How can the chemicals industry achieve Net Zero emissions by 2050?
Although the full answer is still uncertain, there are several proven measures for reducing CO2 today, according to the latest Roland Berger research.
The chemicals industry is behind the curve when it comes to decarbonization. Chemical decarbonization will require a fundamental shift in operations, if not “extraordinary” and “unprecedented” measures in the words of the World Economic Forum.
Chemical decarbonization will undoubtedly involve less resource consumption, more sustainable feedstocks, and new sources of renewable energy, product circularity, and overall increased efficiency across the entire supply chain. The industry has been built on cheap and abundant fossil-based feedstocks and energy, and there is little visibility on what suppliers and customers are doing, making it difficult to measure and implement emission reduction strategies. We’ll examine the challenges of chemical decarbonization, and what chemical organizations can do to start their journey.
“Scoping” the challenge
Since the chemical industry supports almost a quarter of US GDP, there’s a lot on the line when it comes to decarbonizing chemicals. The industry will need to play a leading role in addressing climate change, while still meeting the demands of all participants along the supply chain. To accomplish this, chemical industry leaders will need to address emission reductions across three different areas (or scopes).
Emissions are given off directly by the (re)sources a company owns and controls. Examples include direct fuel combustion in its manufacturing processes, emissions from company vehicles and fugitive emissions.
Indirect emissions from the generation of purchased electricity, steam, heating and cooling for use by the given company.
All other indirect emissions given off elsewhere in the company’s value chain. Examples including emissions generated when delivering a product to a customer, emissions generated by parts suppliers, and emissions generated by energy consumption when the company’s product is in use for the customer.
Chemical players have limited transparency and visibility into Scope 3 emissions – the largest share of CO2 emissions. In fact, on average, an estimated 70-80% of greenhouse gas emissions in the chemical industry are Scope 3. Assessing Scope 3 emissions requires a comprehensive evaluation of raw material sources and derivative end uses, as well as end-of-life treatment. Chemical companies will need to innovate along the value chain through partnerships with suppliers and customers to meet commitments and requirements.
Failure to decarbonize chemicals comes at a risk. Investors are demanding greater transparency and detailed disclosures on ESG performance, impacting future capital access. Leading investors and banks are targeting investments in ESG-aligned initiatives while divesting from non-ESG investments. Because of this, we believe decarbonized laggards will suffer competitively in the coming years.
Financial investors are announcing focused investments in companies with strong sustainability profiles. For example, one investment firm committed USD 25 bn total equity to climate and environmental sustainability investments in 2021, including USD 14 bn committed into renewable assets. Another announced a comprehensive sustainable investing platform and is targeting deploying USD 50 bn in clean energy and climate investments over the next 5 years. A third financial investor announced disinvestments in companies with sustainability-related risks.
Players in key end-industries for chemicals (e.g., automotive, construction, industrials, consumer goods and agriculture) have committed to lowering Scope 3 emissions with many ambitious targets set for 2030 and aspirations to reach Net Zero by 2050. To achieve these goals, companies must reduce emissions in their supply chain and work with suppliers, including chemical companies, to ensure targets can be collectively met. Several key players have already initiated supplier audits, joint GHG reduction roadmaps, and decision matrices for supplier selection.
One major automotive player has established a baseline for supplier CO2 emissions and developed a joint roadmap for performance improvements. In addition, the company plans to work with selected suppliers to reduce their environmental footprint through the launch of a new climate program. This is one of many examples where chemicals companies will need to act quickly to ensure customer relationships are maintained as customers in their end-industries progress towards their sustainability commitments.
Risks and rewards (in different regions)
There is no one way to decarbonize chemical operations. The approach taken by chemical companies will vary depending on their size, portfolio, value chain position and geographic location.
In addition, carbon pricing initiatives will have significant implications on the competitiveness of chemical companies. In Europe, companies will be required to reduce their CO2 emissions primarily via a cap-and-trade system called the ETS (Emissions Trading System) which covers 40% of emissions in the European Union. A cap is placed on the amount of emissions allowed by each company in the scheme, and companies can trade allowances. The overall cap is reduced over time, which leads to an increase in the price of carbon. European ETS carbon prices have gone up from EUR 10/tCO2e in 2018 to as much as EUR 100/tCO2e in 2023. Additionally, Europe will also be launching the Carbon Border Adjustment Mechanism (CBAM) in October 2023, to complement the ETS and ensure that non-EU countries’ imports are taxed according to their emissions footprint. The scheme will focus on industries that are highly carbon intensive, namely cement, iron, steel, aluminum, fertilizers, electricity and hydrogen.
The Biden administration’s agenda has centered around incentives with multiple programs offering tax breaks, loans, and grants. Most recently the EPA has also announced regulation to drive decarbonization in power and automotive sectors. The latest Inflation Reduction Act’s Industrial Decarbonization Program allocated USD 6 bn of funding towards the acceleration of decarbonization projects in energy-intensive industries, including chemicals and refining. The current administration will invest billions of dollars over the next decade to drive clean energy projects in the US. Compliance carbon markets are only in effect in select US states: California, Washington and across eleven states in the US Northeast.
China launched a national Emissions Trading System (ETS) scheme in 2021, one of the largest in the world. The first phase of China’s ETS has targeted the power sector representing around 40% of national emissions in 2021. Carbon pricing in China is expected to almost double from 2020 to 2030 with increased monitoring, reporting, and verification activities. Most Asian exporters outside of China do not have stringent emissions accounting and reporting practices which may pose a challenge for compliance particularly with the new CBAM policy in Europe.
In the near term, regional carbon policy is expected to impact the way global markets operate. Chemical firms will be required to meet end-market legislation, and, as a result, non-compliant regions may become less competitive. In turn, the USA may become advantaged in supplying regulatory-stringent markets like Europe. Since inaction could place profitability and competitiveness at risk, chemical producers must make emission reduction a strategic priority. Not only is decarbonization the right thing to do, it will also be measurably good for business.
Tackling Scope 1 and 2 emissions - seven starting points
There are seven distinct “action areas” for decarbonizing across Scope 1 and Scope 2 emissions. Although these cannot achieve Net Zero on their own, by engaging across these seven areas companies can make significant progress quickly.
Ultimately, the strategies with the highest potential impact, such as truly novel synthetic pathways using alternative feedstocks, are still somewhat embryonic and need further development. An example is green ethylene produced from green hydrogen and captured carbon dioxide. Ethylene is a heavy emitter of carbon dioxide.
There are several ways to capture carbon in this process, namely with underground deposits, pre-combustion, post-combustion, oxycombustion or direct air capture. While carbon capture from ethylene production is expensive, our analysis shows that the cost of implementing and operating CCS/CCU pre-combustion or post-combustion technology can be offset, depending on the level of carbon tax applied in a region. In the case of the EU ETS applying a carbon price of more than USD 100/ton, this would lead to a net benefit for both the environment and operational economics.
CO2 derivative strategies
A carbon tax is a tax levied on the carbon emissions associated with producing goods and services. If a carbon tax of USD 100/ton is implemented, carbon capture technology may be justified. If you are not being taxed on your carbon – as in the US – carbon incentives are an equally important consideration when planning your carbon capture, storage, or reuse strategies.
Sequestration and storage resolve the issue of reducing emissions; a bigger opportunity (and challenge) when leveraging Carbon Capture & Storage (CCS) is identifying sustainable and profitable ways to use the captured CO2 – i.e., defining a “CO2 derivative strategy” for captured carbon.
In an ideal situation, this can be coupled with a novel synthetic pathway, using the captured CO2 as a raw material for something else. Some chemical companies have already integrated captured carbon back into their own orother's processes.
There are several commercial ways to extract value from captured carbon.
• CO2 reaction with hydrogen to make methanol
• Convert CO2 to polyols to extend the chain, for polycarbonates and forisocyanurates
• CO2 conversion to ethane and methane
• Algae "eat" CO2 and grow. Algae can be used as fuel alternative or feedstock for sustainable aviation fuel
Many of these approaches can be economically applied today in regulating incentive structures to begin moving the decarbonization needle. Your mileage will vary, of course, depending on company size, industry segment, location, and level of investment available. But as we have seen from our recent work, these seven reduction strategies across Scope 1 and Scope 2 are being applied with an immediate impact.
On average, an estimated 70-80% of greenhouse gas emissions in the chemical industry are Scope 3. Scope 3 includes supply chain related emissions – Regulation is tightening and reduction strategies throughout the supply chain will soon be mandatory. The EU Supply Chain Law promotes sustainable corporate behavior across the global value chain through sustainability due diligence. The directive requires companies to introduce and report in line with mandatory EU sustainability reporting standards and provide external assurance of sustainability information. With the proposed reporting requirements of the Corporate Sustainability Reporting Directive (CSRD), primary environmental data from impact-heavy suppliers will become a must-have. Similarly, in the US, the SEC has proposed a set of rules which will require the disclosure of GHG emissions from upstream and downstream activities, if the these can beconsidered "material" or if the registrant has set a GHG emissions target/goal thatincludes Scope 3 emissions.
In the chemicals industry, Scope 3 emissions are typically highest for purchased goods and services (Scope 3.1) and direct use-phase emissions of sold products (Scope 3.11). For the latter, emissions will remain high for near-/mid-term future but are expected to reduce dramatically in the longer run, if fully green energy (often: electricity) is used. We believe significant efforts need to be taken, together with suppliers, to reduce Scope 3.1 in the shorter term and to identify opportunities for Scope 3.11 to bridge time until full and truly green electrification of use-phase.
Roland Berger has developed methodologies to holistically reduce a company's scope 3 emissions – meaningful impact can be achieved with supplier engagement and partnership. Segmenting and prioritizing your suppliers based on their carbon contribution and decarbonization maturity forms the basis for said engagement and partnership. Customized reduction targets are co-developed with all prioritized suppliers, in line with both your corporate decarbonization roadmap and industry benchmarks. We jointly detail engagement strategies with prioritized suppliers to ensure their commitment to the emission reduction roadmap, and an implementation roadmap complete with action plans, KPIs and incentives to drive change.
If chemical firms act now, the industry could make significant strides towards its 2050 Net Zero goal – Today, chemical firms should consider:
Which decarbonization levers will create most impact for their business, to avoid loss of profitability and competitiveness
Addressing Scope 1 and 2 emissions in the short-term, tackling a combination of seven measures
Developing industry-wide partnerships with suppliers and customers to drive transparency in Scope 3 emission reduction and develop plans to tackle scope 3 now
Roland Berger is a recognized thought leader in sustainability, environmental strategy and ESG. Our publications on sustainability topics such as sustainability strategies, climate adaptation, decarbonization of different industries, circular economy and waste management strategies, green materials, the energy transition, hydrogen and a whole host of other topics offer vital insights for companies in different industries and sectors.
Through our research, our 30 years’ experience working with chemical companies on their corporate strategies, and our hands-on approach in the supply chain decarbonization and CO2 abatement calculations, we are the right partner to help chemical firms move the needle on emissions reductions today. While these changes can be challenging and costly, we believe leading chemical producers can achieve quick wins and ultimately get a leg up on the competition.
Extraordinary measures: ways to decarbonize the chemicals industry
How can the chemicals industry achieve Net Zero emissions by 2050? Although the full answer is still uncertain, there are several proven measures for reducing CO2 today, according to the latest Roland Berger research.