Sustainability, Clean Energy, Recycling & ESG

The cost of the green hydrogen project in Australia listed below is extremely high. Ethylene (a complex petrochemical) is now down to a cost of around $1.00 per pound if built efficiently – which is $2,200 per metric ton of capacity. The hydrogen project linked - if the $0.5bn and the 33,000 metric ton hydrogen capacity are correct, works out at around $15,000 per metric ton of capital costs. To get a 15% return on the project they will need $2,300 per ton of margin, above all operating costs. In the chart below, this would represent a capital charge of more than one dollar per pound, much more than is implied in the green bar. This does not look economic to us and will require either significant government subsidies – or severe penalties on hydrocarbons to make the hydrogen economic on a relative basis. The project does involve selling some power to the grid, but we still struggle to see how this hydrogen can be an economic fuel alternative.

There is a lot of ESG and Climate news today, including many comments on recycling – we would encourage you to read the ESG and Climate report linked (Trash or Treasure…), which talked about recycling in detail.

Today we focus on recycling and the news that a significant recycler of PET (CarbonLite) has filed for Chapter 11 protection. This is another indication that there is not much money to be made in recycling and it is a little shocking given that the company was focused on PET, which has some of the better recycling rates in the country. The company blames the Bankruptcy on COVID and it is clear that the timing of some major capital commitments related to expansions that were delayed by COVID are part of the problem. While the restructuring is unlikely to see the company liquidated, it appears that the company owes money to customers (pre-payments for the product or for capacity rights – most likely). There could be worse timing for CarbonLite – while the company will look to restructure the debt that it has with customers, it is unlikely that any of them want to run a recycling business and they all need the rPET to meet customer commitments. The negative is that it shines another light on the marginal nature of recycling, even for the better products, and may provide a further incentive for packagers to look to other materials or renewable-based sources

The API is suggesting that it would support a carbon tax in the US, but at the same time is suggesting that this would only be supported if it was the only mechanism that regulators used at a Federal level. While both Europe and California have carbon taxes, they have many other regulations and mechanisms to help lower emissions, such as credits for EV use and LCSF in California.

Today we want to focus on an FT article that discusses Members of Parliament criticizing the current UK climate plan as it does not chart an exact path to 2050 goals. If any country is going to achieve the goals of the Paris Agreement their path should probably be unclear at this time, in that transitional steps are needed to get from here to 2050, which are improvements on current power, and transport systems but not the ultimate solution. Furthermore, we still need some new technology, either improvement in current processes or radical breakthroughs to solve some of the harder emission problems.

With ExxonMobil anchoring much of its “greener” strategy in carbon capture at its analyst day yesterday, the subject of lower-carbon fuel has been elevated and ExxonMobil is not the only one talking about it. More than 75% of the carbon footprint of a hydrocarbon-based transport fuel today comes out of the exhaust or stack when the hydrocarbon is burned – to fuel an engine or create steam for a turbine. The oil companies can capture carbon on refineries, reduce methane leaks, use renewable power for pumping and their transport fuel – to move materials to market, but they cannot do anything about the 75% - Scope 3 – emissions without buying offsets, or sequestering more carbon than they produce (which is Oxy’s plan). Whether a consumer will be more attracted to a “lower-carbon” gasoline remains to be seen, but they are unlikely to pay more for it but might buy preferably if the price was the same – which might be possible if the fuel providers were lowering their costs by avoiding a carbon penalty.

We need to break down our ESG commentary into two distinct sections as the terminology is now being applied not only to how the investment community is investing but also to how corporates are changing behavior. There is a link, in that one of the motivations for behavioral change at the corporate level is to meet investable ESG criteria, but there are other reasons why corporate behavior is changing and it is not just to do with equity value. With ESG factors now impacting debt costs and perhaps more important, activist behavior and all stakeholders, including customers, the issue is being increasingly becoming a core Board responsibility, whether encompassed within a sustainability mandate or addressed more specifically.

While Corporate America has been tugged towards climate and other sustainability issues for years, the step changes of 2020 were significant. The willingness to listen and act, moreover, is high and rising every day. Climate change is becoming more widely recognized and accepted as a critical issue by U.S. corporations. In fact, in our strategy-focused consulting business, we are now almost exclusively focused on climate change and environmental, social, and governance (ESG) related initiatives. This shift has been driven by demand – rather than us – from companies new and old looking for the right answers.