The chemical industry is the largest consumer of industrial energy in the world
With a total gross value added to the global economy of $5.7 trillion per year, or 7% of global GDP, the chemical industry is an integral part of the global economic landscape, permeating almost all goods-producing sectors throughout by supporting 120 million workers worldwide.
As the world’s largest consumer of industrial energy, the chemical industry requires enormous raw material inputs in order to create the millions of end-use products that power modern society. Many of these commodities are themselves considered fuels, which adds complexity to the issues the industry faces with respect to the rising tide of energy transition and ESG concerns. These raw materials represent nearly 60% of the energy consumption of the chemical industry, the rest being distributed in decreasing order between electricity/heat, natural gas, coal and oil.
The global chemical industry, like many other industrial sectors, faces an unprecedented challenge to simultaneously manage these ESG and climate risks while continuing to deliver reliable and affordable products that drive the global economy.
Considering projected population growth, expected global economic development, and increasing manufacturing innovations, chemical industry production volumes are expected to increase two to three times more than current volumes by 2050. However, to have even a 50% chance of limiting global warming to 2°C by 2050, as requested by the United Nations Intergovernmental Panel on Climate Change, emissions from the sector chemicals will have to decrease by 75% per unit of production.
As the chemical industry looks internally to tighten its belt and externally to onslaught with changes due to the continued effects of the COVID-19 pandemic on the supply chain, evolving geopolitical tensions in the world and the increasingly important measures related to climate change, there is an urgent need to increase efficiency and decarbonization gains throughout the value chain, in addition to developing and subsequently monitoring a full legal/regulatory road for the industry for years to come.
Decarbonization opportunities along the value chain
Across all sectors, seeking energy efficiency gains has historically provided the greatest cost savings while simultaneously reducing emissions. These efficiencies have become much easier than seeking to innovate with new decarbonization technologies. But effectively meeting various global emission reduction targets will require simultaneous efficiencies and innovations in low-carbon energy sources. For the chemical industry, where there are already highly optimized manufacturing processes, most decarbonization opportunities are up and down the value chain.
Upstream in the value chain, it is difficult to decarbonize the sector’s chemical inputs, as these are globally traded products with extreme competition and price sensitivity. The largest consumers of chemical production processes include ethylene production, which consumes 42% of energy-carrying raw materials per year (mainly in the form of petroleum or natural gas-based products such as naphtha, l ethane and LPG), and the production of methanol and ammonia. , which consume around 16% of energy-carrying raw materials per year, mainly natural gas. Downstream, emission reductions and electrification of processes are key drivers of overall value chain decarbonization.
In the absence of substantial decarbonization of chemical inputs and in light of the large amounts of carbon dioxide emissions inherent in the chemical manufacturing process, decarbonizing the industry as a whole requires a unique combination of approaches. Approaches include getting low-carbon electricity, seeking efficiency increases, requiring fuel switching, using point-source carbon capture technologies, and the direct removal of carbon from the air and the establishment of large-scale disruptive changes in various manufacturing processes. All of these changes will necessarily have different trajectories and timelines as they evolve regionally, given global differences in energy supply and diverging 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 feedstocks with sustainably produced biomass, such as the use of bionaphtha in chemical production. An important and growing area of innovation is carbon capture, utilization and sequestration (CCUS), with a view to using isolated carbon dioxide molecules as feedstock in the production of many chemicals in addition to big volume. This process, which has the technical potential to lead to a carbon-neutral chemical industry and decouple chemical production from fossil resources, could add more than $1.5 billion a year in additional manufacturing costs depending on the cost of oil. and electricity, meaning these costs would be 150-200% higher than the 2017-2019 market value of these chemicals.
While these technologies herald a renaissance in the chemical manufacturing industry, there are still many hurdles to overcome. A recent study conducted by CO2 Sciences and The Global CO2 Initiative demonstrated several challenges hindering the development and commercial application of CCUS in this industry, such as the fact that the conversion of carbon dioxide into useful chemicals consumes an enormous amount of energy, mainly hydrogen, which leads to high costs and high demand for zero-carbon electricity. Improvements in catalysts and process technology, as well as an increase in the supply of low-cost carbon-free electricity, will significantly improve the outlook for CCUS.
The chemical industry faces many significant challenges as it seeks to evolve. These include the challenges to innovation posed by fully depreciated (or not fully depreciated) chemical manufacturing plants due to the long life of installed capital, thus making consideration of new technologies less attractive. , as well as the prohibitive costs of deploying low-carbon technologies. thanks to the retrofit. Additionally, while deep decarbonization is conceivable, the need for additional technology development to improve the economics of projects that can support and support such a transition is greater than ever.
In light of the looming need for industry-wide innovation as well as manufacturing and process reforms, a comprehensive and transparent regulatory roadmap is essential for a successful transition to a low-emissions and carbon-efficient future. high carbon intensity. Regulations between international jurisdictions will diverge significantly, but it is imperative that consistent guidelines and parallel jurisdictional standards are well balanced and continuously updated in close consultation with industry. Such alignment between regulators and industry ensures the feasibility of innovation and can also safeguard international competitiveness, while avoiding cost-prohibitive responses and stranded investments.
The International Energy Agency has recommended that regulators overseeing all facets of the chemical industry focus on long-term policies to encourage the development of emerging and disruptive technologies and raw materials, while accelerating permit approvals for energy efficiency projects. The IEA also called for a wider deployment of energy management systems, such as ISO 50001, which encourage companies to follow a plan for continuous improvement in energy efficiency, energy security and energy consumption. As jurisdictions roll out various roadmaps and updated regulatory expectations, there is now, more than ever, a pressing need for expert guidance to better navigate the energy transition in the chemical manufacturing space.
Shearman & Sterling has a team of lawyers around the world who work in and around the chemical industry and who are immersed in the ever-changing energy transition and are well placed to advise industry players chemicals on how best to take advantage of new technologies. and policies.
Special thanks to Neil Segel who contributed to this article.