The hydrogen council chart below drags us away from 2050 and back to the more concerning near-term goals of 2030. The chart shows a significant gap in the current planned spend for hydrogen by region and the spending required to move far enough towards 2050 targets. This chart makes assumptions about the share of energy transition that will be met by hydrogen and given that it is the industry producing the chart, it is probably on the high side, but it is inclusive of both blue and green hydrogen. We have serious concerns about these totals being reached in general, but we see the target as completely unreachable without significant blue hydrogen (because of renewable power and electrolyzer capacity limits and we cannot rely on Canada to do all of the “heavy lifting” for blue hydrogen - see company section in today's daily report. The Biden administration may make more progress on emissions if the next order of business was just on CCUS rather than an omnibus bill that included CCUS but which could get held up in negotiations for months if it even gets passed.
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.
We highlight more from the IEA on the importance of EVs versus other vehicles to bring down “well to wheel” carbon footprints and the second (not unexpected) “kick in the pants” chart that shows the World woefully short in terms of its projected EV adoption rate. There are – probably expensive – hurdles to reaching the IEA net-zero goals with respect to EVs. The first is going to be the need to pay or tax consumers enough for them to give up a perfectly good ICE vehicle long before the end of its natural life.
We want to focus today on the headlines around the possible increase in the 45Q CCS credit in the US and discuss the false logic of those that are objecting to it. There is no scenario where the US can move to a lower emissions power and transport profile while avoiding runaway inflation and social disorder without the continued use of fossil fuel-based power and transportation fuels for decades. The reliance on these fuels should and will decline over the years, but it is unreasonable to expect a transition that causes it to stop overnight. In the meantime, CCS is a mechanism that would allow fossil fuels to play a part with a much lower emissions footprint, and given that the CO2 impact on global warming is cumulative, if we can capture and store several billion tons of CO2 underground over that transition period it should be a good thing. Members of the Sierra Club and others would do well to look at the energy inflation problems in Europe and the move this week to put natural gas and nuclear back in the energy transition mix (too late in our view) because the move to renewables cannot keep pace with demand, which will grow faster as more EVs hit the road. The proposed 45Q credit is shown in the chart below vs. the current credit, the LCFS credit, and estimates of CCS costs.
The Financial Times opinion piece linked in the bullet below and from which the chart is taken has used the IEA data that we have featured in recent work. The piece comprehensively walks through how the world is likely to come up short, and while it gives the measures that are needed and the money that likely needs to be spent, it is not an optimistic review of what will most likely occur. We remain firmly of the belief that much more progress could be made if there was a global agreement to make carbon very expensive – accompanied by an agreement on how to share the spoils of that expensive carbon such that the inflationary pressures are offset where they are most needed and that environmental injustices are minimized – this is idealistic are we recognize that.
The methane chart below is another reminder of how important it is for governments to increase their demands on methane emitters to find solutions to cut leakage. The current stated policies are grossly inadequate, and while we are seeing some of the majors taking proactive steps to reduce emissions, the problems are more acute among the independents in the West as well as abandoned wells that might have no current ownership and operators outside the US and Europe. We keep talking about the need for COP26 to focus on natural gas, and this would be one of the key issues on which a global agreement would help. See several of our ESG reports for more on this subject.
We think that Orion Engineered Polymers and its fellow traditional carbon black producers could be in for a rough ride.
The gaps in the exhibit below are not surprising as 2050 is a long way away and we would not expect all of the needed capacity to be announced or pledged yet, especially as many companies are still weighing alternatives. For example, as an ethylene producer, you have 5 paths – hydrogen as a furnace fuel – electric power as a heating medium – stick with what you have and use CCS – find an alternative route to make the polymers – make alternative polymers.
Overnight there has been a very good IEA report on how China could get to net-zero by 2060, and further news of more industries hit by power cuts because of power shortages, some of which are apparently due to tighter emissions standards. These are both important and far-reaching topics and will require some analysis to provide the kind of insight that we believe is necessary, and accordingly, we will push these to next week’s report (all input welcome). In the meantime, we have included a couple of charts that show the way up and the IEA view of the way down. The power outages are interesting as while they may cause some manufacturing cutbacks and we have seen recent news to that effect, China has overbuilt in the last couple of years relative to domestic demand growth, and with port and shipping congestion the country has surpluses of many products sitting around at very low values. The power moves may help correct some of these imbalances and we are already seeing some chemical prices bounce off recent lows because of production cutbacks. We discussed the acetic acid chain in one of our dailies last week – linked here.
Companies are being encouraged/forced to produce climate plans by ever more focused shareholders many of whom only have a passing understanding of how some of the companies operate and how they might best set a course to lower emissions and otherwise be better stewards of the environment. The pretty graphic by Covestro below likely looks much better than the data and ambition behind it really are. This is not necessarily meant as a criticism of Covestro, but the company like many others is being challenged to explain a very complex, process, and engineering-heavy set of options to an audience not really qualified to understand them – pictures with circles are easier.