By Robert Henske, Alexander Baumgartner, Ruirui Zong-Rühe and Dilhani de Silva

Chemical decarbonization will require a fundamental shift in operations, if not “extraordinary” and “unprecedented” measures in the words of the World Economic Forum

Chemical decarbonization will undoubtedly involve less resource consumption, more sustainable feedstocks and new sources of renewable energy, product circularity, and overall increased efficiency across the entire supply chain. The industry has been built on cheap and abundant fossil-based feedstocks and energy, and there is little visibility on what suppliers and customers are doing, making it difficult to measure and implement emission reduction strategies.

There is no one way to decarbonize chemical operations. The approach taken by chemical companies will vary depending on their size, portfolio, value chain position and geographic location.

In addition, differing regulatory approaches in the EU and US will have significant implications on the competitiveness of chemical companies. Europe generally disincentivizes CO2 emissions via penalties (e.g. carbon tax systems such as ETS). The EU also recently enacted the Carbon Border Adjustment Mechanism (CBAM), which will require non-EU countries imports to be subject to the EU Emissions Trading System (ETS) system. In October 2023, the EU Council adopted the amended Renewable Energy Directive (“RED III”), part of the "Fit for 55" package. The RED III aims to increase the share of renewable energy in the EU's overall energy consumption to 42.5% by 2030, with a further indicative target of 2.5%. The approach by the US government has been to reward companies that reduce CO2 via tax breaks, loans, and grants. The Inflation Reduction Act’s Industrial Decarbonization Program, with USD 6 billion allocated funding, will accelerate decarbonization projects in energy-intensive industries, including chemicals and refining. In total, the current administration has made approximately USD 315 billion available to drive clean energy projects in the US.

Asia lags both Europe and the US in terms of carbon tax policies. Most exporters in the region do not have stringent emissions accounting, and reporting practices which may pose a challenge for compliance with the new EU CBAM policy in the future.

In the near term, regional carbon policy is expected to impact the way global markets operate. Chemical firms will be required to meet end-market legislation and, as a result, non-compliant regions may become less competitive. In turn, the US may become advantaged in supplying regulatory-stringent markets like Europe.

Since inaction could place profitability and competitiveness at risk, chemical producers must make emission reduction a strategic priority.

Tackling Scope 1 and 2 emissions - seven starting points

There are seven distinct “action areas” for decarbonizing across Scope 1 and Scope 2 emissions. Although these cannot achieve Net Zero on their own, by engaging across these seven areas, companies can make significant progress quickly.

Ultimately, the strategies with the highest potential impact, such as truly novel synthetic pathways using alternative feedstocks, are still somewhat embryonic and need further development. An example is green ethylene produced from green hydrogen and captured carbon dioxide.

Ethylene is a heavy emitter of carbon dioxide. There are several ways to capture carbon in this process. While carbon capture from ethylene production is expensive, our analysis shows that the cost of implementing and operating CCS/CCU pre-combustion or post-combustion technology can be offset, depending on the level of carbon tax applied in a region. In the case of the EU ETS applying a carbon price of more than USD 100/ton, this would lead to a net benefit for both the environment and operational economics (on certain projects, depending on feasibility of carbon storage or re-use costs).

Many of these approaches can be economically applied today in regulating incentive structures to begin moving the decarbonization needle. Your mileage will vary, of course, depending on company size, industry segment, location, and level of investment available. But as we have seen from our recent work, these seven reduction strategies across Scope 1 and Scope 2 are being applied with an immediate impact.

On average, an estimated 70-80% of greenhouse gas emissions in the chemical industry are Scope 3. Scope 3 include supply chain related emissions – regulation is tightening and reduction strategies throughout the supply chain will soon be mandatory. The EU Supply Chain Law promotes sustainable corporate behavior across the global value chain through sustainability due diligence. The directive requires companies to introduce and report in line with mandatory EU sustainability reporting standards and provide external assurance of sustainability information. With the proposed reporting requirements of the Corporate Sustainability Reporting Directive (CSRD), primary environmental data from impact-heavy suppliers will become a must-have. Similarly, in the US, the SEC has proposed a set of rules which will require the disclosure of GHG emissions from upstream and downstream activities, if the these can be considered "material" or if the registrant has set a GHG emissions target/goal that includes Scope 3 emissions.

In the chemicals industry, Scope 3 emissions are typically highest for purchased goods and services (Scope 3.1) and direct use-phase emissions of sold products (Scope 3.11). For the latter, emissions will remain high for near-/mid-term future but are expected to reduce dramatically in the longer run, if fully green energy (often: electricity) is used. We believe significant efforts need to be taken, together with suppliers, to reduce Scope 3.1 in the shorter term and to identify opportunities for Scope 3.11 to bridge time until full and truly green electrification of use-phase are achieved.

Roland Berger has developed methodologies to holistically reduce a company's scope 3 emissions – meaningful impact can be achieved with supplier engagement and partnership. Segmenting and prioritizing your suppliers based on their carbon contribution and decarbonization maturity forms the basis for said engagement and partnership. Customized reduction targets are co-developed with all prioritized suppliers, in line with both your corporate decarbonization roadmap and industry benchmarks. We jointly detail engagement strategies with prioritized suppliers to ensure their commitment to the emission reduction roadmap, and an implementation roadmap complete with action plans, KPIs and incentives to drive change.

We believe there are a series of strategic focus areas and opportunities that chemical companies can pursue to successfully drive decarbonization:

• • Build a resilient portfolio: Companies need to be risk-aware, diversified, nimble and consistent in delivering steady risk-rewards profiles as they navigate diverse sustainability objectives and investment landscapes.

• Drive a pragmatic decarbonization agenda: There are multiple ways to decarbonize, e.g. via electrification, using hydrogen as alternative fuel, using heat pumps, or carbon capture and storage solutions. Each way has pros and cons and limitations. We should choose the move most effective and the most cost-efficient way to decarbonize.

• Secure access to low carbon feedstock: Focus on decarbonized building blocks including biomaterials, recycled content, CO2-based, and e-based. Biofuels and low-carbon fuels based on blue and green hydrogen can be blended with or replace fossil fuels, without requiring expensive changes to existing infrastructure.

• Secure future sustainability-driven cost position across different regions: Assess how the net-zero transition will play out across different regions and take proactive steps to capture growth opportunities from the transition to net-zero e.g., renewables.

• Build commercial excellence: Establish a green premium value capture mechanism based on a comprehensive understanding of customers’ sustainability goals.

Roland Berger is a recognized thought leader in sustainability, environmental strategy and ESG. Our publications on sustainability topics such as sustainability strategies, climate adaptation, decarbonization of different industries, circular economy and waste management strategies, green materials, the energy transition, hydrogen and a host of other topics offer vital insights for companies in different industries and sectors.

Through our research, our 30 years’ experience working with chemical companies on their corporate strategies, and our hands-on approach in supply chain decarbonization and CO2 abatement calculations, we are the right partner to help chemical firms move the needle on emissions reductions today. While these changes can be challenging and costly, we believe leading chemical producers can achieve quick-wins and ultimately get a leg up on the competition.