Sustainability, Clean Energy, Recycling & ESG

The most significant item worth discussing today is yesterday’s news that the API is likely to support a carbon pricing mechanism in the US. We will have more on this in our ESG and climate piece tomorrow. This is not a game-changer in itself, but it opens the door for one. Imposing a cost on emissions, whether a direct tax or a trading mechanism, as in Europe (but hopefully better managed in the early stages), will likely drive real change and significant investment, as it has done in Europe. The devil will be in the details and how many loopholes are attached to any regulation. For example, the chemical and energy industries are likely to lobby hard for no carbon taxes on exports for fear of losing competitiveness.

Two things today – first, we find continued calls for “advanced recycling” technologies and systems. A couple of the primary issues are not that advanced, collection, transportation, and cleaning, but all require breakthroughs, which in some instances may be local and not economically replicated elsewhere. The strict FDA demands on what types of recycled polymer can be used in food packaging applications exclude many recycled material streams. This is especially true with many of those who have already had food contact applications. Advances in cleaning might meet FDA standards and increase the available pool of useable polymers. The challenge here is that a cleaning process likely works best once the polymer has reground into standard shapes – which would need to come after any AI-enhanced sorting innovation. That would lead to cleaning more than one stream and keeping the polymers segregated – which would cause inefficiencies. Right now, “advanced recycling” technologies appear to be a euphemism for disposal. Anything that can deal with a mixed and not necessarily clean stream will be breaking the polymers down chemically to form some fuel or feedstock for more plastics – it is a significant step down in value and maybe the word “advanced” is misplaced.  

We should focus on the Gevo headline today (Gevo and HCS Group Sign Strategic Agreement to Produce Renewable Low-Carbon Chemicals and Sustainable Aviation Fuel in Europe) as it indicates further acceptance of the technology as well as the opportunities in aviation and other fuels. It is also interesting to note that HCS Group, which has signed the JV with Gevo, mentions low-carbon chemicals in the headline.

There is a lot of news about plastic waste/scrap prices rising this week. History suggests that we should not extrapolate this into any medium to longer-term conclusions about the longer-term fortunes of recycling. Every time base polymer prices rise above a certain point, companies using plastics with less rigorous product quality requirements start looking for anything they can get their hands on – especially if the supply of virgin resins is physically limited. This was the case when oil prices peaked in 2013/2014 and it was also the case in the early 1980s. The difference today is that a prolonged shortage may help to kick-start some recycling initiatives where consumers find that they can use the lower quality product effectively and choose not to switch back as virgin polymer availability rises because of the PR element of what they have switched to. That said, if virgin prices collapse later in the year, there would almost certainly be some switching back. We have been advocates for some time of a more holistic approach to recycling in the US (and globally) where buyers who want recycled content to accept that they must pay prices based on costs rather than a virgin polymer price marker. Without this, we will not drive the necessary investment to create sustainable and efficient models for recycling that can compete at lower prices.

Managing Material Change – Some Seasoned Advice  

Texas wind-based power in February 2021:

We highlight a couple of themes today – one of which is the need for everything. One of the striking conclusions from Shell’s presentation last week was that the company is not putting its eggs in just one or two baskets, it is investing in almost everything – solar, hydrogen, biofuels, natural gas, physical carbon capture, and natural carbon capture through tree planting programs.

One of the subjects we covered in yesterday’s ESG and Climate piece was the need for global coordination around the price of Carbon. We used Canada as an example of how lack of coordination can potentially drive unintended consequences. Canada’s high carbon tax does not apply to products that are exported – which may drive an increase in exports and an increase in imports to exploit the loophole. One of the headlines in today's report talks about the need for Europe to impose a carbon-related tax on imports, to level the playing field for those paying the carbon tax in Europe versus importers (maybe from Canada) that are not paying the tax. We either need a system of global cooperation where everyone pays the carbon penalty equally, domestic users and exporters, or we need carbon-based import taxes that are equivalent, again on a globally consistent basis. The odds of this level of coordination happening are quite low, in our view and almost any legislation will have exceptions and loopholes that will allow traders to exploit unintended arbitrages. This is probably one of the hardest problems to solve as global Governments attempt to form a coordinated approach to climate-related initiatives.