Issue Date: March 30, 2009
Industry Considers Carbon Options
MOST CHEMICAL COMPANIES agree that, like it or not, limits on carbon emissions are coming to the U.S. What they don't agree on is whether a tax, a cap-and-trade program, or some other mechanism is the most efficient way to fairly limit emissions of carbon dioxide and other man-made greenhouse gases (GHGs).
Congress and the Administration of President Barack Obama appear to be leaning toward a cap-and-trade program. Such a program would set industry emission limits and require companies to buy emission allowances from those who pollute less. A tax-based program would require firms to pay a toll on emissions.
Whatever form the program takes, just about all the firms C&EN contacted are concerned that regulation will drive up fuel and feedstock costs, make U.S. chemical plants uncompetitive with other parts of the world, and drive jobs and production to countries where little or no regulation is in effect.
But regulation could have an upside, too. Firms such as Dow Chemical and DuPont see opportunities to sell energy-saving plastics and materials. Others, such as Air Products & Chemicals and BASF, see opportunity for technology that sequesters CO2 underground.
The greatest fear of U.S. chemical makers is that any carbon limitation program would be costly. According to an analysis by the American Chemistry Council, an industry trade group, Obama's proposed cap-and-trade program would saddle chemical businesses with $7 billion in new costs in its first year and a total of $69 billion in costs over 10 years.
In the European Union, where an emission trading scheme (ETS) has been in place since 2005, chemical firms have seen their operating costs go up. According to Christof Bauer, director of chemical energy management for specialty chemical maker Evonik Industries, power producers passing along the cost of emission allowances have driven up Evonik's annual energy costs by $68 million.
Evonik has set up a central service unit to monitor its emissions and collect data on them. Until now, European governments have allocated enough free emission allowances that carbon trading has resulted in "no significant additional costs," Bauer says. But depending on the final form European regulations take beginning in 2013, the firm anticipates it may have to absorb extra costs amounting to hundreds of millions of dollars per year to acquire the emission allowances it needs to operate.
Should a carbon cap-and-trade system go into effect in the U.S., Bauer anticipates a similar increase in U.S. operational costs. He argues that "climate change is a global problem," and so "solutions have to be found on a global level." If only Europe and the U.S. limit carbon emissions, businesses will ultimately move their energy-intensive operations to countries without regulations—a concept many in the industry refer to as "border leakage."
Given the choice between a cap-and-trade program and a carbon tax, Bauer asserts, a tax would be more desirable. A fixed tax on CO2 emissions would allow firms to more accurately budget their expenses. The way the European ETS operates, "prices are determined by short-term political action," Bauer says. Since ETS got under way, carbon allowances have sold for as much as $37 per metric ton and as little as $12.
Refiner and petrochemical maker ExxonMobil also prefers a carbon tax. Long known as a global-warming doubter, ExxonMobil has in the past two years acknowledged scientific evidence that man-made GHGs are a problem. In a January speech, Rex W. Tillerson, the firm's chief executive officer, asserted that cap-and-trade systems like Europe's bring with them a costly brokerage system subject to volatile price swings and high monitoring costs.
A CARBON TAX, Tillerson said, "strikes me as a more direct, more transparent, and more effective approach. It avoids the cost and complexity of having to build a new market for securities traders or the necessity of adding a new layer of regulators and administrators to police companies and consumers." He suggested that a tax could be levied and enforced under the current tax code and with existing bureaucracy.
In contrast, Dawn Rittenhouse, director of sustainability at DuPont, argues that a cap-and-trade program is specifically designed to achieve emission reduction targets. A carbon tax can't guarantee that industry would achieve reductions.
But Rittenhouse argues that any cap-and-trade program should take into account emission reductions that firms have already achieved. DuPont claims that it reduced GHG emissions 72% between 1990 and 2003, and Rittenhouse says the firm should get credit for that effort. Cap-and-trade legislation should recognize such early achievements by putting a greater reduction burden on those who have yet to make emission cutbacks, she says. "What you don't want to do is create a disincentive in the future for companies that act early," Rittenhouse adds.
Rich Wells, vice president for energy at Dow Chemical, says his firm also favors the cap-and-trade option, but he adds that any system needs to take into account a number of qualifications and exemptions. When a hydrocarbon feedstock is transformed into petrochemicals such as ethylene and polyethylene, only the energy consumed in making them should be counted as carbon emissions, he says.
Cap-and-trade costs should ramp up gradually, Wells argues, so competitors in countries without such programs don't develop a competitive advantage. An initially aggressive cap that encourages energy-intensive users to switch from coal to natural gas—which has comparatively low carbon content—would drive chemical manufacturers offshore, Wells warns.
Allen Kirkley, CEO of Shell Chemical U.S., adds that what is really needed is a harmonized global emission trading structure that does not disadvantage any one part of the world. Until that happens, he says, onerous emission caps that don't create enough incentives for energy efficiency will just promote cross-border carbon leakage.
Kirkley suggests that the U.S. should phase in a cap-and-trade system and initially give free allowances to chemical makers and refiners to prevent carbon leakage. "We need a workable cap-and-trade program that allows business to continue," he says. Pointing to disadvantages for chemical makers and refiners under the EU's system, he urges U.S. lawmakers to design a fairer program.
Dow, DuPont, and Shell are all members of the U.S. Climate Action Partnership, a group of businesses and environmental organizations that favor a cap-and-trade approach to limiting carbon emissions. Other members include the environmental groups Natural Resources Defense Council and Nature Conservancy, refiner ConocoPhillips, and health care products maker Johnson & Johnson.
The chemical industry is hardly united behind this approach, though. Companies such as Evonik, Air Products, Huntsman Corp., and BASF are members of Industrial Energy Consumers of America, an organization that emphasizes energy efficiency as a way to cut GHGs. IECA opposes both taxes and caps on emissions.
In testimony before the House Subcommittee on Energy & Environment earlier this month, IECA President Paul N. Cicio said: "The industrial sector already has a price signal for GHG emissions: It is called competition. Because we are energy intensive, we either drive down our energy costs or go out of business." Cicio suggested the best way to reduce GHG emissions would be through national energy-efficiency standards along with tax credits and loans to help companies achieve those standards.
Regardless of their positions on emission caps, chemical company executives all emphasize that many of their products benefit the environment by cleaning the air or helping save energy.
An Air Products spokesman points out the irony that his firm's biggest contribution to CO2 emissions is its production of hydrogen via the steam reformation of methane. Without that hydrogen, refiners would be unable to process sulfur-rich crude oil to make cleaner burning transportation fuels.
BASF notes that because it makes energy-saving materials such as insulation, lightweight plastics, and sealants, its products save three times more GHGs overall than are created during manufacture and disposal. Indeed, although they complain about costs, companies such as BASF also stand to benefit from the sale of products that reduce GHGs.
The chemical industry's products, for instance, enable alternative energy production via solar cells and windmills. Many chemical firms have developed biobased materials that limit CO2 emissions by using renewable resources as raw materials.
SOME FIRMS are developing the technologies that capture emissions and sequester them underground. BASF, for instance, is testing an amine-based solvent to capture CO2 from coal-burning power plant emissions for injection into wells.
Air Products says it is adapting its air separation technologies to capture CO2 produced by power plants for sequestration. The firm is working on a number of demonstration projects, the latest of which is in cooperation with the Department of Energy and power plant builder Alstom Power.
If a cap-and-trade system becomes a reality in the U.S., Rhodia has already positioned itself to make a profit. In 2006, the French company started the GHG emission trading firm Orbeo in concert with the French bank Société Génerale.
The sale of emission credits contributed $232 million to Rhodia's operating earnings in 2008, up 17% from the previous year. Orbeo buys and sells GHG credits, develops carbon offset projects, and markets its services to buyers and sellers. Most of its customers are in Europe, but Orbeo President Philippe Rosier says the business set up a U.S. marketing team at the end of 2008.
Even though Washington appears to favor a cap-and-trade approach to regulating GHGs, no one knows yet what such a scheme will look like or whether it will be approved at all. Although chemical companies see money-making opportunities in a carbon-regulated world, they also see higher costs. As Dow's Wells points out, there's no "silver bullet" for lower carbon emissions.
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