Global concern over climate change is placing pressure on industrial sectors to reduce greenhouse gas (GHG) emissions as more countries establish targets to reduce emissions through internationally binding agreements such as the Kyoto Protocol. Policy measures aimed at mitigating GHG emissions rely heavily on technology based solutions to produce renewable energy and conserve fossil fuels, as well as target harmful emissions such as nitrous oxide (N 2O) and methane (CH4) which pose significant concern to climate change because of their high global warming potential (GWP).1 While the chemical industry continues to play an integral role towards achieving such objectives through the development of light weight composites, renewable fuels, PV cells, high performance insulation, and specialized emissions catalysts, the use of energy intensive products such as ethylene, ammonia, and chlorine makes the industry inherently exposed to policy measures that impose carbon pricing2) from emissions caps on combustion installations [1].

This chapter examines climate change policy instruments such as emissions trading, taxation, and regulation in the context of the chemical process industry and focuses on risk and opportunity management for industry operating in a globally regulated environment on GHG emissions. Recognizing the highly integrated and energy intensive nature of the chemical industry, this chapter focuses on carbon pricing throughout each stage of the supply chain from the production of energy and feedstock to high value downstream chemicals.

While the European chemical industry has nearly achieved a 30% reduction of absolute emissions between 1990 and 2005 )2] ) the industry still accounts for

Global Warming Potential (GWP) is a measure of how much a given mass of greenhouse gas is estimated to contribute to climate change relative to carbon dioxide which has a GWP of 1 on a 100 year time horizon.

Carbon pricing refers to the cost of greenhouse gas emissions under policy measures such as emissions trading.

Managing CO2 Emissions in the Chemical Industry. Edited by Leimkühler © 2010 WILEY-VCH Verlag GmbH & Co. KGaA, Weinheim ISBN: 978-3-527-32659-4

approximately 12% of the of total energy demand in the European Union (EU) [3]. Drawing on examples from the European chemical sector, this chapter explores the challenges faced by the industry' s limited ability to convert to more efficient processes within the timelines of an emission trading scheme. The analysis places emphasis on the most vulnerable products to carbon price absorption, while considering factors such as exposure to international markets, transportation costs, and dependency on carbon intensive upstream products.

The chapter analyzes carbon pricing for a select group of common basic chemicals and downstream products such as ammonia, ethylene, pesticides, varnishes and pharmaceuticals. The analysis takes into consideration the costs associated with purchasing emission allowances, as well as cost pass-through3) from upstream feedstock and electricity producers that also fall under emissions caps. It examines carbon price permeability on the supply chain and the downstream impacts on production cost relative to gross value added. Energy costs already represent up to 60% of chemical production costs and can be as high as 80% for ammonia production [4].

Section 2.4 examines international carbon offset mechanisms within the chemical context and how they can be used to lower the cost of emissions compliance. Building on the basis of the introductory chapter, this section elaborates on international carbon offset markets through the Flexible Mechanisms of the Kyoto Protocol, and identifies what options are currently available to the chemical industry. Outlining the basic guidelines for the project development cycle, the chapter discusses how the chemical industry can use the flexible mechanisms through the clean development mechanism (CDM) and joint implementation (J I).

Recognizing the integral role of the offset market for achieving reductions to emissions levels outside of emissions capped economies, the section on international offsets examines where the largest opportunities exist. A study by the World Bank revealed that 10% of the CDM potential in China rests with the chemical sector [5].Within this context, the chapter places emphasis on where transnational companies can lower their cost of compliance through market mechanisms, drawing on specific examples such as the French chemical company, Rhodia, who developed CDM projects to abate N2O emissions from their adipic acid facilities in Brazil and South Korea.

While long-term agreements to mitigate GHG emissions are currently under negotiation in most of the largest economies of the world, the final section examines the future of climate policies and the positions of leading chemical companies and industry associations such as the European Chemical Industry Association (Cefic),4) towards managing the risks and opportunities of operating within a global emissions market. In this context, discussion around how performance based allocations and sub - sector division will play an integral role avoiding emissions

3) Pass-through refers to carbon cost pass-through associated with emissions compliance as it relates to the chemical supply chain.

4) Cefic is the Brussels-based organization representing the European chemical industry.

leakage5' to 'hot spots',6' market distortion, and border tax adjustments that risk retaliation from trade partners.

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