Fertilizer Production and Alternatives

Fertilizer manufacturers are not necessarily reliant on petrochemical feedstocks. The main petrochemical utilized in ammonia-based fertilizers is hydrogen, which can be produced from natural gas or coal. However, potassium and phosphate fertilizers do not require these inputs.

It's feasible to generate hydrogen from water using green electricity at the fertilizer facility, replacing the conventional steam methane reforming (SMR) process. The water and electricity needed for this transformation are already available at the SMR site and can be enhanced. While this transition may not be inexpensive, many European fertilizer plants have already faced significant challenges due to rising natural gas prices.

Moreover, the over-reliance on ammonia-based fertilizers may change. The increased cost of green ammonia fertilizers could incentivize greater efficiency in agriculture, supported by innovations such as agrigenetic nitrogen-fixing microbes from companies like Pivot Bio and precision agriculture technologies like Hylio's drone solutions.

Navigating Import Substitution

Next, let's examine the concept of "import substitution." The carbon border adjustment mechanism is designed to address this issue. Imports will incur the same carbon pricing as locally produced goods. As one of the world's largest economies, the EU will enforce carbon pricing on imports from all countries, ensuring that domestic companies are not at a disadvantage against foreign competitors.

The substitution of domestically produced high-carbon goods with foreign counterparts will likely be minimal. Instead, foreign companies that can adapt more effectively to low-carbon production may gain a competitive advantage over European firms that are slower to evolve.

Another insightful observation highlighted that cement in Europe is predominantly produced using coal and oil, placing it far from the "clean" category of natural gas. This reflects an industry struggling to adapt. While Holcim is developing a low-carbon plant, the overall statistics for EU cement production are concerning.

It would not be overly difficult for a major international producer to shift towards electrified cement production with carbon capture and storage (CCS) for quicklime CO2, which represents one of the few instances where CCS may hold significant promise.

Fossil Energy in the Value Chain

In my LinkedIn summary of the article, I stated: "If any part of your value stream utilizes fossil fuels and you face competition from organizations without fossil fuels in their processes, you will rapidly lose business in the years ahead."

What I should have emphasized is: "If any segment of your value stream relies on fossil fuels for energy or emits substantial methane..."

Petrochemicals themselves aren't inherently detrimental. The extraction of oil, gas, and coal doesn't automatically equate to climate issues. The real concern lies in their combustion for energy, which we must curtail. This represents the largest use of fossil fuels, with over 15 billion tons wasted annually, primarily in transportation and electricity generation—a trend set to change.

Nonetheless, we will continue to extract, process, and refine geological hydrocarbon reserves for chemical feedstocks, powered by renewable electricity. We will also avoid the most energy-intensive reserves, such as oil sands.

As methane emissions become subject to pricing, petrochemicals will need to compete on an equal footing with biological alternatives, ensuring their longevity as industrial feedstocks for the foreseeable future.

The Steel Industry's Path Forward

Consider the steel industry, which currently presents a significant climate challenge. Most steel is produced from raw iron ore using coal-fired blast and open-heart furnaces.

However, we are already producing 100 million tons of steel annually through direct reduction techniques utilizing synthetic gases. The Hybrit project is pioneering fully green steel production using green hydrogen as a reducing agent, achieving around 55 kg of emissions per ton of steel.

While current direct reduction approaches predominantly use natural gas or coal gas, they could transition to biomethane, which, despite being a climate concern, could benefit from well-integrated anaerobic digestion processes. Energy requirements for syngas direct reduction can also be met with renewable electricity.

In the U.S., 70% of steel is produced from scrap via electric arc furnaces, a method compatible with low-carbon electricity. In contrast, only 40% of EU steel production relies on scrap, indicating a clear opportunity for improvement.

This example underscores that diverse pathways exist within any industry, with low-carbon alternatives likely to become more competitive.

Revolutionizing Industrial Heat

Most energy services in industrial settings are dedicated to heat. Mechanical processes have largely transitioned to electricity, leaving heat as the primary non-electrified application, primarily due to the low cost of fossil fuel combustion.

Approximately 45% of industrial heat energy requirements are for temperatures below 200° Celsius, which can be effectively met with current heat pump technologies. For higher temperatures, various electrified heating methods are available, including microwave, infrared, induction, convection, and resistance heaters. Technologies such as electric gas plasmas are suitable for high-volume ceramics, while thermal storage solutions can utilize waste heat efficiently.

These methods are generally more efficient in converting energy to the requisite heat quality and location. However, widespread deployment has been hindered by the historically low cost of fossil fuels. The EU's emissions trading system (ETS) and carbon border adjustment will provide the necessary economic incentive for large-scale electrification of industrial heating.

Addressing Methane Emissions

Let’s briefly discuss anthropogenic biomethane, a significant climate concern comparable to methane emissions from fossil hydrocarbons. These emissions primarily originate from agricultural waste, livestock manure, and food processing. Each year, we waste around 2.5 billion tons of food—approximately one-third of total production—most of which ends up in landfills, generating substantial anthropogenic biomethane.

This issue will soon be priced into the market. Solutions that redirect waste biomass into chemical feedstocks or biofuels—particularly for specific needs like long-haul aviation and shipping—will be incentivized by the carbon pricing mechanism. Today’s waste disposal costs will rise, encouraging diversion strategies.

Conversely, any solution reliant on fossil hydrocarbon feedstocks will incur costs related to methane emissions from oil, gas, and coal operations, which are often prone to leaks. Methane leakage is a significant issue during coal extraction, especially with methods like fracking, and natural gas extraction is no exception.

Recent advancements in satellite technology, such as those developed by Orbital Sidekick, now allow for precise monitoring of methane emissions from space, making it increasingly difficult to hide or misreport these figures.

Utilizing waste biomass for hydrocarbons instead of fossil hydrocarbons will present a clear economic advantage that is not currently available.

Establishing Merit Order

"It would be beneficial to identify industries devoid of fossil fuels or feedstocks in their value chains."

Indeed, this understanding is crucial. Many organizations are actively researching these dynamics. The implications of the EU ETS and CBAM are not well understood across various sectors, prompting analysts—including myself and colleagues at Wood Mackenzie—to produce ongoing analyses and reports.

That said, a straightforward merit order can be applied to evaluate specific solutions or investments:

1. Does it utilize fossil fuels? If so, it ranks low in merit.
2. Does the business case remain viable when factoring in methane leakage? If not, it ranks low.
3. Will rising prices of petrochemical feedstocks render the business case untenable? If so, it ranks low.
4. Are there viable alternatives that leverage electrification without CO2 emissions? If so, it ranks low.

The EU ETS and CBAM will elevate all low-carbon solutions. If, and this is a significant if, fossil hydrocarbon pathways can become lower in carbon intensity than alternatives, they may endure. However, many will not. The only industry facing extinction will be fossil fuels, even as a drastically reduced fossil hydrocarbon feedstock sector continues to exist.