There was a very strong focus at the WPC on the need for carbon pricing in the US to facilitate investment decisions around many initiatives focused on carbon abatement. The consensus was very much that a carbon price – so a cap and trade system like they have in Europe – was the best mechanism, and far more likely to drive action and limit inflation than a carbon tax. This is something that we broadly agree with but the US is a bit late to the game and the right caps need to be set so that CO2 prices don’t languish at very low levels for years, as they did in Europe. Jim Fitterling of Dow was somewhat provocative in his comments around nuclear power, but we see this as part of a broader initiative aimed at getting a serious dialogue moving around how we make the practical steps needed to drive carbon lower. Nuclear power provides stable baseload and is carbon-free – a small modular nuclear reactor could generate enough steam and enough power to drive the decarbonization of major chemical complexes – one investment for example could transform one of the larger Dow sites. If we are going to get to net-zero targets without nuclear, we need much more progressive policies – especially around carbon pricing – which is likely the direction that Dow would like to take the discussion.
It is interesting to contrast Linde and LyondellBasell with Air Products and Dow. Air Products and Dow have transitioned away from the more generic messaging around broad objectives, and while they still have them, have started talking about concrete plans and spending aimed at lowering carbon emissions. Dow has a project on the books that will lower the emissions of existing capacity while Air Products is talking about greenfield low carbon investments at this point. Many of the commentators and climate activists are calling for concrete plans as opposed to broad objectives and we suspect that most of the narrative will move that way across energy and materials.
Europe is likely to be a test case of how much inflation a country or region is willing to bear on its path to clean energy. Costs are rising in Europe, as LNG markets tighten and as carbon prices rise. The net result is increased power prices, with reports of unhappiness in many countries – this is a topic we have discussed at length in our dedicated ESG and climate work and was a focus of last week's report – linked here.
There are several things worthy of comment today. First, the math looks wrong in the Biden EV executive order, especially when combined with tighter fuel efficiency standards that are also on the table. The US consumes around 340 million gallons (approx. 8.1 million barrels) of gasoline a day and a reduction of 340,000 would only be a 1% reduction by 2030, even assuming growth in driving over the next 10 years we would expect the fuel standards and EV introduction to have a much more meaningful impact if successful. We will write more on this is our dedicated ESG and climate work.
The primary reason for the flurry of carbon capture related headlines in the US over the last few weeks – and our analysis shows a significant step up – is because it looks like this will be the one technology/route to lower carbon emissions that will get a real boost from the infrastructure bill. There is bipartisan support for CCS because the fossil fuel industry sees it as a way to stay in the game and the unions believe that it will create jobs. This combination should garner enough votes to push it into the bill and get it passed, although the details around how CCS would be supported remain unclear. The infrastructure bill has very few real sources of income in it to offset the very high costs – something we will discuss on Sunday – and consequently giving a bigger tax break, through the 45Q program would create an even larger funding gap than we have today. The value/cost dynamic has to rise to get the activity that everyone is looking for and maybe that could be achieved by overlaying a carbon credit onto the program. Anyone exporting to Europe and concerned about the CBAM extending to natural gas, NGLs, chemicals, and polymers would likely consider CCS if they were eligible for 45Q and could also claim an offset on their exported products to neutralize the CBAM tax/fee.
The table below is from an interesting analysis published by the EIA this week that focuses on possible power demand scenarios for the US – all weather-related – and then backs into the power sources that would be needed to meet the demand, concluding with the US carbon emissions that would correspond to each scenario. The conclusions should not be surprising, which are that carbon emissions rise disproportionately faster as power demand rises – as more coal is required to balance generation needs, and fall disproportionately more quickly as power demand falls (as less coal is needed). The analysis is effectively a study of how much less CO2 emissions are using natural gas to generate power versus coal. As renewable generation increases as a share of the total, however, the math will change, and the EIA study does not take into account the weather factor on renewable power, it looks at cooling degree days and heating degree days at a national level only. This is reasonable as there is likely not enough data to be able to put good reliability estimates yet around renewable power annual volatility and more importantly, the impact of weather on renewable power is likely to be short-term in nature. Perhaps this analysis could be improved by adding a “daily risk band” around each scenario, showing how much renewable power volatility could cause peaks in the high scenario and lows in the low, etc.
The ESG investment shakeup could be one of the major events of this year, and as many of the headlines in our daily report suggest, there is a lot of work to be done, whether it is agreeing on a common set of measurement metrics – note the US and European differences discussed in one story – or the introduction of more empirical methods to judge whether what is labeled as an ESG investment fund is labeled correctly. There is also the issue of comparable disclosures, especially for companies in complex industries. It is interesting to note that in many analyses we see around carbon footprint or greenhouse gas emissions, and the potential routes to and cost of abatement, the chemical industry is omitted, except for ethanol and hydrogen. This is despite the industry accounting for 15% of the non-power emissions in the US industrial sector (similar in size to refineries). We believe that this is because the complexity of the industry makes it hard to model, and analysts choose to exclude it because they are not sure what they are doing.