In recent months I’ve been leaning into the EU’s carbon border adjustment mechanism. I am asked about it regularly, including during a Dalian Chinese business executive presentation on Europe’s carbon neutrality pathways. Most recently, I published an assessment of the implications for three commodities — cement, methanol, and electricity.

As always, comments and questions abounded. Perhaps the best was on LinkedIn from Richard Payne, the head of commodity and energy trading at Afry, a 17,000, 100+ location, globally-operating, Swedish engineering, advisory, and design firm that grew out of its 1890s origins as a steam generation association. Payne asked:

“What do you advise for petrochemical or fertilizer producers who can only use fossil feedstocks? If they lose business fast then logically that means the emissions pricing has been passed on and European consumers have reduced their buying of plastic and food and/or those products have been substituted by imports. It would be great to understand which industries don’t have fossil fuels/feedstocks in their value chains.”

There are a bunch of implications and nuances bound up in that question, so it’s worth tearing it apart and answering it more fully. What follows are my responses in the thread, collected and lightly edited.

Fertilizer

Fertilizer producers do not require petrochemical feedstocks. The primary petrochemical used in ammonia-based fertilizers is hydrogen manufactured from gas or coal. Potassium and phosphate fertilizers don’t have that requirement.

Hydrogen is entirely possible to manufacture from water and green electricity at the fertilizer plant, replacing the steam methane reformation (SMR) facility. The water already flows to the SMR plant, as undoubtedly does electricity, which will be beefed up. Not cheap, but then most of Europe’s fertilizer plants were heavily impacted by the natural gas price spikes regardless.

Ammonia-based fertilizer is over-used today. The higher cost of green ammonia-based fertilizer will drive efficiencies in farming. These include agrigenetic nitrogen-fixing solutions like Pivot Bio‘s microbes, precision crop spraying drone solutions like Hylio‘s, and low-tillage farming.

Import Substitution

Next, lets look at the ‘substituted by imports’ part. That’s what the carbon border adjustment mechanism is for. Imports will be charged the same carbon price as domestically manufactured goods. The third largest economy in the world will be pricing carbon for all imports from all economies. This ensures that domestic firms are playing on a level board and not just undercut by foreign firms.

Substitution of high-carbon products domestically manufactured with foreign high-carbon products won’t occur to a significant extent. What could happen is that foreign organizations that are better able to pivot to low-carbon products might out-compete European organizations that are slow to pivot.

Another comment pointed out that cement in Europe is mostly manufactured with coal and oil as energy sources, for example. They aren’t even in the ‘cleanish’ category of using natural gas. That’s evidence of a moribund industry. I know Holcim is working on a low-carbon plant, but frankly, the stats on EU cement are abysmal.

It would be pretty easy for a major foreign manufacturer to pivot to electrified cement with CCS for quicklime CO2 — one of the few places I see CCS having potential merit — and competing well with imports.

Fossil Energy vs Feedstocks

I wrote in the LinkedIn post summarizing the article: “If anything in your value stream uses fossil fuels, and you are competing with organizations which don’t have fossil fuels in their value streams, you are going to be losing business fast in the coming years.”

I should have said: “If anything in your value stream uses fossil fuels for energy or emits a lot of methane…”

Petrochemicals aren’t inherently bad. Oil, gas, and coal aren’t inherently and necessarily climate problems. Burning them for energy is, and we have to stop doing that. That is the biggest use of them by far, over 15 billion tons a year of single use waste, dominated by ground transportation and electrical generation. That’s going to go away.

But we’ll still be extracting, processing, and refining geological hydrocarbon reserves for chemical feedstocks. We’ll be powering that with renewably-generated electricity instead, and we won’t bother with the most energy intense reserves like the oil sands.

We’ll also be pricing methane emissions, so those petrochemicals will have to compete with biological pathways on a level playing field.

But petrochemicals will persist as an industrial feedstock for a long time.

Steel

Let’s look at the example of steel. It’s a massive climate problem right now, mostly because the majority of steel at present is made from raw iron ore in coal-fired blast and open heart furnaces.

Millions of Tons of Steel Per Year By Method Through 2100, chart by author

But we are already making 100 million tons of steel a year using direct reduction approaches with synthetic gases, and Hybrit is already making fully green steel by using green hydrogen as a direct reducing agent, about 55 kg per ton of steel.

The syngas DRI approaches use natural or coal gas right now for the most part, but can use biomethane instead for that. Biomethane is a climate problem as well, but a well integrated anaerobic digestion to syngas to DRI plant would reduce concerns there. The syngas DRI energy requirements can easily be met with green electricity as well.

Next, 70% of steel in the USA is made from scrap in electric arc furnaces. That’s entirely amenable to being run on low-carbon electricity of course. Only 40% of EU steel is made from scrap, so that’s an obvious gap that can be closed.

The point of this example is that within any industry there are multiple pathways to the same products, and the ones that are low-carbon will be much more competitive.

Industrial Heat
The majority of energy services in industry are for heat. All the mechanical stuff converted to electricity long ago. It’s only heat which has persisted as a non-electrified process, simply because nothing is cheaper than burning fossil fuels and using the atmosphere as an open sewer.

Sexy / Unsexy, Practical / Impractical quadrant chart for residential, commercial and industrial heat sources by Michael Barnard, Chief Strategist, TFIE Strategy Inc.

• Of industrial heat, about 45% of energy requirements are for heat below 200° Celsius. Current heat pump technology can deliver all of that.
  
  Above 200° Celsius, we have a wide variety of electrified heating solutions. These include microwave, infrared, and other EMF solutions. They include induction, convection, and resistance heaters. We have electric gas plasmas which are suitable for high volume ceramics. We have thermal storage and heat exchangers that can take waste heat and use it productively immediately or hours later.
  
  These are almost all more efficient at shifting energy into heat of the right quality and location. What we haven’t had is a cost justification for their deployment at scale, because fossil fuels were dirt cheap.
  
  Electrification of all heat in industry is entirely possible and the EU ETS and carbon border adjustment will provide the cost justification.
  
  Methane
  
  Let’s talk about anthropogenic biomethane for a minute. It’s a major climate problem. It’s on the same scale as all methane emissions from the fossil hydrocarbon industry. That’s mostly from waste biomass from agriculture, livestock dung, forestry and food processing. We waste 2.5 billion tons of food annually, a full third of production, and most of that ends up in landfills where it emits a lot of anthropogenic biomethane.
  
  That’s going to be priced.
  
  Any solution which diverts waste biomass into chemical feedstocks or biofuels for the few places they are actually required — longer haul aviation and shipping — will have very beneficial pricing because they’ll be paid the carbon price or close to it to get their feedstock. Waste that costs money to dispose of today will cost a lot more to dispose of in the future, so diversion will be incentivized.
  
  Any solution which depends on fossil hydrocarbon feedstocks will be paying the carbon price on methane emissions from oil, gas, and coal extraction, processing, refining, and distribution streams, which are leaky. Coal extraction comes with a lot of methane leakage as coal seams are disrupted and mountain tops removed. Oil extraction, especially via fracking, comes with a lot of methane leakage. Unsurprisingly, natural gas — which is mostly methane — extraction comes with a lot of methane leakage.
  
  That methane leakage can be quantified from space, as I discussed with Orbital Sidekick founder and CEO Dan Katz recently. They have multiple satellites in operation already and more in the launch schedule which are doing just that with hyperspectral imaging. Hiding and under-reporting methane emissions is not really possible any more.
  
  There will be a strong economic benefit which currently doesn’t exist to leverage waste biomass for hydrocarbons instead of fossil hydrocarbons.
  
  Merit Order
  
  “It would be great to understand which industries don’t have fossil fuels/ feedstocks in their value chains.”
  
  Yes it would. And lots of organizations are working on that kind of thing. The EU ETS and CBAM implications are very poorly understood by a lot of industries, and analysts like me and the folks over at Wood Mackenzie are writing analyses and reports pretty regularly.
  
  But that said, there’s a fairly easy merit order to consider for any specific solution or investment.

• Does it burn fossil fuels? If so, very low order merit.

• Does the business case pencil out if methane leakage is priced? If not, low order merit.

• Does the business case pencil out if the price of petrochemical feedstocks go up substantially (as current extraction, processing and refining economics are all heavily dependent on dirt cheap fossil fuels and the atmosphere being an open sewer)? If not, low order merit.
  Are there obvious alternatives that are electrified and don’t have process CO2e emissions? If so, low order merit.

• The EU ETS and CBAM float all low-carbon boats equally. If — a big if — fossil hydrocarbon pathways are made lower carbon than alternatives, then they will persist. But a lot won’t. The only industry that will disappear is the fossil fuel industry, even as a vastly smaller fossil hydrocarbon feedstock industry persists.