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Climate Change and the Role of the Chemical Industry Presentation for the PlasticsEurope/APPE joint General Assembly Event Brussels, May 28th, 2009 CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited Contents ▪ Context and objectives for the study undertaken for ICCA ▪ Methodology ▪ Results McKinsey & Company | 1 Global temperatures are clearly rising “Business as usual” scenario Temperature anomaly (°C) Recent past ▪ 11 of the 12 past years have been the warmest since 1850, when temperature chronicles begin ▪ Last 5 years (2002-06) amongst 6 warmest on record ▪ Late 20th century warmer than any period during past 1,000 years and is warming up by ~ 0.13°C/decade Future ▪ Under "business as usual" scenario, temperature will increase by ~ 6°C by end of century1 ▪ Climate models are converging – increasingly high level of scientific consensus Year Pre-industrial Industrialization heavy usage of fossil fuel 1 Further temperature increase due to the onset of self-reinforcing feedback loops at certain thresholds not included (e.g., methane emissions from melting permafrost) SOURCE: IPCC, 2007; Stern Review; McKinsey McKinsey & Company | 2 Containing global warming below 2°C requires reduction of GHG emissions by 35-50 GtCO2e vs. BAU by 2030 Global GHG emissions GtCO2e per year 70 70 Peak at 550 ppm, 3.0°C Peak at 510 ppm, 2.0°C Peak at 480 ppm, 1.8°C Current pathway / Business-as-usual (BAU) 60 -38 50 Technical measures < €60 per tCO2e Focus of the study 40 30 32 -9 20 23 Additional measures Behavioural changes & expensive measures 10 0 2005 SOURCE: McKinsey 2010 2015 2020 2025 2030 McKinsey & Company | 3 McKinsey’s global GHG abatement cost curve shows this is not impossible Global GHG abatement cost curve beyond 2030 BAU Cost of abatement1 below EUR 60 per tCO2e 1 This is an estimate of the maximum potential of all technical GHG abatement measures below EUR 60/tCO2e, if each lever was pursued aggressively, not a forecast of what role different abatement measures and technologies will play SOURCE: McKinsey McKinsey & Company | 4 McKinsey's experience in climate change related work Climate change related McKinsey projects1 Numbers, 2002 to March 2009 NOT EXHAUSTIVE Share of projects Jan - Mar 2009 by service line2 Percent ~510 Other Environmental 10 Finance 5 Biosystems 407 Water 19 9 16 Energy Efficiency Abatement & 11 Regulation 12 Sustainability Transformation 14 Clean Energy Technologies Share of projects Jan - Mar 2009 by region Percent 134 Other/tbd 10 13 Asia 126 25 South America 2004 05 06 4 Europe 13 07 08 5 45 2009 28 North America 5 Middle East 1 Not exhaustive 2 Energy Efficiency incl. Sustainable Cities; Clean Technologies incl. Renewables, EV, CCS; Biosystems incl. Biofuels SOURCE: CCSI McKinsey & Company | 5 Objective of the ICCA study was to create the "climate change story" for the chemical industry Elements of the report Messages ▪ Positioning "First industry to create full carbon transparency" ▪ Methodology "Representative sample, conservative approach, external validation" ▪ Current impact "Abatement by a factor x higher than own emissions" ▪ Outlook "Potential to further improve the x:1 ratio, and the absolute impact of its low carbon solutions" ▪ Supporting factors "Need for regulatory conditions that stimulate demand for low carbon products and favor innovation" SOURCE: McKinsey/ ICCA McKinsey & Company | 6 Contents ▪ Context and objectives for the study undertaken for ICCA ▪ Methodology ▪ Results McKinsey & Company | 7 Life cycle emissions of chemicals cover entire life cycle of products Extraction (feedstock and fuels) SOURCE: McKinsey/ ICCA Production (direct and indirect energy emissions, process emissions) Disposal (incineration w/ or w/o heat recovery, recycling, landfill) Total life cycle emissions of chemical products McKinsey & Company | 8 More than 100 CO2e life cycle analyses (cLCAs) were made … Category Transportation Insulation Building Overall abatement potential Agriculture Packaging Consumer goods Power Lighting SOURCE: McKinsey/ ICCA Subcategory ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ ▪ Autom. weight reduction Lubricants Lower friction Engine efficiency Aviation weight reduction Marine fuel reduction Building insulation Fridge insulation Construction material Piping Windows Feed supplements Fertilizer & crop protection Preservation Food production efficiency Food packaging Shopping bags Electronic components House ware Service wear Textile Low temp detergents District heating Solar power Wind power CFL lighting LED lighting Number of cLCAs 1 9 1 9 1 0 1 7 1 3 1 8 All cLCAs externally validated by the Öko Institut 4 2 McKinsey & Company | 9 ... Comparing the CO2e emissions from using a chemical industry product with the total avoided CO2e emissions from not using a non-chemical industry product Chemical products emissions over life cycle of chemical product SOURCE: McKinsey/ ICCA Non-chemical product emissions over life cycle of nonchemical alternative Difference Gross in in-use emissions emissions savings due to performance difference between chemical and non-chemical product McKinsey & Company | 10 Results presented in two ways – Gross savings ratio or X : 1, and net emission abatement Gross savings (or X : 1) ratio "Chemical industry saves X kgCO2e for every 1 kg emitted" 1 Net emission abatement "Global CO2e emissions would be Y Gt higher without chemical industry" Emissions, GtCO2e (2005 example) 46 46+Y Y X Chemical Gross industry savings emissions SOURCE: McKinsey/ ICCA World as-is World w/o extensive use of chemicals McKinsey & Company | 11 The impact of the chemical industry was evaluated under three scenarios – current and two forward looking Today ▪ CO2 emissions for the ▪ ▪ industry calculated over the entire life cycle of its products based on current data from IEA, EIA, SRI, etc. More than 100 and representative sample of life cycle analyses (cLCAs) done and externally validated to assess GHG impact of chemical products vs. non-chemical products Conservative assumptions taken for products/ applications not covered by cLCA’s SOURCE: McKinsey/ ICCA 2030 BAU scenario ▪ Projection into 2030 under the assumption of a business-as-usual scenario (BAU) – No major changes in regulation – Volume growth assuming no major disruptions – No technological breakthroughs (“frozen technology” assumption) – just standard efficiency improvements in production 2030 abatement scenario ▪ Projection into 2030 under the assumption of an aggressive trajectory towards a low carbon society – Regulation to increase the use of products/ applications with a positive abatement effect – Globally consistent regulation and initiatives to reduce the industry’s “own” emissions McKinsey & Company | 12 Contents ▪ Context and objectives for the study undertaken for ICCA ▪ Methodology ▪ Results McKinsey & Company | 13 Total life cycle CO2e emissions linked to the chemical industry amounts to 3.3 Gt GHG life cycle emissions of chemical products, 2005 GtCO2e 3.3 0.4 0.5 2.1 0.3 Extraction Production Disposal High GWP gases1 Total 1 HFC-23, HFC-32, HFC-125, HFC-134a, HFC-143a, HAFC-1521, HFC-227ea, HFC-236fa, HFC-4310mee, CF4, C2F6, C4F10, C6F14, SF6; GWP factors according to IPCC 1996 SOURCE: IEA; EPA; IPCC; WEF; McKinsey/ ICCA McKinsey & Company | 14 Production emissions are composed of energy and process emissions Production emissions Production emission methodology Type of emission Direct energy emissions Rationale Sources used ▪ ▪ Fuel consumption required for process to run (excluding fuels for feedstock purposes) IEA Chemical industry production emissions GtCO2e, 2005 2.1 0.6 Overall production emissions Indirect energy emissions* ▪ ▪ ▪ SOURCE: McKinsey/ ICCA ▪ IEA 0.8 ▪ Process emissions Electricity generated off-site N2O (adipic acid/nitric acid, caprolactam) CO2 (ammonia, calcium carbide, titanium dioxide, soda ash, methanol, ethylene, EDC/VCM, ethylene oxide, acrylonitrile, carbon black) HCFC-22 ▪ ▪ IPCC emission factors SRI/Tecnon production values 0.7 Production ▪ US EPA McKinsey & Company | 15 Extrapolations were made for products/applications not covered by cLCAs Chemical industry emissions Assumption on savings Products1 with alternatives available today and for which cLCAs were calculated Savings (positive or negative) calculated from detailed comparative cLCAs Products1 with alternatives available today, but no cLCAs made Products1 with no realistic alternative available today Gross savings equal to life cycle emissions – conservative compared to using average CO2e savings from case studies Zero savings (only emissions) – very conservative 1 Or applications SOURCE: McKinsey/ ICCA McKinsey & Company | 16 The chemical industry saves 2.6 tons of CO2e per ton emitted. The net abatement of 5.2 Gt equals ~11% of 2005 global emissions Emission abatement of chemical industry GtCO2e Chemical industry emissions Gross savings (savings factor) Net emission abatement 3.30 Products1 with alternatives available today and for which cLCAs were calculated 1.45 1.45 6.01 7.46 (5.1) Products1 with alternatives available today, but no cLCAs made Products1 with no realistic alternative available today Total 1 1.00 0 1 (1.0) 0.85 0.85 0 (0.0) 3.30 -0.85 5.16 8.46 (2.6) 1 Or applications SOURCE: McKinsey/ ICCA McKinsey & Company | 17 The main contributors are insulation, fertilizer & crop protection, and lighting Net abatement 2005 MtCO2e Net abatement volume per chemical application Not explicitly calculated No realistic alternative available Insulation Lighting Packaging Marine antifouling Synthetic textile Automotive weight Low-temp. detergents Engine efficiency Piping Wind power District heating Green tires Solar power Other Sub-total Fertilizer & crop protection Total 1:1 0:1 Net 2,400 700 220 190 130 120 80 70 70 60 60 40 40 230 4,410 1,600 6,010 0 3,560 850 5,160 w/o fertilizer & crop protection SOURCE: McKinsey/ ICCA McKinsey & Company | 18 Gross savings ratio could reach 4.7 : 1 and net emission abatement could reach 18.5 GtCO2e if the appropriate abatement measures are taken 2005 Gross savings ratio Own emissions and gross savings 2030 BAU 2030 Abatement 2.6 : 1 3.1 : 1 4.7 : 1 3.3 6.5 5.0 8.5 20.3 13.8 23.5 18.5 5.2 Net abatement GtCO2e SOURCE: McKinsey/ ICCA McKinsey & Company | 19 While more than doubling output, the emissions linked to the chemical industry would only be 50% higher by 2030 than in 2005 (largely due to geographic shift) Calculated evolution of chemical industry emissions 2005 2030 BAU 2030 Abatement 50% Chemical industry is expected to double its output by 2030 6.5 1.6 1.5 3.3 5.0 2.0 0.5 3.3 Emissions, 2005 SOURCE: McKinsey/ ICCA BAU volume growth effect Improve- Geogra- BAU ment of phic shift emissions, efficiency effect 2030 Beyond BAU improvement measures Effect of volume growth beyond BAU Emissions after abatement measures implement -ed 2030 McKinsey & Company | 20 GHG abatement cost curve for the chemical industry Society view1 Business view2 Process intensification level 3 EUR per tCO2e 140 Process intensification level 1 Catalyst optimization level 1 120 100 80 60 Fuel shift coal to biomass CCS Direct energy Process intensification level 2 Motor systems 40 20 0 -20 0 100 200 300 400 500 600 700 800 900 1,000 1,100 1,200 1,300 1,400 1,500 1,600 1,700 1,800 1,900 2,000 2,100 -40 -60 CCS Ammonia -80 Catalyst optimization level 2 -100 Fuel shift oil to gas CHP Decomposition of N2O from adipic and nitric acid Catalyst optimization level 3 Ethylene cracking 1 The curve presents an estimate of the maximum potential of all technical GHG abatement measures below EUR 60 per tCO2e (society view) if each lever was pursued aggressively. It is not a forecast of what role different abatement measures and technologies will play 2 4% interest rate, depreciation over life time of equipment 3 10% interest rate, depreciation over 10 years SOURCE: McKinsey McKinsey & Company | 21 In the abatement scenario, the net abatement is 3.5 times higher than in 2005 Net abatement MtCO2e Net abatement volume per chemical application Not explicitly calculated No realistic alternative available Insulation Lighting Solar power LC-ethanol Wind power CCS Marine antifouling Synthetic textile Packaging Automotive weight Green tires Low-temp. detergents Engine efficiency Piping District heating Other Sub-total Fertilizer & crop protection Total 1:1 0:1 Net 6,800 4,100 15,950 2,000 1,000 700 600 400 350 300 300 100 100 100 50 50 200 17,150 2,500 19,650 0 1,200 18,450 w/o fertilizer & crop protection SOURCE: McKinsey/ ICCA McKinsey & Company | 22