We have written extensively about carbon prices over the last two years and followers of our dedicated ESG and Climate service will know that our expectation is for all CO2 markets to see prices rise to levels that justify large investments to avoid CO2 production or sequester it. We see that price closer to $100 per ton than the $50 per ton that 45Q will rise to by 2026. The California price shown below has much more upside as credits demand rises. Many of the net-zero pledges made by manufacturers and energy producers today cannot be achieved without buying some sort of credit and we expect demand to rise relative to supply through the balance of the decade and possibly quite quickly.
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.
The annual review of World energy from bp shows a stark reversal of the company’s position only a short while ago. When the pandemic hit, bp went on record suggesting that we may have seen peak oil demand in 2019. It was an interesting theory and one that we discussed at the time, but it underestimated the impact that aggressive COVID-related stimulus would have on consumers globally and we suspect that bp, like many others, overestimated the rate at which renewables could be added. Now the company is exploring a very different scenario, one in which the current momentum in the energy market continues and the rate of renewable additions slows, either because of more limited capital or because of material constraints – or a combination of both.
Playing right into the central argument of our ESG and Climate report is today’s ExxonMobil investor day, and we include a couple of key slides around the company's proposed path to net-zero below. The first slide shows just how much blue hydrogen (with CCS) the company plans to add to offset its emission-generating fuels – the volumes implied in the chart are high.
One piece of big news early this week was ExxonMobil’s announcement that it is developing plans that will drive net-zero emissions by 2050 and the company shared a detailed overview. We have picked some charts from the report, some of which can help us draw conclusions for ExxonMobil, but others are more general. The company is banking on a lot of emission reduction and CCS to get to the 2030 target and a large part of the goal is likely to come from the plans for the Permian and the previously stated net-zero target that the company has for 2030 – detail on how this will be achieved is shown in the Exhibit below, see more in today's ESG report.
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.
When China announced its 2060 net-zero goals we dedicated one of our ESG and Climate pieces to the topic - China: A Challenge With 2060 Goal But Also A Possible Edge - concluding that this would likely drive considerable competitive advantage for China assuming that others would bear the costs of new technology learning curves and China would get the solutions more cheaply. In interim China would have lower costs of manufacturing because of the delayed net-zero implementation. With the Biden administration now pushing for a coordinated 2050 commitment for the US, some of the burdens of early costs that China could benefit from also fall on the US. In one of the headlines (from today's report), there is criticism of the European CBAM and questions around whether it could work. The reality is that it, or something like it, has to work, otherwise asymmetric climate policies will create pockets of competitive advantage - potentially very damaging to those spending more.
In our ESG and Climate piece yesterday we briefly discussed the mid-west carbon capture projects, questioning their economic viability. Two of the most expensive components of any CCS project are pipelines and compression costs and we cannot see how a long network of pipe in the mid-west to pick up what are essentially small volumes can work economically. These projects are reliant on very high LCFS-like credits, and as we showed in last week’s report, LCFS credits have fallen this year and could fall further. The pipeline right of way issue is another major hurdle and we have seen growing resistance to pipelines of any sort over the last few years. Those who oppose CCS in principle could cripple these mid-west plans simply by co-opting enough land-owners on the path of the proposed pipelines and refusing access. We are supporters of CCS, but have done substantial work on economics and show that the process only begins to make economic sense if the sequestration is close to the emissions. Relying on possible artificially high carbon prices to justify the projects will only lead to pain, assuming the pipeline right of ways can be obtained.
The core message of the IEA analysis published today is around how renewable power rates of investment remain far too low and need to more than double immediately to meet net-zero goals – see below. This analysis is very supportive of our renewable power inflation thesis, as none of the renewable power component manufacturers can double production either cheaply or quickly, and none of their suppliers has that much spare materials capacity. On the solar front, we may have the additional problem of regional production concentration. China has the largest share of capacity for solar module capacity and now has much more aggressive plans for solar power domestically. We could see China-based components stay in China, exaggerating shortages outside China. The IEA has an accompanying report today on the possible impact of commodity pricing on solar and wind pricing and it is also linked here – these reports were published this morning and we will cover them in more detail in next week's ESG and Climate report. More on this in today’s ESG and Climate report.
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.