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.
Senator Cramer’s proposed Bill to increase the value of the 45Q carbon credits for sequestration and use as well as remove the annual cap could be a game-changer in many ways. The threshold removal is necessary regardless of the credit value. In our view, the cap creates a potential competitive disadvantage for smaller companies competing with larger ones, especially in the chemical space. Should the Bill increase the tax credit enough to drive real investment in abatement but not remove the threshold we would expect to see litigation from smaller disadvantaged companies. The chart below shows the current expectations for 45Q. To date, the only real investment activity we are seeing is around sequestering CO2 from ethanol production in the US. This is because the CO2 stream is easy to separate in a fermentation process and because some of the ethanol can benefit from the much higher LCFS credit if the fuel is sold into California.
Finally, Larry Fink has recognized the flaw in his aggressive ESG rhetoric. Maybe he knew this all along, but it is good to see him step into the debate in favor of not crippling the fossil fuel industry by denying it access to capital and investors too quickly. However, that boat may have sailed, with investors like Engine No. 1 feeling empowered by their win over ExxonMobil and raising more money as a consequence. We have covered this subject at length in our ESG and climate weekly this week: Big Oil’s Big Problem – Hard To Find A Favorable Scenario – maybe Larry read it!
There are too many important topics to choose from today and we will cover many of these in our ESG and Climate report tomorrow. Here we focus on the IEA report published this week, which shows a path to net-zero on a global scale and looks at both the fossil fuel consuming sectors and the rate at which each must change (they are different by sector) and what fuel alternatives will be needed to replace them. Our review of the work would suggest the following: