INSIGHT: US policy must catch up to enable investment in sustainability driven projects

COLORADO SPRINGS (ICIS)–US policy must quickly catch up with the transition to sustainability and a net zero carbon emissions future amid a fast-changing global energy landscape to enable critical investment and innovation in the chemicals industry.

“We expect the growth in circular and sustainable solutions is going to drive an increase in the total addressable market (TAM) for [the chemicals industry] from $650bn to $800bn by 2025,” said Dow CEO Jim Fitterling, who noted that more than a third of the company’s capital expenditures (capex) is dedicated towards these areas.

“And that’s going to require that we have a lot of good policy support to make that happen,” he added.

“We really need stable, cost effective policies in order to deliver our plans. We need to be able to incentivise the development and scale of the technologies that will help society move towards its net zero ambitions,” said Karen McKee, president of ExxonMobil Chemical.

Fitterling, McKee and other industry executives spoke at a press briefing at the American Chemistry Council (ACC) Annual Meeting in Colorado Springs, Colorado, US.

The Dow CEO pointed to the company’s zero carbon cracker project in Fort Saskatchewan, Canada, which is being enabled by a price on carbon, and hydrogen carbon capture and storage (CCS) infrastructure.

“We did some work with the ACC and with the infrastructure bill; there are earmarks for up to eight hydrogen carbon capture hubs in the US. Our estimate is that these hubs in the right locations could help decarbonise up to 85% of our industry,” Fitterling pointed out.

The industry is also investing in renewable energy sources, along with looking at small modular nuclear reactors (SMRs), he noted.

“If the policies are right, I think we’ll decarbonise by 2050 and more than double production,” said Fitterling, who added that new capacity would be built in cost advantaged regions such as the US.

“Once we prove we can do it [sustainably], and it’s a good return on investment, the pressure is going to be on the market to keep doing it faster, and that’s really what investors want to see. There’s a lot of money out there waiting to flow into ESG funds, and it’s already started,” he added.

INCENTIVES AND PRICE ON CARBON
From a policy standpoint, incentives are needed to promote new technologies, along with a price on carbon, said the Dow CEO.

As the industry moves away from cracker furnaces fuelled by direct-fired natural gas to ones fuelled by hydrogen to reduce CO2 emissions, operating costs will be higher as hydrogen is a less dense fuel. Plus redesign will be needed, adding capex, he explained.

“Typically governments have been supportive of capital going into low carbon technologies, so they give you some sort of a tax incentive or in some cases a subsidy to make that transition,” said Fitterling.

The second key policy tool would be a price on carbon versus a tax.

“We’re trying to solve a climate problem, and if you raise tax, the money doesn’t go back to the climate problem – it’s just inflationary and we still have the climate problem,” said Fitterling, who also noted that if the US put a tax on carbon and other countries do not, that would simply erode competitiveness and deter investment.

“If you put a market-related price on carbon like through an emissions trading system (ETS), then that becomes an incentive… to make that investment because we recoup part of that investment out of the price of carbon. At that point, these ESG investors come in, and that money flowing into the industry helps the transition much faster than government can by deploying tax funds. And that’s where I think we have to use the capital markets in the US to our advantage,” he added.

The price of carbon would have to be around $65-100/tonne – about where the prices are in the EU and Canada. And if many countries had a price on carbon, the price would harmonise, eliminating the need for schemes such as carbon border adjustment mechanisms (CBAMs), he noted.

“That’s the winning formula if you do it right. You also need to take the foot off of [energy production] and let production increase,” said Fitterling.

“There’s a fallacy out there that low emissions means no fossil fuels. Natural gas is a path to hydrogen carbon capture and low emissions, and it’s been proven,” he added.

In the production of blue hydrogen, hydrogen is produced from natural gas through steam methane reforming while the CO2 is captured and stored.

INVESTOR PATIENCE A KEY FACTOR
Investor patience is also a key variable as the chemicals industry seeks to put capital towards innovative projects that enable sustainability, such as chemical recycling of plastics facilities and crackers with low or zero carbon footprints.

Investors certainly won’t have patience for companies investing in projects using traditional non-carbon mitigating technologies that tie up billions of dollars for as long as 7-10 years, said Peter Huntsman, CEO of Huntsman Corp.

But investors will also have to be patient for projects that enable sustainability, given how long these can take to be approved.

Permitting even for smaller projects such as Huntsman’s $30m ultra-pure ethylene carbonate expansion for electrolyte material for electric vehicle (EV) batteries in Conroe, Texas, can take over two years, he noted.

“I question how patient investors are going to be,” said Huntsman, pointing to the energy sector where investors are favouring return of capital in the form of dividends and share buybacks versus new projects.

“Some of these ESG funds investing in these technologies are going to have to be very patient because the investment to build a large-scale facility today can stretch out to upwards of a decade,” he added.

Fast tracking on the regulatory side of projects that enable sustainability is sorely needed. By the time a project gets approved, a new and improved technology could well make that project obsolete.

FIXING TSCA NEW PRODUCT APPROVAL DELAYS
The ACC’s top policy priority is to get the US Environmental Protection Agency (EPA) to fix the severe delays in approvals of new chemicals under the reformed Toxic Substances Control Act (TSCA).

“If you look at the list of the first 33 chemicals that are in the queue, it supports every sector of the economy from auto, ag products, healthcare, textile production and transportation… The administration talks a lot about semiconductors, EVs, alternative sources of energy and as we all know, you can’t do these things without [the chemicals industry],” said Chris Jahn, CEO of the ACC.

“Under TSCA, new chemicals are supposed to be reviewed in 90 days, but it’s been more like two years now… If we’re going to tackle some of the biggest challenges facing the world going forward and we want to do that here in the US, we’re going to need policy that enables that,” he added.

REMOVING ROADBLOCKS TO ENERGY PRODUCTION
The ACC’s other top priority is climate and energy policy. Policies that promote oil and gas production are needed for the chemicals industry to produce products that enable sustainability.

“We really need to have a climate smart energy policy. We can do both those things – produce more energy and reduce emissions, while also supporting our allies. But we have to be really smart about how we do that,” said Jahn.

The Russia/Ukraine war has changed the calculus in the global energy markets, requiring more US production of oil and natural gas to supply energy the world, along with feedstock for the chemicals industry.

“Regulatory-wise, we have been putting roadblocks in front of energy production – some are related to pipelines and some related to the ability for producers to get financing. The demand for energy is going up, and we’re not letting the supply increase,” said Fitterling.

“This industry will be the solution to a more sustainable, more innovative and a more sustainable future. The engines behind that have to be affordable energy and reliable energy, and it makes zero sense for us to be encouraging more exports without encouraging more production,” said Huntsman.

“In spite of everything, I see nothing but opportunity for us – light-weighting, semiconductors, batteries, solar and wind all go through this industry. We are the innovators and ones that are going to get it done,” he added.

Insight article by Joseph Chang