarbonization Pathways in Buildings
The key decarbonization pathways focus around energy efficiency, electrification of heat, and increased use of renewable and low-carbon heat sources

• Energy efficiency and building fabric improvements.
• Deep energy retrofits – improving insulation, windows, air-tightness, and ventilation – can cut heating and cooling needs dramatically, particularly in cold and temperate climates. Modern building codes that mandate “zero-carbon ready” or nearly zero-energy buildings for new construction are central to net-zero scenarios.
• Electrification of low- and medium-temperature heat.
• Heat pumps (air-source, ground-source, and water-source) are a cornerstone of building decarbonization. By moving heat rather than generating it through combustion, they can deliver three to four units of heat for each unit of electricity. This efficiency makes them cost-competitive over their lifetime even when installation costs are higher than fossil boilers, especially if electricity is decarbonized. Electric boilers can complement heat pumps for peak loads or specific applications.
• District heating and renewable heat sources. In dense urban areas, district heating networks can deliver low-carbon heat from centralized sources such as large heat pumps, geothermal plants, waste heat from industry or data centers, and solar thermal fields. The IEA notes that integrating district heating into building standards and zoning policies is crucial for achieving zero-carbon-ready building stocks.
• On-site and building-integrated renewables. Rooftop solar PV combined with battery storage and smart controls allows buildings to generate part of their electricity demand, reduce grid peaks, and provide flexibility. In some regions, solar thermal collectors can also meet a large share of domestic hot water demand.

Enablers: Regulation, Subsidized Re-wiring, Digitalization
Building decarbonization depends heavily on policy and regulation, subsidized re-wiring, district heating, and digitalization.

• Policy and regulation: Building codes, minimum energy performance standards for appliances and equipment, and phase-out dates for fossil boilers are among the most powerful tools. Carbon pricing, or taxes on fossil heating fuels, can further shift incentives.
• Subsidized re-wiring and infrastructure upgrades: Heat pumps, EV chargers, and electric cooking all increase electrical loads. Many existing buildings require upgrades to wiring and panels before these technologies can be installed safely. Public support for re-wiring, especially for low-income households and older building stocks, can prevent decarbonization from stalling on infrastructure constraints.
• District heating and planning: Public authorities typically play a coordinating role in planning and regulating district heating systems, including decisions about zones where connection may eventually be mandatory. Long-term policy visibility helps utilities and investors finance and build low-carbon networks.
• Digitalization and smart controls: Smart thermostats, building management systems, and demand response programs can optimize heating and cooling profiles, shifting loads to times when renewable electricity is abundant and cheap.

Constraints: Cost, Split Incentives, and Acceptance
Cost is the primary constraint in buildings.

Upfront investment for deep retrofits, heat pumps, or district heating connections can be substantial. Even when lifetime costs are lower, many households and small businesses are capital-constrained or sensitive to payback periods. Financial instruments – such as concessional loans, on-bill financing, and energy-service company (ESCO) models – can help bridge this gap.

A second constraint is the “split incentive” problem: building owners decide whether to invest, but tenants pay energy bills. Without appropriate regulatory mechanisms (e.g., minimum rental property standards) or innovative contracts, landlords may under-invest in efficiency and low-carbon technologies.

Third, social acceptance and awareness matter. The rapid rollout of heat pumps and other new technologies can be slowed by concerns about noise, aesthetics, or reliability, especially in historic or high-value buildings. Experience from, for example, UK churches adopting heat pumps shows that tailored engineering, stakeholder engagement, and communication about comfort and running cost benefits can significantly improve acceptance.

Cross-Cutting Enablers and Constraints

Across all four sectors, several cross-cutting enablers emerge:

Coherent policy and regulatory frameworks
Long-term climate strategies, clear targets, and integrated sectoral plans reduce uncertainty and guide investment. Aligning power, buildings, transport, and industrial policies avoids contradictory signals – for example, simultaneously mandating EVs while failing to plan for grid expansion.

Carbon pricing and financial instruments
Explicit carbon prices, whether implemented through emissions trading systems or carbon taxes, can tilt investment towards low-carbon options. Complementary financial tools – green bonds, blended finance, concessional loans, and guarantees – lower the cost of capital for clean infrastructure, particularly in emerging markets.

Digitalization and data
Smart meters, IoT sensors, digital twins, and AI-driven analytics are essential for optimizing energy use, integrating distributed resources, monitoring emissions, and verifying certificates of origin and other market instruments. Digital systems underpin many of the enablers, from smart grids to demand response.

Innovation ecosystems
Accelerated RD&D is needed in several domains: long-duration storage, low-carbon fuels, alternative binders and feedstocks, and carbon removal technologies. Innovation policy must address not only technologies but also business models, market design, and social innovation.

Equity, just transition, and public acceptance
Social acceptance is an important enabler. Policies that ignore distributional impacts risk backlash. Just transition plans, reskilling programs, and targeted support for vulnerable consumers can help maintain public support and ensure that the benefits of decarbonization are widely shared.

Major constraints cutting across sectors include:

• High upfront costs and access to finance, especially in low- and middle-income countries.
• Legacy infrastructure and lock-in, such as long-lived fossil assets, urban forms that encourage car dependence, and poorly insulated building stocks.
• Institutional capacity and coordination challenges, including fragmented responsibility across ministries, regulators, and levels of government.

Addressing these constraints requires not only technology and capital, but also institutional reform, capacity building, and sustained stakeholder engagement.

Implications for Policymakers and Investors

For utilities and system operators, the transition implies a fundamental shift in business models – from selling kilowatt-hours produced in centralized plants to orchestrating complex systems of distributed generation, flexible demand, and new energy services. Investments in grid modernization, storage, and advanced analytics are no longer optional but central to core business strategy.

For policymakers and regulators, the findings underscore the importance of integrated planning across sectors. Electrification in buildings, transport, and industry will significantly increase electricity demand and change load profiles; these changes must be anticipated in power system plans and distribution network investment decisions. Clear regulatory frameworks for new assets like EV charging networks, hydrogen pipelines, and CO2 transport and storage infrastructure are essential.

For investors and financial institutions, decarbonization pathways define both risks and opportunities. Stranded asset risk is rising for unabated coal, oil-fired power, and inefficient industrial facilities, while renewed demand is emerging for low-carbon infrastructure and technology providers. Incorporating sector-specific transition pathways into portfolio strategies will be central to managing climate-related financial risk.

Conclusion

Decarbonizing power generation, buildings, transport, and industry is both a technological and institutional challenge. No single solution is sufficient; rather, the transition will be driven by a portfolio of measures: rapid deployment of renewables and storage; deep efficiency improvements; electrification of end-uses; deployment of hydrogen, sustainable bioenergy, and synthetic fuels where appropriate; and strategic use of CCUS in hard-to-abate applications.

Global evidence from the IPCC, IEA, and other institutions confirms that these pathways are technically feasible and, in many cases, economically advantageous, particularly when the co-benefits of cleaner air, improved health, and reduced fuel import dependence are accounted for.

Yet the pace and shape of the transition will be determined not only by technology and economics, but also by governance, policy, and societal choices. Countries, cities, and companies that move early to align their power, buildings, transport, and industrial systems with net-zero trajectories will be better positioned to capture the economic opportunities of the transition and to contribute meaningfully to global climate goals.