Key Takeaways

Contents

Key Takeaways 1

Introduction. 2

A Brief Summary of “Pathways to Decarbonize the PVC Value Chain” 4

Research, Development, and Demonstration. 4

Infrastructure. 6

Grid Decarbonization. 7

Incentives for Early Technology Adoption. 8

“Clean” Procurement 9

Carbon Pricing. 9

Air Pollution Regulations 10

International Trade Policies 11

Conclusion. 12

Endnotes 14

Introduction

The chemicals sector is one of the three highest-emission industrial sectors globally and within the United States. It is far more diversified in terms of products and processes than the other two leaders, steel and cement, and therefore its solution set for emissions reduction is likely to be more diverse as well. George Mason University’s Center for Energy Science and Policy recently published a first-of-its-kind, bottom-up model of the cost and emissions impact of decarbonizing a major chemical industry value chain, “Pathways to Decarbonize the PVC Value Chain in 2050.”[1] The study’s value chain approach provides a granular analysis of some of the most important opportunities available in the near future to decarbonize this industry as well as some of the major challenges.

Polyvinyl chloride (PVC) is the third largest plastic material, by volume, produced in the United States. It is used primarily in durable applications, notably in construction, but also in automobiles, medical products, and other sectors. The U.S. PVC value chain is directly responsible for approximately 15,000 jobs, paying above average wages, and it leads the world in exports. The “Pathways” study estimates that production facilities involved in making PVC were responsible for about 18 million tons (MT) carbon dioxide (CO2) emissions in 2020.

The PVC value chain is thus important for its own sake. The “Pathways” study of it may also be important for insights into decarbonization pathways for the broader chemical industry. Some key sources of emissions within the PVC value chain, such as ethylene crackers (factories that make the chemical ethylene, a key input to PVC) and power plants that also produce high-temperature steam for industrial use (known as combined heat and power plants or CHP) are also present in other value chains. On the other hand, the PVC value chain is unique in some respects. In particular, because of PVC’s durability, the carbon embodied in this material is more likely to stay embodied in a product than other plastic materials, even after the product has been discarded. By contrast, single-use plastics, such as those used in packaging, are more likely to be combusted or degrade and thus release carbon into the environment at the end of their lifecycle.

Therefore, although the study affords insights into opportunities for federal policymakers to catalyze the decarbonization of the chemical industry, it does not yield specific recommendations. PVC is an important product, but it is not important enough to warrant its own policies. Indeed, because the PVC value chain interconnects with others, it would be impossible to decarbonize PVC production alone, even if one wanted to, without reconfiguring the industry. This initial study must be validated as well as extended to other value chains before any recommendations would be sufficiently well-grounded to warrant action. In addition, the study takes an in-depth approach on a small number of technology options. A broader approach would include options for decarbonizing the chemical industry that encompass technologies that have not yet reached maturity as well as energy and material efficiency, product substitution, and recycling.

After a brief summary of the “Pathways” study, this report sets forth policy insights across three loosely defined time scales.

Near-Term Insights

▪ Research, development, and demonstration: The most important immediate opportunity for federal action is to encourage and support demonstration projects that would assess the potential of decarbonization technologies at commercial scale in real-world conditions.

▪ Infrastructure: A second near-term opportunity is providing federal support for an initial build-out of infrastructure, such as carbon dioxide and hydrogen pipelines, that will be essential for decarbonizing the chemical industry.

▪ Grid decarbonization: While the grid is not a major contributor to the PVC value chain’s carbon emissions, accelerated grid decarbonization, which the Biden administration has set as an objective, would be helpful.

Medium-Term Insights

▪ Incentives for early technology adoption: Once the infrastructure for decarbonization begins to expand, the federal government should encourage early adoption of chemical production decarbonization technologies with incentives such as tax credits or contracts for differences.

▪ “Clean” procurement: Federal policymakers could also encourage early adoption by creating standards for low-carbon PVC and applying them to federally funded projects, although such policies will face significant implementation challenges due to the complexity of the industry’s value chains.

Long-Term Insights

▪ Carbon pricing: Ensuring there is a predictable, rising carbon price is an attractive approach for decarbonizing the chemical industry, because it would cover all stages of the value chain and allow compliance costs to be distributed in proportion to emissions.

▪ Air pollution regulations: In lieu of carbon pricing, traditional point-source air regulations could be applied to facilities like cracker furnaces and CHP plants that are the largest point sources of emissions in the PVC value chain.

▪ International trade policies: Federal policies to level the playing field globally, such as border adjustments and export incentives, will likely be necessary to avert the migration of production abroad and enhance the competitiveness of U.S. production in international markets.

A Brief Summary of “Pathways to Decarbonize the PVC Value Chain”

The “Pathways” study concludes that the PVC value chain may be able to achieve 80 to 90 percent reduction in CO₂ emissions by 2050 in the United States using technologies approaching maturity today at a modest incremental cost. The industry average incremental cost—the “green premium”—for low-carbon PVC resin that would be made in the United States in 2050 in the study’s decarbonization scenarios ranges from about 5 percent to 15 percent of this product’s price in 2020.

The study’s estimates draw on a model that represents every plant that contributes to U.S. PVC production today. These plants are very heterogeneous. The model assumes continued growth of the PVC market and replacing or upgrading plants at the end of their useful lifetimes. The “Pathways” study screens many technological options and explores two major decarbonization pathways in detail: carbon capture and sequestration (CCS) and hydrogen fuel. For each pathway, the study examines representative policies of varying stringency as well as game-changing technological innovations.

Technology adoption choices in the model are made at the plant level, based on plant-specific economic and industrial conditions as well as the policy and technology assumptions built into each scenario. CCS is a capital-intensive technology with relatively low operating costs, and economies of scale favor its application by large plants. Very stringent policies or breakthroughs that reduce the capital costs of CCS drive substantial abatement in the study’s models by 2030 if supporting infrastructure is in place and by 2040 with more realistic assumptions.

Decarbonization using hydrogen fuel is less capital-intensive than CCS, and the cost of hydrogen is sensitive to the cost of natural gas and the scale of production. Very stringent policies or very low-cost hydrogen drive substantial abatement in the study’s models by 2040 if supporting infrastructure is in place and by 2050 with more realistic assumptions. Many uncertainties could affect the outcomes the study examines, and its model does not cover upstream and downstream emissions. Moreover, policy interventions will be required to realize any of the decarbonization pathways that the study explores.

Research, Development, and Demonstration

The fundamental characteristics of the technologies underpinning the main pathways in the study, CCS and hydrogen fuel, are well-known. Both have been studied for decades. Both have diverse applications outside the chemical industry and so have been of interest not only to the highly capable, R&D-intensive firms, academic institutions, and government laboratories associated with that industry globally, but many others beyond it. While unexpected breakthroughs can never be ruled out, the key technoeconomic challenges likely to be encountered while pursuing these pathways lie in adapting the basic technologies to specific chemical industry applications.

Such challenges are best addressed by demonstration projects. The International Energy Agency (IEA) defines technology demonstration as the “operation of a prototype … at or near commercial scale with the purpose of providing technical, economic, and environmental information.”^[2] Successful demonstrations instill confidence in developers, users, and investors that a technology will perform predictably from both a technical and economic perspective. Demonstration projects are required because it is difficult to extrapolate the cost and performance of commercial-scale systems from experience with smaller prototypes, especially for complex technologies and systems like chemical plants.^[3]

Key technologies adopted by plants in the study, like CHP with CCS, and cracker furnaces and CHP fueled by hydrogen, have not been demonstrated at commercial scale, and they are costly. The risks posed by such projects, especially in commodity industries with modest profit margins, can be daunting. A comprehensive review of demonstration projects across eight sectors over the last half century by Gregory Nemet and his colleagues found that a majority of them received public funding. Such cost- and risk-sharing is essential to surmounting the so-called demonstration “valley of death.”^[4]

The Infrastructure Investment and Jobs Act (IIJA), which passed Congress with bipartisan support in 2021, includes funding that might support demonstration projects that would advance decarbonization in the chemical industry. Nearly $3.5 billion will be devoted to carbon capture demonstration and pilot projects, and another $500 million to industrial emissions demonstration projects by 2026. In addition, $8 billion will support the development of regional hydrogen hubs, along with funding to support hydrogen manufacturing technologies. Industrial demonstration funding received another big boost with the passage of the Inflation Reduction Act (IRA) in August 2022, which allocates $5.8 billion over five years to this end.

The Department of Energy (DOE) is responsible for implementing these programs. Initial program documents confirm DOE’s inclusion of the chemical industry within its scope. Project developers have begun to put together proposals in response to this opportunity. For instance, both the nascent Houston and Corpus Christi hydrogen hubs are likely to emphasize chemical production as a significant intended end use.^[5]

While public funding for demonstration projects would fill the most important gap in the RD&D policy domain, enhanced tax incentives for private R&D spending may also be helpful. Companies developing CCS and hydrogen technologies will need to invest in product development, problem solving, and adaptation. These investments may spill over to benefit other firms, and tax incentives compensate the R&D investor for this loss. The United States has long had such an incentive, but the 2017 Tax Cuts and Job Creation Act weakened it considerably. Robert Atkinson of the Information Technology and Innovation Foundation (ITIF) has proposed doubling the value of the main provision of the tax code, along with other changes that would restore the incentive’s effectiveness.^[6] In addition, firms carrying out energy-related R&D can take advantage of a little-used 20-percent tax credit for work carried out in collaboration with academic institutions and federal laboratories.^[7]

Infrastructure

CCS and hydrogen solutions are not stand-alone. They require infrastructure to operate. Carbon dioxide must be taken away from capture sites and either used elsewhere in the economy or permanently sequestered in underground geological formations. Hydrogen must be produced and, in many cases, transported to the plant site to be combusted. Some methods of hydrogen production involve CCS as well.

Hydrogen is currently produced by “reforming” natural gas under high heat and pressure. This process yields CO2 as a byproduct, which is typically released. As a result, conventional hydrogen production is very carbon-intensive, emitting on a global basis as much as the nations of United Kingdom and Indonesia combined (equivalent to about 830 million metric tons of carbon dioxide (MMT CO2-e) per year).^[8]

The “Pathways” study’s modeling assumes that hydrogen will be produced in a similar fashion as today, but with improved reforming technology and CCS systems installed. The price of hydrogen in the model thus fluctuates with the price of natural gas. Electricity can also be used to produce hydrogen by splitting water into its constituent elements. If the electricity used for this purpose is generated without emissions, the process is without emissions as well, because little heat is needed and oxygen is the main byproduct.^[9]

The United States produces about 10 MMT of hydrogen per year, some 15 percent of the world’s total.^[10] Industry roadmaps suggest that this figure could grow several-fold by 2050, even as production is cleaned up.^[11] For these ambitions to be achieved, hydrogen must be made and moved to the point of use at a reasonable cost. Pipelines are likely to be the predominant mode of transport because they are the cheapest way to transport hydrogen across land.

Hydrogen pipelines are a mature technology. About 1600 miles are already operating in the United States, primarily in the Gulf Coast region, serving the oil and gas industry. They are different from natural gas pipelines, which are far more extensive. Hydrogen is harder to compress and leaks more easily than natural gas, and it is more corrosive. Hydrogen pipelines are more expensive to build as a result.^[12]

Carbon dioxide pipelines are also mature and even more common than hydrogen pipelines in the United States, with a little over 5000 miles in operation. They serve a variety of industries, including chemicals and oil and gas. For instance, CO2 is piped to oil fields and injected to enhance output.^[13]

The hydrogen and CCS pipeline systems would likely need to be expanded considerably if the U.S. economy is to approach net-zero emissions. For instance, the high electrification scenario in Princeton University’s Net-Zero America report estimates that over 55,000 miles of CO2 pipelines would be required, for a wide variety of purposes.^[14] While new and extended pipelines might become profitable, uncertainty about the uses of both gases and about sequestration of CO2 creates a classic “chicken and egg” problem. As with other forms of infrastructure, public funding can overcome this problem for these types of pipelines.

Such funding could be provided by a variety of means. Direct funding on a cost-shared basis may flow through the regional hydrogen hubs and similar federal programs. Low-cost loans or loan guarantees to pipeline developers, such as those provided by DOE’s Loan Programs Office, are another way to subsidize them. Tax incentives could reduce the costs of pipeline construction and operation indirectly, although it is unclear whether pipelines would qualify under current provisions, which favor CO2 sequestration and hydrogen production and energy storage. Other provisions of tax law, such as accelerated depreciation and private activity bonds, might also be utilized.^[15]

Like other major infrastructure projects, CO2 and hydrogen pipelines must run the gauntlet of federal, state, and local environmental review, which can be time-consuming and costly. Using existing rights-of-way and repurposing older infrastructure, such as natural-gas pipelines, may lower these hurdles. The IIJA contains provisions aimed at accelerating the federal review process, and a side deal that enabled the passage of the IRA may lead to legislation that furthers this objective. However, many observers see permitting as a major barrier to infrastructure projects, even those that would accelerate decarbonization.^[16]

Finally, infrastructure operations must be safe and perceived by the public to be so. Hydrogen is explosive, corrosive, prone to leakage, and an indirect greenhouse gas (GHG). CO2 is also corrosive, can be toxic, and is, of course, a GHG itself. Federal regulations for pipeline safety must be extended and enforced to ensure that new infrastructure serves its intended purposes and accidents are avoided.^[17]

Grid Decarbonization

One of the unexpected findings of the “Pathways” study is that onsite power from CHP plants predominates among plants that contribute to the PVC value chain. The study’s 2020 baseline reveals that over 50 percent of emissions from the chain are from CHP and less than 15 percent from the grid. Its model assumes that the grid will decline further in importance as older plants retire and highly efficient CHP-based systems take their place in the chain.

Nonetheless, if the abatement pathways the study models are pursued, a considerable portion of residual emissions (approximately 40 percent) will be due to the grid. If the grid can decarbonize more quickly than projected by the Energy Information Administration (EIA), whose forecasts are incorporated into the study’s model, the PVC value chain’s carbon footprint will diminish more quickly as well.

The passage of the IRA is likely to have this effect. Models of its impact forecast that the power sector will be the largest source of emissions reductions during the 2020s, thanks to generous support for renewables, energy storage, nuclear power, and more.^[18] The Biden administration has called for further reductions, setting a 2035 target for fully decarbonizing the grid.

The carbon intensity of the grid varies dramatically from region to region, and the pace of decarbonization will certainly vary by region as well. Louisiana and Texas, where the PVC value chain is concentrated, have moderately carbon-intensive grids today. Some utilities in the region, have made net-zero pledges, such as Entergy’s for 2050. An April 2022 report from the University of Texas notes that that state is blessed with abundant low-carbon energy resources and charted numerous pathways to net-zero emissions across the economy by 2050, including one that leads to a zero-emission grid by 2035. However, the state has by no means reached a consensus on pursuing decarbonization, much less adopting an aggressive pathway.^[19]

Incentives for Early Technology Adoption

Once the infrastructure to transport CO2 and hydrogen (and, in the case of CCS, sequester CO₂) has begun to expand, and CCS and hydrogen combustion systems have been demonstrated for typical facilities within the PVC value chain, these systems must diffuse rapidly for the pathways modeled in the study to be followed. Whether they will diffuse rapidly is far from certain, especially in the absence of a carbon price or regulatory mandate. Managers considering adoption may find that conventional systems remain cost-effective, may lack information or harbor uncertainty about low-carbon systems, or may simply prefer to minimize risk. These classic market barriers to completing the innovation cycle through early adoption may be addressed by incentives.

Investment tax credits (ITC) provide an incentive to potential early adopters by reducing the effective cost of equipment for those who have or can access a sufficient tax liability. The ITC played a key part in accelerating adoption of solar power in the United States over the past decade. The “Pathways” study’s models show that CCS systems are particularly sensitive to capital costs and so might benefit from an ITC. Whether an ITC would accelerate cost reduction for CCS systems, triggering a virtuous cycle of further innovation and adoption, as it has in the case of solar panels, is unclear. Such a cycle is most likely if the targeted system can be commoditized, so that the growth enabled by the ITC creates economies of scale in production. But, if each system must be customized to its site, as may be the case with CCS retrofits, this pattern will not be realized.

The hydrogen pathways to decarbonize the PVC value chain have relatively higher operating costs and lower capital costs than the CCS pathways. The cost of low-carbon hydrogen fuel is the largest driver of this difference. The “45V” (named for the relevant section of the tax code) production tax credit (PTC), which was incorporated into the IRA, promises to cut this cost. 45V could be worth as much as $3.00 per kilogram (kg) of hydrogen if the producer can demonstrate very low lifecycle emissions and meets specified labor standards. (Hydrogen producers may also opt for an ITC that is tied to emissions intensity instead of taking the PTC.)

The “Pathways” study’s models assume the use of hydrogen produced from natural gas with CCS or from steam cracker furnaces with CCS. With modest improvements in abatement from current levels, this product could become eligible for a PTC of between $0.12 and $0.60 per kg, which would probably put it in the range of the study’s hydrogen scenarios with low energy prices and thus could bring forward adoption slightly.^[20] “Green” hydrogen produced through electrolysis with much lower lifecycle emissions would be eligible for higher incentives, potentially bringing within reach the study’s hydrogen “stretch” scenario. This scenario has the largest cumulative emissions reductions of all the models in the study and would also have lower residual emissions if realized with “green” hydrogen.

Many alternative designs for providing incentives are available. For example, Germany and the United Kingdom are pursuing a “contract for differences” model to subsidize hydrogen, rather than a PTC or ITC.^[21] This approach uses an auction mechanism to identify the cost difference between “clean” and “dirty” products (the “green premium”) and makes up the difference with a subsidy. In addition, the specific design features of the ITC and PTC, which may be altered by Congress at any time, can have major impacts on their effectiveness. For instance, 45V may be taken through “direct pay” for the first five years a production facility is eligible. That means the producer need not have a tax liability to receive the incentive, reducing the transaction costs of the provision’s implementation and enhancing its impact.

“Clean” Procurement

A second policy that could accelerate early adoption of CCS or hydrogen in the PVC value chain once decarbonization pathways have been demonstrated is “clean” procurement. The public sector, along with its contractors and voluntary private participants, may require a product like PVC to meet specific standards, such as a low level of embodied carbon. By doing so, these buyers (which may include companies like Occidental and Shell that have made notable climate commitments) accept paying more than the market rate for the product. Ideally, rapid early adoption leads to cost reduction, and the green premium disappears over time.^[22]

As the “Pathways” study notes, construction is the major end-use for PVC, making up about 70 percent of total usage.^[23] The public sector is a major force in this industry in the United States, with tax dollars paying for nearly half of all cement and a fifth of steel.^[24] Its role will grow as the IIJA and IRA are implemented. For instance, the IIJA includes $50 billion in spending on water infrastructure nationwide, which could lead to the purchasing of large quantities of PVC pipe. And the modeling in the “Pathways” study reveals a relatively small green premium, so buying “clean PVC” would not add much to the overall cost of any specific project.

The Vinyl Institute, a trade association, working in collaboration with the Carbon Leadership Forum, has begun to develop standards for embodied carbon in PVC that include emissions from its production.^[25] This effort initially seeks transparency for end-users of the product as well as to support companies pursuing voluntary goals. It might ultimately create a tool for estimating embodied carbon in a wide range of products used in construction.

However, the complexity of the PVC production process will make the use of such standards in clean procurement challenging. The PVC value chain intersects with other chains, such as chlorine for water purification and ethylene for production of polyethylene and other materials. The same plants frequently serve multiple chains. Decarbonizing PVC production thus requires at least partially decarbonizing other value chains. Indeed, only a minority of the total costs of the system that “Pathways” modeled are allocated to PVC and are thus included in its estimate of the green premium. A majority of the system costs, therefore, would not be defrayed by “buy clean” programs unless these programs pay much larger premiums than the model estimates.

A final complicating factor for clean procurement is that many public construction projects currently specify materials other than PVC, such as ductile iron or cement for pipes. These restrictions on competition among materials neglect the potential lifecycle GHG emissions advantages of PVC.^[26] Until such procurement processes adopt technology-neutral “open competition” principles, “buy clean” may have little effect on PVC production.

Carbon Pricing

The “Pathways” study envisions nearly universal adoption of abatement technologies throughout the PVC value chain by 2050. Unless the cost of clean production matches or falls below conventional methods, market incentives alone will not achieve this outcome. Public policy will need to alter these incentives, either by sustaining incentives for clean production until it reaches this cost threshold or by disincentivizing conventional production.

Carbon pricing would do the latter. Producers who emit GHGs would pay the government for every ton. If the incremental cost of cleaner production is less than the carbon price, they will adopt abatement technologies. Carbon prices can be imposed through taxes or fees or by the creation of a market for a limited number of emissions allowances, known as a “cap-and-trade” system.

The study models a carbon price that starts at either $50 or $75 per ton in 2030 and rises 5 percent per year after that. Not surprisingly, starting at the higher level leads to more rapid emissions reductions across all the scenarios that the study models. The carbon price variable is far more powerful in driving adoption of CCS or hydrogen than energy prices, which “Pathways” also varies in its scenarios.

A predictable, rising carbon price is an attractive approach for decarbonizing the chemical industry. The industry will be faced with difficult decisions about long-lived, expensive capital assets. This approach would reduce one element of uncertainty and provide a long horizon for planning. Equally important, it would cover all stages of the value chain and allow compliance costs to be distributed in proportion to the emissions that are ultimately embodied in end products.

A deficiency of this approach is that the carbon price is set in advance and is not easily adjustable if abatement costs prove to be different than anticipated by policymakers. Cap-and-trade systems are less predictable but more efficient in principle, setting the price at the level demanded by emitters. The European Union’s Emissions Trading System uses this approach, and it covers basic chemicals used in PVC production, such as ethylene, ethylene dichloride, and vinyl chloride monomer. However, free allowances have largely blunted its impact on the European chemical industry.^[27] A proposal to eliminate these allowances more quickly than currently planned is working its way through the EU’s policymaking process at the moment. California’s cap-and-trade system also encompasses chemical production, but no plants in the PVC value chain are located there (though the state is home to many downstream PVC product fabrication plants). Neither the federal government nor the states in which the bulk of the PVC value chain resides have shown an appetite for carbon pricing.

A final complication worth considering in carbon pricing policy is parity across materials. If substitute materials like concrete or ductile iron face a different carbon price per ton of emissions than PVC, investments in production will be distorted. Policymakers must be attentive to competition among materials in end-use markets in their carbon price designs.

Air Pollution Regulations

Carbon pricing provides a convenient variable to represent a range of public policies in “Pathways” modeling, and it would likely be an effective policy to decarbonize the PVC value chain in practice. But it is not the only policy that could drive widespread adoption of abatement technologies. Point-source air pollution regulation is an alternative, one that has commonly been adopted for similar challenges in the United States in the past.

The U.S. Environmental Protection Agency (EPA) has the authority under the Clean Air Act to impose restrictions on pollutants from point sources like power plants and industrial facilities. This authority extends to CO2, as established by the Supreme Court in Massachusetts v. EPA (2007). The Court’s recent West Virginia v. EPA (2022) decision did not challenge this authority, but instead is likely to focus its application on each individual plant, rather than on broader “systems of emissions” like industries or states, as the Obama administration had proposed in its Clean Power Plan.

Cracker furnaces and CHP plants are the largest point sources of emissions in the PVC value chain and would be the logical targets for such regulations. Chemical industry sites with these facilities are already subject to federal regulation to control pollutants that impact local air quality or pose health hazards. More stringent standards for currently regulated pollutants might reduce CO2 emissions as a cobenefit. There are no regulations currently in place to control CO2 because of its global warming potential, but the EPA has stated that it will soon issue such regulations for coal and natural gas power plants. It has not sought to control industrial CO2 emissions.^[28]

Were the EPA to pursue a point-source strategy to regulate new chemical-industry facilities to control GHGs, its standard would need to “reflect the level of emissions performance achievable through the best system of emission reduction, considering cost and other factors, that has been adequately demonstrated.”^[29] Whether either of the two main pathways, CCS or hydrogen fuel, would provide this benchmark for new sources will likely depend on the success of demonstration projects. Standards for retrofits are typically less stringent. Upgrades at existing sites dominate “Pathways” models. Whether such upgrades would qualify as new sources or retrofits may be situation-dependent.

The study’s models provide rough estimates of the costs of imposing facility-based standards for CO2 emissions that would force the adoption of CCS or hydrogen combustion under a variety of assumptions. Very large sites in the PVC value chain might be required to spend hundreds of millions of dollars. In the models, site owners choose to do so because it is cheaper than paying the carbon price. In a regulatory framework, they would need to face a credible threat of enforcement. A collaborative RD&D program pursued in the shadow such a threat might reduce the cost of compliance over time and induce a productive dialogue between the industry and regulators.^[30] However, one should not be sanguine that the imposition of regulatory standards would go unchallenged, especially since West Virginia provides new grounds for such challenges.

International Trade Policies

Widespread domestic adoption of abatement technologies will depend on trade policies as well as carbon pricing or regulation. “Pathways” models assume that PVC production for both domestic consumption and export will continue to grow for the next three decades. But if higher prices caused by the green premium undercut the competitiveness of domestic production, these assumptions are unlikely to be realized. In the face of a carbon price or heightened regulation, production may move abroad instead.

An increasingly widely discussed option to level the playing field in the United States would be to assess a “border adjustment” on imported PVC that embodies more carbon per unit than the domestic product. The more carbon-intensive the production method, the higher the adjustment would be. For instance, PVC made with high-carbon feedstocks, energy-intensive methods, and high-carbon electricity without abatement technologies would face a very high adjustment. PVC made under conditions comparable to those in the United States, on the other hand, would not face one at all.

Other jurisdictions that pursue similar policies will seek to impose similar adjustments, but universal adoption of such a policy is improbable. To allow U.S. producers to compete in the global market, the federal government could provide export incentives to compensate them for the green premium. These payments would enable domestic producers to lower their prices to match those offered by more carbon-intensive producers abroad.

At least two major challenges arise for such policies. One is the difficulty of estimating the amount of embodied carbon in any particular shipment of PVC resin. The carbon intensity of grid power, for instance, may change over the course of each day. Many plants are capable of using multiple feedstocks with different levels of carbon intensity. Standards for carbon transparency developed to support clean procurement will help solve this challenge for domestic production, but similar trusted standards would need to be implemented globally for “clean trade” policies to achieve their goals.^[31]

A second challenge of clean trade policymaking is avoiding protectionism and favoritism unrelated to climate goals. Once the possibility of adjusting the industrial playing field is opened, producers everywhere will have a strong incentive to distort it to their own advantage. World Trade Organization (WTO) rules are intended to address this risk, but they are rarely effective, and their application to climate-related trade policies is confusing and untested. Where specific and demonstrable costs are imposed domestically, like the U.S. Superfund excise tax (which covers the PVC value chain), export incentives can be WTO-compliant. But the legality of most clean-trade policies is much murkier. Border adjustments, for instance, may be incompatible with the WTO’s core principle of nondiscrimination among trading partners.^[32]

Conclusion

The “Pathways” study of the PVC value chain provides insights into public policies that might be employed to decarbonize the chemicals industry more broadly. The sequencing and combination of policies explored here, for instance, are likely to be generalizable. Abatement technologies must be demonstrated and an early wave of infrastructure deployed first, with policies to support early adoption to follow, and more stringent policies that induce widespread adoption, along with trade policies that ensure fair competition globally, enacted in the later stages.

The chemical industry is rightly considered hard-to-abate. It makes many products that are vital to the economy and to daily living. It is very complex, internationally networked, and technologically advanced. Yet, if the world is to reach the net-zero goals laid out in the Paris agreement, this industry cannot be neglected or ignored. The sooner climate policy begins to tackle this hard-to-abate sector, the more time industry will have to find, refine, and implement solutions.

Endnotes