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<span/><span/>Global carbon emission
has dropped substantially due to coronavirus (COVID-19) that has
curbed the demand of transportation fuels and business activities
temporarily. However, the energy and petrochemical industries need
to look beyond this pandemic and continue the efforts to drive
higher energy efficiency and control global warming for a
sustainable future. Also, industry needs to move beyond simply
estimating carbon emission to focus on how accounting for carbon
emission cost will impact the production cost and profitability of
a company's process or business.
Traditionally, variable costs for energy and chemical production
include raw materials, utilities, and by-product credits. To ensure
a sustainable future carbon emission cost or avoidance credit needs
to be factored in as the fourth category and accounted for in a
quantitative way for a more precise assessment of business impact,
as explained in the following table.
Figure 1: Accounting for Carbon Emission Cost in Production
Economics
Where W is the sum of unit consumption times unit price of all
raw materials, counting as cost. X is the sum of unit production
times unit price of all by-products, counting as credit. Y is the
sum of unit consumption times unit price of all utilities, counting
as cost. Utilities can include fuels, electricity, steam, cooling
water, process water, etc. The traditional total variable cost is
calculated as W+Y-X.
When carbon emission cost is added as the fourth category of
variable cost, there are three important factors: emission
allowance or benchmark (Eb), total carbon emission of the process
(E), and carbon pricing (P). A possible way to set the benchmark is
shown in the following figure.
Figure 2: Cumulative capacity
The carbon emission intensity ( ton CO2 emission/ ton
of product) of all competing processes is plotted against
cumulative production capacity similar to production cost curve
(Ref. CCMA). If the medium carbon emission intensity (Em) is
selected as the benchmark, half of the capacity will be above the
benchmark and must pay for the emission and that other half is
below it and will receive a credit. The industry would stay at
carbon neutral status. To ensure long term reduction of net carbon
emission, the benchmark (Eb) needs to be set below the medium
emission intensity and gradually move lower every year . The lower
carbon emission intensity is set as benchmark, the more aggressive
is the carbon reduction goal.
In most cases, when a process does not consume CO2 as
a raw material or capture CO2, carbon emission for a
process E is generally a positive number. If the carbon intensity E
is greater than Eb, E-Eb is positive, and the process will pay for
excess emission and thus an additional cost. On the other hand, if
a process emission E is less Eb, E-Eb is negative, the process will
get a credit for having lower emission intensity than the
benchmark.
However, E can also be a negative number if the process consumes
CO2 as a raw material such as in the urea production or
CO2 is captured by a CCSU (carbon capture storage and
utilization) process that avoids carbon emission and should receive
a credit. For a biochemical or biofuel process, when a biomass is
used as a raw material, if there is a direct CO2
emission from the process such as in fermentation, the amount of
process emission is waived and subtracted from the total emission E
of the process, since it is assumed that CO2 is
temporarily released from the biomass to the atmosphere and can be
reabsorbed by other plants within a reasonable time period. Carbon
emissions due to fuel and electricity consumption in a biobased
process are still needed to be assessed.
By adding carbon emission as the fourth variable cost category,
the total variable cost is calculated as W+Y-X+ Z, where Z= P x
(E-Eb), and it can be positive (a cost) or negative (a credit). The
total variable cost will trickle down to cash cost by adding fixed
(operating and maintenance) costs and to total production by
further adding depreciation and corporate overhead. Thus, the
impact of added carbon emission cost will eventually impact the
margins of the process or business.
The above-mentioned benchmark setting scheme has been proposed
by China Petrochemical and Chemical Industry Federation (CPCIF). In
Europe, where a carbon trading system has ben operating for years.
The total carbon emission is controlled by gradual reduction of
carbon allowances, where high emitter has to buy allowance and low
emission can sell allowance. An emission benchmark is implicit in
the system. For US where carbon emission trading is only
established in power industry in certain regions, not for all
industries. However, we believe that all companies need to
quantitatively determine the potential impact of accounting for
carbon emission cost for strategic and business planning purposes.
The urgency of controlling climate change is mounting; it is well
beyond national borders. The actions will eventually be determined
by human conscience.
The proposed addition of carbon emission cost as the fourth
variable cost category can also allow the policy makers to effect
desired energy transition in terms its direction and speed by
applying two levers: carbon emission benchmark Eb and carbon
pricing P.
Take hydrogen production for example. Although green hydrogen
production by hydrolysis of water has advanced significantly, its
scale is still very small. Industry will still depend on the steam
reforming of natural gas to produce large quantity of hydrogen for
hydroprocessing in the refineries. Large quantity of hydrogen will
also be needed to make fuel cell based transportation possible in
the future. But natural gas reforming has a large carbon intensity
per ton of hydrogen production. It's thus called brown hydrogen. To
meet the large volume hydrogen requirements in a sustainable way,
there has been a lot of interest in blue hydrogen production by
capture and sequester CO2 produced in the brown
hydrogen. However, our recent study in Q1 2019 has shown that based
on the prevailing technology with high capital investment cost,
blue hydrogen production by carbon capture is estimated to increase
$788 per ton of hydrogen, or $80 per ton of carbon capture on the
total production cost basis as shown in the following graph.
Figure 3: Blue hydrogen production
The analysis shows that to incentivize the blue hydrogen
production, policy maker needs to grant a credit of $80 per ton of
carbon capture to make blue hydrogen competitive to brown hydrogen,
at least initially. This credit can be gradually reduced to
encourage future technology innovation. This example demonstrates
that the detailed accounting for carbon emission cost in the
overall production economics can provide a quantitative tool for
policy makers to steer the future energy transition in a more
targeted and deliberate way.
IHS Markit experts are available for consultation on the
industries and subjects they specialize in. Meetings are virtual
and can be tailored to focus on your areas of inquiry. Book in a
consultation with RJ Chang.
RJ Chang is vice president of Process Economics Program
at IHS Markit.
