INSIGHT: EU’s Fit for 55 plan to add costs for chemicals, but could spur innovation

BARCELONA (ICIS)–The EU’s Fit for 55 package published on Wednesday will add substantial carbon costs for the region’s chemicals industry, but could also create new markets and help rebuild the sector for a low carbon future.

Full details of the ambitious package of 12 pieces of legislation were revealed on Wednesday and the package includes the implementation of a charge on carbon-intensive imports plus a toughening up of the existing Emissions Trading System (ETS).

The ETS will include for the first time the aviation and maritime sectors.

Fit for 55 is the European Commission’s response to the EU Green Deal goal of achieving a 55% cut in carbon emissions by 2030, compared with 1990 levels.

The EU is aiming for the 27-country bloc to become the world’s first carbon-neutral region by 2050.

Once published, the legislation will need to be debated and approved by the European Parliament over the next few years before it is implemented.

The Green Deal also aims to introduce the circular economy and reduce pollution.

Vast sums of money are available to help meet these objectives with the EU aiming to spend 37% of the €750bn pandemic EU recovery fund on Green Deal objectives.

The Fit for 55 legislative framework will also stimulate markets for new petrochemicals-derived materials in some important end use markets and along entire value chains.

The electrification of transport, for example, creates opportunities to develop new materials for batteries and vehicle light-weighting.

CHEMICALS: CHANGE NEEDED
The chemicals sector is under pressure to change, and can expect to experience a mixture of carrot and stick from the EU.

Billions of euros will become available to fund innovation in areas such as low carbon technologies and recycling.

But reforms to the ETS will mean steep increases in the cost of carbon, which regulators hope will push the industry towards investing in ways to lower its carbon emissions.

The cost of carbon emissions for the chemical sector is expected to rise steeply towards the end of the decade, according to analysis by ICIS Carbon Market Analytics.

“For 2021, we could see CO2 [carbon dioxide] prices already rise if the package is perceived ambitious by market participants,” said ICIS analyst Florian Rothenberg.

“However, we expect the package to have a significant impact for industry, mainly in later years, either by a decline of free allocation for 2026-2030 or the Cross Sectoral Correction Factor being applied for free allocation in 2029 and 2030.”

The Cross Sectoral Correction Factor is a uniform cut of free allocation across all industry sectors if overall emissions exceed the limit of free allowances.

“Both scenarios will mean the sector’s short position will grow and chemical products will be increasingly exposed to CO2 costs which we expect to rise significantly towards 2030,” added Rothenberg.

ICIS Carbon Market Analytics forecasts that carbon prices will rise from around €60/tonne towards €90/tonne by 2030.

CEFIC: MORE RENEWABLES, CLEAN HYDROGEN
The chemicals industry is very energy-intensive, so switching to non-fossil fuel sources of power could be an important way reduce its carbon intensity.

Chemicals majors such BASF, Shell, Dow and others are involved in projects to assess the feasibility of developing crackers powered by renewable energy.

Europe’s chemical trade group Cefic said Fit for 55 must stimulate rapid expansion of renewable electricity.

“To accelerate the industrial electrification business case, the package needs to ensure huge volumes of renewable and low carbon energy become available as soon as possible,” said Cefic’s president Martin Brudermuller, also CEO of BASF.

The trade group said low-carbon hydrogen could be an effective way for the chemicals industry to cut emissions, according its director general.

“We agree with the Commission that accelerated deployment of a clean hydrogen economy will be essential to make the energy transition succeed. As the Commission’s latest data shows, the EU chemicals industry is a frontrunner in the use of hydrogen,” said Marco Mensink.

CIRCULAR ECONOMY DRAWS CLOSER
Fit for 55 legislation should pour money and other incentives into development of the circular economy.

The chemical industry can play a key role here, as both mechanical and potentially chemical recycling technologies start to scale up.

Paul Hodges, chairman of New Normal Consulting, said Fit for 55 would “mean a different way” of doing business, prompting industrial companies to move towards a more local and distributed manufacturing base.

“Instead of 1m tonne/year crackers [in the petrochemicals industry], we will see local resource centres with proper collection and recycling facilities,” said Hodges.

“3D printing will allow recycled materials to be made into products and sold back into nearby cities.”

Front page picture: European Commission’s president Ursula Von der Leyen (left) in the presentation of the Fit for 55 package in Brussels on Wednesday
Source: European Commission 

Insight article by Will Beacham