It is worth a short explanation of what is going on with European CO2, given the mixed signals of shortages in headlines today and then the slight weakness in pricing shown in the image below. These are two very different markets, with the food, beverage, medical and nuclear industries looking for pure streams of CO2 rather than the contaminated streams that make up the bulk of emissions. Historically, the food and beverage industry looked to fermentation – so alcohol production – as its source of a pure CO2 stream, but as demand grew, the next best place became ammonia production, which also has a pure CO2 stream as a by-product. Most ammonia is further converted into urea, which is a consumer of CO2 and there is not enough CO2 produced in a natural gas-based ammonia plant to convert all of the ammonia to urea. You sometimes see urea facilities also selling ammonia, but more frequently they take the carbon monoxide by-product of the syngas reaction and convert that to CO2. The result is enough CO2 to convert all of the ammonia to Urea and surplus CO2 to sell. Because of this more dominant supply of food and beverage grade CO2, and shutdowns caused in this case by runaway natural gas prices, have an immediate impact on the industries that rely on the CO2.
Cleaned up CO2 from industrial sources, such as those included in the pricing mechanism below, could be used for food and beverage applications, and in some rare cases they are, but the clean-up process is expensive. Cleaning up other sources of CO2 for the food and beverage industry, for example, requires removal of all other gases that might be in a flue stack, even in very small quantities – not only adding costs but also suggesting a long lead time to get to alternate supplies. The UK is subsidizing CF Industries to keep facilities operating and unless ammonia prices spike – creating more inflation in the food chain as fertilizer prices rise – the subsidies will need to continue. For more on CO2 see our ESG & Climate report published today.
Source: Bloomberg, C-MACC Analysis, September 2021
In the meantime, the European carbon price is bouncing along a €60 per metric ton average for now and is likely to be unaffected by what is going on in the food and beverage market as the markets are not connected. In the work we showed last week around Carbon Capture as a Service, we noted that the price likely needed to move up by another 10-20 percent for some of the CCS ideas to work absent additional government subsidies. We expect the trend in the chart to keep moving up and would not be surprised to see €100 per ton at some point in 2022.
