Assessing The Cost Of Greenhouse Gases

Global climate-change regulations--if they come to pass--are likely to cost chemical firms big time by 2030, according to one recently released study. But a second study suggests that, at least for U.S. commodity chemical makers, the price of emitting carbon likely won't be a competitive disadvantage as far out as 2033.

Both studies, one by consulting firm Mercer and the second by credit ratings agency Standard & Poor's together with think tank World Resources Institute, are based on speculative scenarios. But each study intends to divine the regulatory impact of greenhouse gases such as carbon dioxide on large industrial companies and, by extension, the financial community.

"Institutional investors should be factoring long-term considerations, such as climate change, into their strategic planning," says Andrew Kirton, chief investment officer at Mercer. His firm's report suggests investors may want to shift assets into businesses such as real estate, timberland, and agricultural land that are less likely than energy-intensive industries to feel the brunt of climate regulations. Industrial firms might want to consider carbon mitigation strategies.

By 2030, regulations that put a price on carbon emissions will have a significant global impact on energy-intensive industries, the Mercer study concludes. Under a worst-case scenario, in which global agreement on regulations only comes in 2020 or later to meet 2030 emissions targets, the world's utilities and basic resource industries would each pay more than $250 billion a year for their carbon emissions.

Chemical makers would fall right in the middle of Mercers' industry groupings, paying a $100 billion-a-year penalty for carbon emissions in 2030. Industries making smaller payments for carbon emissions would include retail operations, automobile makers, and household goods manufacturers.

The study from Standard & Poor's and World Resources Institute looks ahead to 2033, suggesting that carbon regulations, if and when they come to the U.S. commodity chemicals sector, will create winners and losers. The study uses carbon trading regulations that Congress failed to pass and the Environmental Protection Agency's plans to regulate carbon dioxide as templates for future U.S. rules.

"Companies that act now to improve their energy efficiency and reduce emissions are likely to gain a 'first movers' advantage in a greenhouse gas-constrained economy," says Kirsty Jenkinson, who heads the World Resources Institute's markets and enterprise program.

Most chemical makers, including firms producing petrochemicals, carbon black, plastics, and synthetic rubber, are likely to experience higher feedstock and compliance costs, the study authors say. But they would get more than enough emissions credits to meet their needs and keep them competitive with other global players.

However, industrial gas producers, phosphate fertilizer makers, and ethanol producers wouldn't get much help from government provided offsets. This is because industrial gas producers have contracts that allow them to more easily pass along the cost of energy while phosphate fertilizer and ethanol producers aren't as exposed to international competition as others in the commodity sector and can recover costs more easily too, the study authors say.