The CCS spending chart below is quite detailed, but shows the limited amount of spending in 2021 and 2022 and may underestimate the amount of seismic spending needed, especially in the US, as companies prepare permit applications. We do not expect to see much spending in the US before mid-decade beyond permit applications. However, as we discuss in today’s ESG and Climate report, should the API proposed carbon tax, or something similar, be additive to the 45Q tax credit, we could see a step-change in CCS when/if the tax is approved. The tax on its own is likely not enough to drive decarbonizing investment, but when added to 45Q it could be a specific trigger for CCS investment, and we could see a step-change in the second half of the decade. This might involve large-scale blue hydrogen production, especially on the Gulf Coast to decarbonize the refining and chemical industries.
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.
2022 is the year in which the rubber will need to meet the road for many of the chemical and other material and industrial companies who have made 2030 emission pledges. In the Dow release yesterday, the company used the call as an opportunity to remind investors about the Canada investment and tie that into the 2030 emission goals. We note LyondellBasell’s 30% emission reduction goal by 2030 and like others, LyondellBasell will not be able to get there without substantial investment. LyondellBasell and others do not necessarily have to spend in 2022 (neither does Dow), but unless there are some concrete plans by the end of the year stakeholders will likely start to question whether the emission goals are real. We suspect that most companies are trying to work out whether investments in hydrogen (likely blue hydrogen because of the volumes needed) are a better solution than trying to capture CO2 from a natural gas furnace. Any large hydrogen investment with associated CCS will take 5-6 years from concept to production. Like Dow, we would expect others to focus emission-reduction investments in countries/states that have a clear value on CO2. See today's daily report for more.
Whether it is carbon capture, hydrogen investments (blue versus green or just in general), plastics waste, or any other aspect of the drive to greater sustainability and net-zero emissions, everyone is looking for a “playbook”; a set of rules that allow for more effective and less risky decision making. The headline linked that talks about the chemical industry needing governments to take more action is another such example. Companies facing increasing shareholder pressure to make change are not only looking for government guidance and possible incentives but they are also not wanting to second guess what any regulatory move might be. No one wants to make a significant capital decision if there is a risk that a government policy shift will make it the wrong move. The European carbon credit price – shown below is at least a framework that many European companies can use to value possible decisions – even if some European companies and countries are moving at different paces than others in terms of emission and hydrogen mandates. The price is tangible and its mechanism for calculation should also allow companies to forecast how it might change. Europe is also working on a plastic waste tax – this would give a stronger economic framework to push improved recycling.
Source: Bloomberg, C-MACC Analysis, June 2021