Basic Chemical Preparation

The production of basic organic and inorganic chemicals requires the use of feedstock and energy (both electricity and fuel). This section examines how the marginal cost of basic chemical production is affected by carbon pricing on direct emissions associated with the production process, as well as on the upstream carbon pass-through from feedstock and electricity producers. Steam cracking of feedstock for chemical preparation is also very energy intensive and installations which operate their own CHP facilities are potentially subject to carbon pricing which incurs a direct cost for the installation.

A report by Climate Strategies on estimating carbon costs for the chemical sector outlines a basic methodology to determine the impact of carbon pricing for a range of chemicals under a scenario where 100% of emissions allowances are auctioned to the chemical and power sector at a price of 20€. The report estimates the value at stake for a select group of chemicals by calculating the production cost increase relative to gross value added; where value added is determined by subtracting the cost of raw materials and energy from the gross production value for the German chemical industry using 2003 as the base year.

Figure 2.4 illustrates the three elements of cost increase imposed on the basic chemical industry. While all basic chemicals experience cost increases from direct emissions, substances such as alumina, soda ash, methanol and ammonia experience the highest effect. Feedstock pass-through is experienced most notably by olefins such as ethylene, propylene, butadiene, and butane while electricity pass through is more prominent for alumina, methanol, acetylene, and aromatics.

Figure 2.5 illustrates the same analysis for electro-intensive industries which are highly susceptible from cost pass-through from the power sector. While all electro industries are vulnerable to such cost increases, chlor-alkali for chlorine production experiences the highest rise in cost. Calcium carbide also experiences a significant increase in production cost relative to added value when the power sector is faced with auctioning of allowances.

The analysis by Climate Strategies suggests that while basic chemicals experience the highest production cost increase relative to gross added value, substances such as chlorine and ammonia generally sell within a regional market because of the high transportation costs associated with potentially hazardous materials. This logic suggests that products such as alumina, soda ash, and basic nitrogen

Electricity Emissions I Direct Emissions Feedstock Emissions

Electricity Emissions I Direct Emissions Feedstock Emissions

Figure 2.4 Cost increase relative to gross added value for basic chemicals [15].

160%

140%

120%

Electricity Emissions I Direct Emissions Feedstock Emissions

Chor-alkali Air separation Hydrogen

CaC2

Figure 2.5 Cost increase relative to gross added value for electro-intensive basic chemicals [15].

fertilizers derived from ammonia are the most at risk to leakage where exposure to international markets prevents carbon pass-through from producers.

Inter sector trading of basic chemicals makes across border risk analysis difficult where carbon intensive intermediate processes are subject to leakage from undue shift in production to countries with little or no regulations on carbon emissions.

Since much of the downstream chemical industry relies heavily on chlorine and olefins as inputs for the production of products such as PVC, polyethylene, and ethylene, the next section examines how pass-through cost affects the relative value at stake for a select number of downstream chemical products.

2.3.2.4 Subsector Chemical Preparation

In an earlier discussion around industry exposure and carbon pricing, it was concluded that although downstream chemical products such as pesticides and synthetic materials have the most exposure to international trade, they are not necessarily the most affected by carbon pricing measures, given the high added value relative to production cost increase. The value at risk for high value chemicals is particularly low even with a carbon cost transfer at each stage of the production process.

Here the analysis extends for downstream chemicals substances polyethylene, polypropylene, and PVC. Using the same methodology as derived by Climate Strategies, the cost increases are examined relative to added value, as illustrated in Figure 2.6. Under a carbon cost scenario of 20€ per tonne of C02 imposed on the power sector, PVC experiences the highest cost increase relative to added value. This estimate assumes that chlorine producers pass 100% of the carbon cost through to PVC producers; a realistic assumption based on low trade exposure in the chlorine industry.

Where two-thirds of chlorine trade occurs in the downstream PVC industry, this represents a significant concern for regulating authorities of a cap-and-trade scheme where product demand in emissions capped countries will not decrease. The Chlor-Alkali Association of Europe is particularly concerned about the PVC

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