Carbon and its Impact on the Global Pulp and Paper Industry

Transcription

1 Carbon and its Impact on the Global Pulp and Paper Industry An Uneven Field and a Bumpy Ride Ahead By Subhash Deodhar, Senior Consultant, Fisher international Why Does It Matter? So far, the impact of the carbon, or Greenhouse Gas (GHG), issue on pulp and paper mills has been relatively small and uneven. Some mills may pay small amounts of penalties while others actually benefit from Renewable Energy Credits (RECs) they earn and are allowed to sell when they produce energy from renewable fuels. The carbon issue, however, has the potential to have a large impact on individual mills and paper companies. Consumers are increasingly concerned about global warming threats and inclined to prefer products that can claim to be carbon neutral. Governments throughout the world, both local and national, are considering instituting a variety of disincentives for carbon emissions. The wide range of penalties under consideration, if instituted, could affect pulp and paper mills in wildly varying degrees. Fisher International has calculated the GHG emissions of every operating mill and machine in the world for each of the products it produces. The data are in the Carbon Benchmarking Database of FisherSolve. We ve used some of this data to analyze the potential impact of the carbon issue on the industry as a whole in this article. Since societal responses and government policies are still evolving, we ll look at the uneven range of carbon emissions across countries and grades and how they may affect individual mills differently. In a future article, we ll tackle the unevenness of government policies and how they could tilt the field on which individual mills compete even further.

2 2 Humanity emits about 36 billion tons of carbon annually according to the Global Carbon Project, co-led by researchers from the Tyndall Centre for Climate Change Research at the University of East Anglia. We ve calculated the global paper industry s emissions to be just under half a billion tons per year coming from its combustion of fossil fuels and use of purchased electricity ( gate-togate ). Using a cradle-to-gate metric, the industry emits just over half a billion tons of GHG (Figure 1). While other industries, such as cement, emit considerably more carbon than pulp and paper, the paper industry s contribution to global emissions is large enough to attract the attention of society and governments. And, to the extent that the general public and governments choose to penalize carbon emissions, pulp and paper s GHG volume is large enough to cause a significant financial impact on many of the industry s players. One could well ask, How can this be, given that the industry s main raw material is biomass which absorbs carbon rather than emitting it? In fact, large portions of the industry produce products, particularly pulp, with a very low net carbon impact while other parts of the industry are responsible for significant amounts of GHG. This fact will be the cause of great disruption in the industry. The unevenness of the carbon footprints of different mills and the uneven responses that different countries are likely to have with regard to GHG emissions have the potential to dramatically change the competitive positions of paper producers vis a vis their peers. The following offers some perspective on the subject. Figure 1. Emitting 0.6 billion MT CO2 per year, the paper industry represents 2% of the world s carbon footprint according to Fisher International s Carbon Benchmarking Database

3 3 Cap-and-Trade or Carbon Taxes? It is generally accepted that Greenhouse gas (GHG) emissions can influence the atmosphere and will contribute to climate change if their concentration continues to increase. Greenhouse gases relevant to the paper industry are Carbon Dioxide (CO 2 ), Methane (CH 4 ) and Nitrous Oxide (N 2 O). GHG emissions are generally reported as mass of Carbon Dioxide Equivalent (CO 2eq ). Instead of reporting separately for methane and nitrous oxide, their equivalent CO 2 emission is calculated and added to CO 2 emission to obtain the total CO 2eq emission. The common reporting unit is metric ton of CO 2eq, but often stated simply as tons of carbon dioxide. Combustion of fossil fuels such as coal, oil or natural gas generates GHG gases. Combustion of biomass fuels such as wood or pulping liquor generates CO 2, but it is usually not considered to be GHG emission since CO2 from biomass combustion is reabsorbed by new growth of trees and other biomass at roughly the same rate as we burn it. Renewal of biomass absorbs CO 2 from atmosphere, thus biomass fuels are considered carbon neutral. Various forms of incentives and penalties have been proposed to control and reduce GHG emissions. Penalties can be either in the form carbon cap-andtrade or carbon tax. For cap-and-trade, each industrial site is allocated a permissible carbon emission for a base year and target reduction for subsequent years. The site then pays a penalty if it emits more than its quota or can sell credits to third parties if they emit less than their quota. The trading occurs at carbon exchanges. Few carbon exchanges have come up around the world but the European Union s Emissions Trading Scheme (ETS) is the most established. Under some conditions, cap-and-trade systems can be effective. Experience from the EU s ETS suggests that price volatility and gaming by market participants can undermine the effectiveness of this complex, opaque, and indirect system for pricing carbon pollution. The European Union s ETS operates in the 28 EU countries and covers around 45% of the EU's greenhouse gas emissions from power generation and manufacturing industries. In North America, the Chicago Climate Exchange is the largest and longest running greenhouse gas emission trading platform. The carbon tax system is a direct tax collected during the sale of fossil fuels. The tax is based on tons of carbon dioxide that will be emitted by the fossil fuel being sold once it is burned. The tax is generally recalculated as the equivalent of a ton of coal, gallon (or liter) of oil, or cubic foot (or cubic meter) of natural gas. A few countries have had direct carbon tax in place for a few years. Examples and their approximate tax rates are Sweden ($23/ton), Finland ($27/ton) and Australia ($23/ton). Canada does not have a national carbon tax but Quebec ($2/ton) and British Columbia ($30/ton) have had carbon taxes in place for the

4 4 past several years. In the USA, a few states may start imposing carbon taxes or a cap-and-trade system. At the national level, various bills have been proposed in US Congress. The most recent bill is the Climate Protection Act of 2013 proposed by Senators Sanders and Boxer. The bill proposes carbon tax starting at $20/ton and rising over a decade to $33/ton. Measuring GHG There are different ways to assign responsibility for GHG emissions to the sources that emit them. One way is to charge the source, say a paper mill, only with the emissions that occur directly at the site. This method is called Scope 1. For example, Scope 1 emissions might include CO 2 produced from a site burning natural gas and coal. However, it could be argued that CO 2 emitted during the production of the electricity that a mill purchases from a power utility should also be counted. CO 2 from power and steam purchases is considered a Scope 2 measurement. Similarly, one could argue that a ton of paper produced at a mill is responsible for the emission of CO 2 not only from fuels burned at the mill and power generated near the mill, but also from other ingredients used by the mill to make the paper. For example, manufacturers of starch and latex that is used in paper also emit CO 2 in their process. So, to fully understand the CO 2 impact of a ton of paper, we need to account for all the CO 2 emissions required up to the point the jumbo roll is produced. This last level of measurement is called Scope 3. Fisher International s Carbon Benchmarking Database in FisherSolve calculates the GHG emissions of every operating mill and machine in the world for each of the products it produces. The Carbon Benchmarking tool displays data on Scope 1, Scope 2, and Scope 3. It also allows for combinations such as Gate-to-Gate (Scope 1 and 2) and Cradle-to-Gate (all three Scopes together). Using the rollup functionality, a user can analyze the carbon footprint at any level, from machine to company to region and from Finished Product to Major Grade. Impact on the Pulp and Paper Industry The carbon tax will have a direct impact on the cost of fossil fuels purchased. Additionally, purchased electricity costs are likely to increase if power utilities pass on the carbon taxes they pay on purchases of fossil fuels. The cost impact of a carbon tax can be easily calculated from GHG emission numbers readily available in FisherSolve. In this report, we ll use North American pulp and paper to illustrate the impact of a potential carbon tax. (In future articles we will

5 5 consider how countries may approach the issues differently and how that could affect players throughout the industry.) If we assume a carbon tax of $20/ton of carbon dioxide, North American producers costs would rise as shown in Figures 2 and 3. Figure 2: Increased cost to North American producers if the carbon tax rate is USD $20/ton (from fossil fuel combustion) The carbon tax on fossil fuels by major grade would vary from a low of $1.96 per ton of Newsprint in Canada to the high of $18.17 per ton of Tissue and Towel products in United States. The average tax cost for the paper industry would be $4.43 per ton in Canada and $10.12 per ton in United States. The total tax burden for the Canadian paper industry would be $106 million while for U.S. paper industry the amount would be $890 million (Figure 2).

6 6 If power utilities pass on their cost of carbon taxes to their paper mill customers, purchased electricity costs will increase for paper mills (Figure 3). Since FisherSolve calculates purchased electricity volumes and the GHG emissions associated with each utility catchment, the total impact of carbon tax can be easily analyzed for every mill and machine. Figure 3. Increased cost to North American producers if the carbon tax rate is USD $20/ton The carbon tax cost impact can differ substantially between paper mill sites. Figures 4 and 5 illustrate carbon tax on fossil fuels and carbon tax via purchased electricity for all pulp and paper mill sites in North America. The graphs are for carbon dioxide emission per ton of production. The carbon tax cost will be a direct multiple of that number. Each bar represents a mill site. Notice how many orders of magnitude difference there are in the CO 2 per ton emitted between players at either end of the curves.

7 7 Figure 4. There are many orders of magnitude difference in the CO2 per ton emitted from mill to mill Figure 5. The carbon tax cost impact can differ substantially depending on the source of electricity purchase

8 8 The effect on the competitiveness of paper mills can best be analyzed by comparing mills making similar grades. Figures 6 and 7 illustrate differences between mills making Tissue and Towel and those making Market Pulp. The graphs are for carbon dioxide emission per ton of production. The carbon tax cost will be a direct multiple of that number. Each bar represents a mill site. Figure 6. The carbon footprint of Tissue and Towel Mills in Canada and the U.S. Figure 7. The carbon footprint of Market Pulp Mills in Canada and the U.S.

9 9 Paper mills can reduce the impact of carbon taxes with various alternatives. Improving energy efficiency will reduce carbon tax in addition to a reduction in the cost of purchased fuels. Replacing coal with natural gas reduces carbon dioxide emissions per unit of energy used and, therefore, the carbon tax by 42%. Replacing fossil fuels by biomass fuels (wood, pulping liquor, biogas) can completely eliminate carbon tax on purchased fuels. (There is no carbon tax surcharge on purchased electricity if it is generated by nuclear, hydroelectric, wind, or solar.) How Much Does It Matter Today? While the full financial impact of carbon footprints may not have arrived yet, mill owners already take the issue into account. The future potential for relatively expensive carbon taxes and other forms of penalty affects owners decisions today on which assets to select for investment and which to close. The possibility that consumer advocacy on the issue will increase in strength already affects decisions on which products companies create, how they market them, and where and how companies invest in manufacturing plants and equipment. Finally, because the financial impact of carbon will be so uneven, we can expect the impact of the carbon issue to vary greatly between players. It will be particularly important for owners and their stakeholders to understand the relative position of each of their assets compared to its peers. In a future article, we will explore the unevenness of the playing field and potential for further disparities among mills once government policies begin to take shape. For information about Fisher International s Carbon Benchmarking Database, please contact info@fisheri.com.

10 10 BETTER INTELLIGENCE. BETTER DECISIONS. About FisherSolve FisherSolve is a market analysis tool that supports data-driven decision making in the pulp and paper industry. It contains a powerful proprietary database that accurately describes every pulp and paper mill in the world (making 50+ TPD) with information about each mill and machine s scale, asset quality, cost-of-production, competitiveness, market shares, and much more. FisherSolve is used by the world s major pulp and paper producers, suppliers, investors, and buyers to bring analytic discipline to their strategic and tactical business practices. Fisher International, Inc. 50 Water Street So. Norwalk, CT USA NORTH AMERICA I LATIN AMERICA I EUROPE I NORDIC I ASIA PACIFIC. A FISHER EXCLUSIVE ANALYSIS