Worldwide: Developing An Energy Transition-Conscious Legal Roadmap For The Chemical Industry

The Chemical Industry Is the Largest Industrial Energy Consumer Worldwide

With a total gross value addition to the global economy of $5.7 trillion annually, equivalent to 7% of global GDP, the chemical industry is an integral part of the global economic landscape, permeating nearly every goods-producing sector while supporting 120 million workers worldwide.¹

As the largest industrial energy consumer worldwide, the chemical industry demands enormous feedstock inputs in order to create the millions of end-use products that power modern society. Many of these feedstocks are themselves considered fuels, adding complexity to the issues that the industry faces with regard to the rising tides of the energy transition and ESG-related concerns. These feedstocks compose nearly 60% of the energy consumption within the chemical industry, with the remainder split in declining order among electricity/heat, natural gas, coal and oil.

The global chemical industry, like many other industrial sectors, is facing an unprecedented challenge to simultaneously manage these ESG and climate risks while continuing to provide reliable and affordable products that drive the global economy.

Given population growth predictions, forecasted global economic development and increases in manufacturing innovations, production volumes in the chemical industry are expected to grow two to three times greater than current volumes by 2050.² However, to have even a 50% chance of limiting global warming to 2°C by 2050, as called for by the United Nation's Intergovernmental Panel on Climate Change, emissions in the chemical sector will need to decline by 75% per unit of production.³

As the chemical industry looks internally to tighten its belt and externally to the onslaught of changes due to the ongoing COVID-19 pandemic supply-chain effects, shifting geopolitical tensions worldwide and increasingly prominent climate-change related measures, there is an imminent need to increase efficiencies and decarbonize along the entire value chain, in addition to developing and subsequently monitoring a comprehensive legal/regulatory roadmap for the industry for the years to come.

Decarbonization Opportunities Along the Value Chain

Across all sectors, seeking to obtain energy efficiency gains has historically provided the greatest cost savings while simultaneously lowering emissions. These gains in efficiency have come far easier than seeking to innovate with new decarbonization technologies. But effectively meeting various global emissions reduction targets will require concurrent efficiency gains and innovations in lower carbon energy sources. For the chemical industry, where there are already highly optimized manufacturing processes, most of the decarbonization opportunities lie upstream and downstream on the value chain.

Upstream on the value chain, it is difficult to decarbonize the chemical inputs to the sector, as they are globally traded commodities with extreme price competition and sensitivity. The largest chemical production process consumers include ethylene production, which consumes 42% worth of energy-carrier feedstocks per year (mostly in the form of petroleum- or natural gas-based products such as naphtha, ethane and LPG), and methanol and ammonia production, which consume approximately 16% worth of energy-carrier feedstocks per year, mostly natural gas.⁴ Downstream, emissions reductions and process electrification are the key drivers towards overall value chain decarbonization.

In the absence of substantial decarbonization to the chemical inputs and in light of the large amounts of carbon dioxide emissions that are inherent to the chemical manufacturing process, decarbonizing the industry as a whole requires a unique combination of approaches. Among the approaches include obtaining low-carbon electricity, seeking increases in efficiencies, mandating fuel-switching, employing point source carbon capture and direct air carbon removal technologies and instituting large-scale, disruptive changes to various manufacturing processes. All of these changes will necessarily have different trajectories and timelines as they evolve regionally, given the global differences in energy sourcing and divergent national priorities.

Examples of these disruptive changes abound. Chemical producers are now considering replacing high-temperature chemical processes with electrochemical processes, in which electricity, rather than heat, drives reduction and oxidation reactions. Some chemical producers are replacing certain feedstock fuels with sustainably produced biomass, such as using bionaphtha in chemicals production. One significant and growing area of innovation is carbon capture, utilization and sequestration (CCUS), with an eye toward using the isolated carbon dioxide molecules as a feedstock in the production of many of the largest volume chemicals. This process, which has the technical potential to lead to a carbon-neutral chemical industry and to decouple chemical production from fossil resources, could add more than $1.5 billion per year in additional manufacturing costs depending upon the cost of oil and electricity, meaning that these costs would be 150-200% more than the 2017-2019 market value for those chemicals.⁵

While these technologies portend a renaissance in the chemical manufacturing sector, there are still many obstacles to overcome. A recent study by CO2 Sciences and The Global CO2 Initiative demonstrated several challenges impeding the development and commercial application of CCUS in this industry, such as the fact that converting carbon dioxide into useful chemicals consumes an enormous amount of energy, most prominently hydrogen, leading to high costs and strong demand for zero-carbon electricity. Improvements in catalysts and process technology, together with an increase in the supply of low-cost zero-carbon electricity, will vastly improve the prospect of CCUS.⁶

Regulatory Roadmap

There are many significant challenges facing the chemical industry as it seeks to evolve. These include challenges to innovation posed by fully paid-off (or non-fully-depreciated) chemical manufacturing plants because the long life of installed capital, thereby making consideration of new technologies less appealing, as well as the prohibitive costs of deploying low carbon technologies through retrofitting. Additionally, while deep decarbonization is conceivable, the need for further technological development to improve project economics that can support and sustain such a transition is higher than ever.

In light of the imminent need for industry-wide innovation as well as manufacturing and process reforms, a comprehensive and transparent regulatory roadmap is essential for a successful transition toward a lower emission and carbon-intensive future. Regulations across international jurisdictions will diverge vastly, yet the need for consistent guidelines and parallel jurisdictional standards to be well-balanced and continuously updated in close consultation with the industry is imperative. Such alignment between regulators and the industry safeguards innovative feasibility and can also preserve international competitiveness, while avoiding prohibitively expensive responses and stranded investments.

The International Energy Agency has recommended that regulatory agencies overseeing all facets of the chemical industry focus on policies that are long-term to encourage developments in emerging and disruptive technologies and feedstocks, while also accelerating permit approvals for energy efficiency projects.⁷ The IEA has also called for broader deployment of energy management systems, such as ISO 50001, that prompt companies to follow a continuous improvement plan for energy efficiency, energy security and energy consumption. As jurisdictions roll out various updated regulatory roadmaps and expectations, there is now, more than ever, a pressing need for expert advisory input to best navigate the energy transition within the chemical manufacturing space.

Shearman & Sterling has a team of lawyers around the world who work in and adjacent to the chemical industry and who are immersed in the constant evolution within the energy transition and are well poised to advise chemical industry participants on how to best take advantage of new technologies and policies.

Special thanks to Neil Segel who contributed to this article.

Footnotes

1. International Council of Chemical Associations, "The Global Chemistry Industry: Catalyzing Growth and Addressing Our World's Sustainability Challenges," (2019).

2. P.G. Levi and J.M. Cullen, "Mapping global flows of chemicals: From fossil fuel feedstocks to chemical products," Environmental Science and Technology (2018) 52:1725-1734.

3. P.G. Levi and J.M. Cullen, "Mapping global flows of chemicals: From fossil fuel feedstocks to chemical products," Environmental Science and Technology (2018) 52:1725-1734.

4. Arnout de Pee, et. al. "Decarbonization of industrial sectors: the next frontier," McKinsey & Company (June 2018). 17.

5. Kätelhön, Arne et al. "Climate change mitigation potential of carbon capture and utilization in the chemical industry," Proceedings of the National Academy of Sciences vol. 116(23) (2019): 11187-11194.

6. Arnout de Pee, et. al. "Decarbonization of industrial sectors: the next frontier," McKinsey & Company (June 2018). 31.

7. "Technology Roadmap - Energy and GHG Reductions in the Chemical Industry via Catalytic Processes," IEA (2013). 43.

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