We tend to focus on recycling conventional plastic waste, but there are growing initiatives to look at the longer life cycle of durables and while this has mostly been focused on the automotive space, it is interesting to see the building industry looking at building life cycles. Many of the alternative use mechanical recycling initiatives are directed toward substituting building products such as concrete and wood and while this will help the construction sustainability story, the end of life cycle issue is less clear. The majority of commercial real-estate emissions are associated with operations (around 70%) and this is the greater focus for owners today, but the life cycle question is increasingly important for building tenants. In the UK for example there are redevelopment projects proactively advertising how much of the original building will be retained – i.e. not demolished and landfilled. Ultimately this might lead to lower demand for commercial building products where developers are looking at existing buildings, but it will not impact new greenfield builds unless you get a steep increase in recycled polymer use. The offset would likely be concrete as this is the high carbon footprint material that most are targeting. See more in today's ESG and Climate Report.
The focus of our ESG and Climate report tomorrow will be on recycling and the challenges associated with each proposed solution. The piece that most chemical recycling projects, like the one highlighted below, fail to mention is that the heat required for pyrolysis is significant, and the carbon footprint is very high unless you can heat through renewable power or you can capture the carbon associated with the heat. Given the location of the facility shown below, it could have access to offshore wind-based power and/or could tie into one of the offshore CCS projects that have been proposed. Both pyrolysis and gasification processes have very high emissions.
There are a handful of “renewable” headlines in today's daily report, and it is probably worthwhile discussing the differences. First; the linked Gevo RNG announcement is likely one of several RNG projects that we will see come online in 2022, as there are a number of farm-based RNG projects underway in the US and other parts of the world. The Gevo facility is based on farm manure and is expected to produce 355,000 MMBtu of RNG per year. As such it is not large, and all of the farm-based projects are small in the larger context of the natural gas markets. However, when focused on decarbonizing a specific product or process this RNG can be very important. Our take on the market is that there will likely be more demand for RNG than supply, as several companies are looking for RNG to make proposed investments make sense from a “green” perspective (Monolith would be a good example). This suggests that it will be better to be a seller than a buyer longer-term.
In yesterday's ESG and Climate report, we looked at an extreme example of how the right support for clean fossil fuel use through a long period of energy transition, could create economic growth, support job growth, and not require subsidies – coal gasification to produce low-cost hydrogen. With the opposition to the “Build Back Better” bill, there is a clear opportunity for the fossil fuel industry to step up and suggest compromises, and we are seeing increasing interest in large scale CCS, despite its cost, in part because it is a path that will allow natural gas and other fossil fuels to meet increasing demand in a way that has a much lower carbon footprint, and in part, because it will still be cheaper than some of the heavily subsidized ideas to try and accelerate investments in renewable power that will inevitably fall foul of equipment and material shortages – something we have written about at length in past research – linked here. The EIA has already noted that coal use in 2021 has risen globally and it is likely that it will rise again, given the increasing demand for electric power and the lack of supply elasticity in the renewable power and natural gas-based systems – coal is a large part of the swing capacity these days. Many of the CCS projects proposed for the US are not much more than proposals today, but we are seeing some initial investment to prove that subsurface storage opportunities are feasible.
The Monolith announcement is not that surprising, as the auto industry is very focused on its carbon footprint and its suppliers, like Goodyear, are under pressure to look for more sustainable solutions. While Monolith uses natural gas as a feed, it’s carbon black is produced with very limited Scope 1 emissions, unlike the traditional route, used by the incumbents. It is not clear what the production economics are for Monolith because the co-product value of hydrogen could vary greatly depending on local needs, but the emergence of a competitor who sees carbon black potentially as a by-product is not likely to be good news for the traditional makers. A by-product that is more environmentally friendly is even more of a threat. Complicating the picture further could be the arrival of larger volume production from Origin Materials, which has a renewable based carbon black like material, which may also be seen as a by-product.
We note the IEA work on CCUS in several charts below and this is good timing relative to our ESG and climate report this week – which focused on carbon pricing, something we believe is necessary to promote more real activity in CCUS. In the Exhibit below, it is important to note how many projects are in “development” rather than operational or under construction. It is also worth noting that the number of projects under construction has not grown since 2019. One of the reasons for this is that increased activity at the planning stage is then followed by a delay associated with permitting, which depending on the region can take 2 plus years. The other constraint is uncertainty, with many of the projects under consideration waiting for something to change, either local values of CO2 or mandates or direct government support. For example, the large project planned for Houston and championed by several oil, power, and chemical companies is unlikely to move forward without a higher tax credit for CO2 sequestration or without some other incentive. The mid-West projects targeting the ethanol industry will also need permits, not just for the wells but also for the many hundreds of miles of proposed pipelines.
In a media interview earlier this week (more details to follow) we were involved in a discussion about inflation and specifically energy. The discussion covered much more than this, but the chart below is perhaps one of the easier ways of showing where our concern lies, and it ties directly to the behavioral patterns that are emerging concerning climate change and ESG focused investing. As noted in the title of the chart, the likelihood that the linear path from here to net-zero will work is very low, given that we would need global government coordination now, and we are far from it. The other scenarios are much more likely, at least in the early years, and they call for an increase in emissions, which implies growing demand for fossil fuels and other materials that have a high emissions footprint. If you are an oil or gas producer and you look at the chart you could quickly conclude that while your products are in demand today and likely to be in growing demand for several years, the longer-term outlook is very unclear. This might slow down your investment plans, or at least make you think twice about the shorter lead-time projects – such as on-shore and shale-based. However, it could kill any longer-term offshore/deepwater projects that take many years to bring on stream. Today we see energy investment hesitancy everywhere (see our Chemical Blog), but at the same time, we do not see the global coordination to drive a faster energy transition, assuming we had the materials and the investment dollars to move any faster. The risk that we run out of produced fossil fuels from time to time over the next 3-5 years is very high.
ExxonMobil is seriously upping its lower-carbon game with the CCS announcements over the last few weeks and the release this week that states the company will spend $15 billion over the next 6 years on lower carbon initiatives. In this linked headline ExxonMobil states that it will meet its 2025 emission goals this year – we are assuming that this must be correct as the company would not want to risk the accusation of greenwashing. Either way, the critics will weigh in, either claiming “greenwashing” or suggesting that the targets were not high enough, to begin with. The ExxonMobil focus is very much on CCS, which makes sense for an oil and gas-centric company whose only real play right now is to lower the carbon footprint of its fuel portfolio. In the release linked above, ExxonMobil also talks about biofuel and hydrogen initiatives, but again calls for supportive policies from governments and we suspect that the underlying push here is towards the US government. ExxonMobil and others have indicated that $100 per ton is the right incentive to drive CCS and other carbon abatement strategies and we would agree with this estimate as it backs up much of the work that we have done over the last year. See - Carbon: Trading, Offsets, and CCS as a Service – It’s All Coming! and - Carbon Games – Appetite, But Not Enough Hunger Yet. The other reason why ExxonMobil and others would like to see the US act is because other jurisdictions in which they operate will likely take a lead from the US.
We have not spoken much about the agriculture industry and its emissions footprint – but it is significant and the sector is coming under greater focus as a consequence. It is not clear to us that the chart below is complete as it does not appear to include the carbon footprint of the fertilizer used in farming unless it is included in the fossil-fuel category, which seems unlikely. Much of the renewable natural gas planning in the US is relying on farm-based production, and there are initiatives to increase the amount of “low-tillage” farming as it has the effect of releasing far less CO2 from the soil than heavy tilling/plowing. Some of the categories listed below can be addressed through better land and waste management, but others will require offsets, another reason why the offset market needs work. For more on carbon offsets see today's ESG and Climate report.
