Market outlook: China's climate change policies to impact petrochemicals

25 October 2013 14:50  [Source: ICB]

While the debate continues over man-made influences, China has launched legislation that could have a big impact on the chemical sector

The debate will no doubt continue for many years between those who are sceptical over the man-made impact on climate change and those who have become convinced that we are responsible for changes in the behaviour of the weather.

In late September, the UN’s Intergovernmental Panel on Climate Change (IPCC) once again came down firmly on the side of the non-sceptics.

“The atmospheric concentrations of carbon dioxide (CO2), methane, and nitrous oxide have increased to levels unprecedented in at least the last 800,000 years,” it wrote in its latest risk assessments.

China, the biggest emitter of carbon dioxide, is closing heavily polluting factories

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“CO2 concentrations have increased by 40% since pre-industrial times, primarily from fossil fuel emissions and secondarily from net land use change emissions. The ocean has absorbed about 30% of the emitted anthropogenic carbon dioxide, causing ocean acidification,” it added.

The IPCC is now 95% certain that we are responsible for global warming.

It has based its latest assessments on 2m gigabytes of numerical data from climate model simulations and cites more than 9,200 publications. More than three quarters of those publications have been released since the last IPCC assessment in 2007. Also, scientists from an increasing number of nations have contributed to the research.

In China, the world’s biggest emitter of carbon dioxide (CO2), policymakers are already acting on the assumption that organisations such as the IPCC could be right.

For example, according to Barbara Finamore, senior attorney and Asia director, Beijing, for the US-based environmental group National Resources Defence Council :

■ China’s own 710-page Second National Assessment Report on Climate Change, which was released last year, says that China faces serious ecological and environmental damage from global warming. The country is at risk of more droughts and floods, which threaten China’s already vulnerable food and water supplies. Rising sea levels might also affect millions of people in Shanghai.

■ China is closing heavily polluting factories [including chemicals plants, according to anecdotal evidence from industry contacts that have spoken to ICIS], prohibiting new coal-fired power plants in major industrial regions, and investing more in renewable energy than any other country in the world.

■ It is experimenting with CO2 cap and trade programmes, debating a carbon tax and drafting a climate change law.

■ The National Development and Reform Commission, China’s top administrative body, is also working with China’s top energy experts to develop a comprehensive, enforceable programme that will put a nationwide cap on coal consumption.

And earlier this year, China published a national “water census” showing that as many as 28,000 rivers logged in a government database had disappeared since the 1990s, leaving just under 23,000, said a 23 September Reuters article. No reason was given by the government for the disappearance of the rivers.

“We have witnessed major fluctuations in precipitation in different parts of China,” Ma Jun, a water expert and director of the Institute of Public and Environmental Affairs, which monitors China’s rivers, told Reuters.

“One thing in the mind of policymakers and researchers is that climate change will add to uncertainties – in some areas, the water supply situation is already quite tense.”

India, China, Indonesia, South Africa and Brazil were the most vulnerable countries within the G20 to risks from climate change, added an 18 September HSBC report.

On a relative ranking basis, China’s position had worsened to second-most vulnerable G20 country to climate change risk from third in 2011, said the report, drawing on HSBC research.

The possibility that human activity was causing climate change was not the only reason for China’s legislative push, said several senior chemical industry executives. Other reasons included China’s chronically bad air quality, widespread water pollution as well as water shortages, and land pollution, they added.

Hundreds of thousands of people are thought to die from air pollution in China every year.

China’s environmental protection ministry published a report in November 2010 which showed that about a third of 113 cities surveyed failed to meet national air standards last year.

According to the World Bank, 16 of the world’s 20 cities with the worst air are in China.

And about a fifth of urban Chinese breathe heavily polluted air, said the Chinese government. Only a third of the 340 Chinese cities that are monitored meet China’s own pollution standards.

One of the senior chemicals industry executives quoted above said that he had detected a major sea change in China’s approach over the past 12 months.

“China’s new leaders really mean business on the environment. The issue of global warming aside, air pollution is a huge problem for them because it is causing a great deal of social unrest,” he said.

“In the future, I think that whilst it might be possible to further develop existing chemicals complexes in China, a tougher approvals process will make it harder to create new sites.”

Coal-to-olefins projects (CTO) could be the most vulnerable to this tougher approvals process, as large amounts of water are used in the CTO process. Many of these projects are also located in western China, where water is already scarce.

It takes 15-20 tonnes of fresh water to make one tonne of olefins via the CTO process, according to a 2012 ICIS China study into CTO. This compares with 0.80-2.17 tonnes of water of for each tonne of crude oil processed through an oil refinery.

The final shape of climate change legislation, both in China and elsewhere, might well hinge on who finally wins the debate.

Organisations such as the Chicago-based Nongovernmental International Panel on Climate Change (NIPCC), for example, while not disputing that climate change is a reality, argue that human behaviour is of far less importance than nature – for example, the heating and cooling cycles of the sun.

The NIPCC, in a report issued a week before the IPCC published its latest climate change review, said that future policy initiatives should therefore focus on better civil defence against changes in weather patterns that are beyond our control.

They cited inadequate government responses to Hurricane Katrina in 2005 and the Australian bushfires in 2009 as examples of policy failures.

But so far at least the people who matter the most – the legislators – seem to have lined up on the IPCC side of the debate.

Chemical companies must, therefore, plan for the strong possibility that they will face an increasingly difficult legislative environment.

But the upside in China could be greater than the downside, according to a source with a global oil, gas and chemicals producer.

“China is building whole cities from scratch and it can, thus, build cities that are extremely energy efficient. This will provide lots of opportunities for chemicals and polymer producers that provide raw materials for these cities,” he said.

“Yes, there will be lots of vested interests who might want to resist China’s new legislative programme on the environment. But equally, there could also be a great deal of government money available for research and development,” the source added.

And Nicholas Stern, the climate change economist, writing in the 30 September issue of the Financial Times, said: “Everywhere evidence is emerging of opportunities afforded by new energy sources that are more efficient and less polluting. Trillions of dollars of investment will be needed, but this will unleash decades of growth at a time when there is slack in many economies and interest rates are low.”

Additional reporting by Nigel Davis

By: John Richardson
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