Chemicals: Carbon 101

As global emission trading schemes (ETS) only account for ~18% of total greenhouse gas (GHG) generation and governments continue to focus on decarbonisation, we believe chemical companies will need to implement wide-ranging strategies to avoid higher future costs. In a recent report, the UBS Utilities team concludes that emission reductions in the EU are not on target to meet net carbon zero target by 2050. As one of the highest industrial GHG emitters, we expect the chemical industry to come under further pressure to decarbonise. But governments need to act and provide more clarity for the industry's ROCE: we estimate that the incentive carbon price to switch to low or carbon free technology is €125 - 430/t vs the current price of €62/t.

In this report we lay out the extensive work we have carried out on our coverage companies' carbon positions. Using the EU database we map the allowances and emissions for each plant/installation owned by the chemical companies. We also published an interactive model in conjunction with this report. Using the data we estimate costs to the sector under three scenarios: 

1. Base case impact on 2021 FCF of 8% on average; 
2. In the second scenario we assume all European Scope 1 and 2 GHG emissions fall into the ETS (this could reduce 2021 FCF by 17%); 
3. The third scenario assumes all European allowances are removed (26% of 2021 FCF).

We do not expect companies to stand still, so we also consider what the strategic responses might be. However, the sector may need to be more radical investing in new process and feedstocks, such as electrification (using renewables) or using green hydrogen feedstock. Initially we would expect this to increase capex and opex for the sector, resulting in lower returns.