INSIGHT: US Inflation Reduction Act to boost chems going to sustainability

Al Greenwood

05-Aug-2022

HOUSTON (ICIS)–The Inflation Reduction Act should increase demand for several chemicals used to make insulation, sealants, solar panels and other products used to produce renewable power and increase energy efficiency – while increasing taxes and making it more expensive to produce oil and gas.

  • Incentives would encourage carbon capture and renewable energy production.
  • Credits target biodiesel, renewable diesel and sustainable aviation fuel (SAF).
  • Provisions promote electric vehicles (EVs).

Late on Thursday, the bill received support from a pivotal vote, US Senator Kyrsten Sinema (Democrat-Arizona), the Wall Street Journal reported. Her vote makes it possible for the bill to pass the upper legislative chamber and become law after the signature of President Joe Biden.

REMNANT OF BUILD BACK BETTER
The Inflation Reduction Act is the remnant of the $1.75tr Build Back Better Act, which included provisions that would expand the social safety net, fight climate change and accelerate the adoption of electric vehicles (EVs).

Whether the Inflation Reduction Act lives up to its name is another matter, because several provisions could increase costs.

It imposes minimum wages on certain projects.

For electric vehicles, the bill imposes domestic-content requirements.

The act increases several rates for oil and gas production. Regardless of whether the rates were paltry and needed updating, they will increase costs for oil and gas production. That will trickle down to the chemical industry and the rest of the economy.

HIGHER PRODUCTION COSTS FOR ENERGY
The bill would increase production costs for energy by increasing the royalty rates for oil and natural gas.

The offshore rate would rise to 16 2/3-18 3/4% from 12 1/2%. Onshore would rise to 16 2/3% from 12 1/2%.

The minimum oil and gas bids would rise to $10/acre from $2/acre.

The fossil fuel rental rates would rise to $3/acre from $1.50/acre during the first two years of the lease. It would then rise to $5/acre for the next six years and then reach $15/acre.

The rental rates and royalty rates apply to federal land. The changes would not apply to private land, much of which includes the Permian and other productive oil and gas fields in Texas.

The bill relies on incentives and fees to reduce methane emissions from oil and gas production. The incentives are in the form of grants worth $850m.

For the fees, the government will start imposing them once producers exceed a certain threshold. The fees will start at $900/tonne of methane for 2024, $1,200/tonne in 2025 and $1,500/tonne in 2026.

The American Chemistry Council (ACC) criticised the methane fees. “The cost of the methane tax would be passed through to the production of chemicals used as building block materials for virtually all manufacturing,” it said.

Oil and natural gas provide chemical companies with fuel and feedstock.

On the other hand, the act will require the US to conduct scheduled lease sales by the end of this year, which should end an obstacle to more energy production.

HIGHER TAXES
The bill sets a minimum 15% corporate tax rate on adjusted income for companies that make more than $1bn/year for a three-year period.

Several US-based chemical companies and refiners would meet this threshold.

However, it is unclear how this tax will affect chemical companies and other manufacturers.

Late on Thursday, the political publication The Hill reported that Sinema and another senator, Chuck Schumer (Democrat, New York) reached an agreement to protect manufacturers from the effects of the corporate minimum tax rate.

As part of the agreement to win Sinema’s support, the bill also removed a provision that would close the carried interest loophole, The Hill reported. To offset the loss in revenue from the loophole and the corporate minimum tax rate, the act will add a new excise tax on stock buybacks, The Hill said, quoting an anonymous source.

Prior to Thursday, the ACC welcomed the energy and climate provisions in the bill but urged lawmakers to reject the tax increases.

“At a time of rising inflation, stretched supply chains and economic weakness, the new taxes could increase costs and administrative burdens for US chemical manufacturers, stifle innovation, sacrifice jobs and further escalate prices for consumers for a variety of goods,” the ACC said in a statement.

Already, the chemical industry is dealing with the newly re-instated Superfund excise taxes, the ACC said.

It warned that the bill’s higher taxes could slow manufacturing investment in the US.

BILLIONS IN TAX CREDITS, GRANTS, REBATES
The act allocates billions of dollars to encourage consumers to buy electric vehicles and energy-efficient appliances; and to retrofit their homes to make them consume less power.

The appliances and retrofits could increase demand for insulation made of expandable polystyrene (EPS) and polyurethanes.

Sealing up gaps in homes would increase demand for sealants.

Other improvements that qualify for the programmes include heat pumps, doors, windows and water heaters. The windows and doors could have components made of polyvinyl chloride (PVC).

For electric vehicles, they consume more plastics by weight than automobiles powered by internal combustion engines (ICEs).

In particular, the separators in lithium-ion batteries are made of ultra-high molecular weight polyethylene (UHMW-PE). Faster adoption of EVs should further increase demand for this material.

RENEWABLE ENERGY
Other provisions in the act promote solar panels and wind turbines.

Solar panels are made with ethylene vinyl acetate (EVA) and polyvinyl butyral (PVB). Wind turbines are made with epoxy resins.

The lubricants used in wind turbines are typically made of polyalphaolefins (PAOs), according to the publication Windpower Engineering & Development.

RENEWABLE FUELS
The act extends the tax credit for biodiesel and renewable diesel to 31 December 2024 from 31 December 2022. It extends an incentive for second-generation biofuels to 2025 from 2022.

It also increases the value of the fuel credit for sustainable aviation fuel (SAF).

The incentives for SAF and renewable diesel could encourage refiners to build or convert units that produce these fuels. The processes used to make these renewable fuels are similar to those used to make petroleum-based products.

CLEAN HYDROGEN
The Inflation Reduction Act awards tax credits for low-carbon hydrogen such as green hydrogen.

Green hydrogen uses electrolysers to split water molecules. The electrolysers are made with fluoropolymers such as Chemours’s Nafion, and the water will likely require some form of treatment. More water treatment would increase demands for the chemicals used in the process.

Some companies plan to export green hydrogen overseas by converting it to ammonia, so ammonia production could also increase.

For the chemical industry as a whole, they could use green hydrogen as an emission-free source of process heat. Chemical companies can further lower their carbon emissions by purchasing electricity from utility companies that burn blends of hydrogen in their gas-fired power plants.

The credits could not be used for blue hydrogen, the production of which relies on steam methane reformers and carbon capture and sequestration (CCS).

CARBON CAPTURE
Blue hydrogen would still benefit from the bill, which provides incentives for CCS, including the extension and expansion of the Section 45Q carbon capture and sequestration credit.

Occidental Petroleum and other oil and gas producers in the US are relying on carbon capture to offset the emissions of their products. Occidental is going as far as to build direct-air capture plants to extract carbon dioxide (CO2) from the atmosphere and use it in enhanced oil recovery.

Ethanolamines are used to capture carbon dioxide from emissions and the atmosphere, so more carbon-capture projects should increase demand for them.

Carbon capture could allow oil and gas producers to maintain production, which would provide chemical companies with the ethane and other natural gas liquids (NGLs) that they use for feedstock.

Carbon capture is an integral part of the net-zero petrochemical project that Dow is developing in Fort Saskatchewan, Alberta province in Canada.

Provisions for carbon capture should make it easier for chemical companies to expand capacity while still meeting their targets for emission reductions.

Summaries and details of the Inflation Reduction Act can be found here.

By Al Greenwood

Thumbnail image shows electric vehicle. Image by Mario FOURMY/SIPA/REX/Shutterstock

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