Analyst Note GHG Emissions Forecast for Cement Manufacturing Sector. January Akash Gandhi

Transcription

1 Analyst Note January GHG Emissions Forecast for Cement Manufacturing Sector Chandan Kumar Lead Economist Akash Gandhi Associate Economist i Executive Summary: Based on 2015 s emission data, released by California Air Resources Board (ARB), the cement manufacturing sector was found to contribute 2.2% of emissions covered under the second compliance period of the California cap-and-trade program. Movements in this sector can significantly impact the supply-demand position and hence trading prices in the market for California carbon allowances. Using time-series econometric analysis, it is expected that the greenhouse gas emissions from the 8 cement manufacturing plants is likely to increase from 7.5 MMTCO 2e in 2015 to approximately 8.7 MMTCO 2e, 9.7 MMTCO 2e and 10.8 MMTCO 2e in 2020, 2025 and 2030 respectively. It is expected to increase at a decreasing rate keeping macro economic growth, industrial growth rate, technological advancement and use of alternative fuel in mind. Cement sector is expected to be among the few sector whose emissions is expected to increase though at a decreasing rate during the next decade, so it will have significant impact on the carbon allowances price post 2020 once there will be restriction on free allowances allocated to cement sector. Historical overview of the cement manufacturing sector California is one of the country s largest producers of cement, with eight fully active and one partial active production facilities on the Environmental Protection Agency's (EPA s) list of greenhouse gas emitters. California stands second only behind Texas, among the top five cement-producing states in the US, followed by Missouri, Florida, and Alabama; combined, they account for 50% of the total cement production in the US ii. Contents Historical overview of the cement manufacturing sector Overview of emissions from the cement manufacturing sector Forecast of cement production 3 Emissions Forecast 4 Policy Implications and use of alternate fuel Conclusions 6 Page No California Carbon 1

2 California s 9 operational entities involved in cement manufacturing produced million metric tons of cement in the year 2014 Trends for cement manufacturing In the year 2005, California was the largest cement producing state in the US, accounting for approximately 12% of US cement production and 0.5% of global cement production. Cement production then registered a steady decline between 2005 and California cement production by metric tons Source: Portland Cement Association In the year 2008, the 11 California facilities in operation produced 10.8 million metric tons (MMT) of cement. About 73% of the cement produced in California was shipped to ready-mix concrete producers, 19% to concrete manufacturers, and the rest to contractors and dealers. In 2009, California cement plant production dropped to 8.2 MMT due to changes in the worldwide economy. Along with this drop in production, two California cement plants, CEMEX in Davenport and TXI in Crestmore ceased operation. California cement production declined to a low of 7.2 MMT in Post 2010 cement production increased rapidly to reach its pre recession level of 8.7MMT in 2011 and 9.4 MMT in Moving ahead, cement production registered a year on year growth of 8.5%, 10.4% and 5.0% to reach 9.4 MMT, 10.4 MMT and 10.9 MMT for 2012, 2013 and 2014 respectively. For the first time post 2010 cement production declined by 2.4 between 2014 and 2015 to reach 2.21* MMT (interpolated basis cement sector emissions and its emissions factor) Fuel use in cement plants, and trends in associated emissions The total energy consumption for 2009 across the eight cement plants subject to cap-and-trade regulation was approximately 27,669,000 million metric British thermal units (MMBtu). iii Electricity contributed approximately12% of the energy used, with the majority of the remainder coming from fuels such as coal and petroleum coke, which are the primary fuels for kilns in California cement plants and which provide about 76% of the total energy for these plants. Other fuels used in smaller quantities include natural gas, scrap rubber tires, dried sewage sludge, wood, and biomass fuels. Emissions from cement plants derive mainly from fuel combustion and the clinker process. Emissions from the cement manufacturing sector peaked in 2004 and 2005, with a decrease beginning in 2006 and continuing through Between 2005 and 2010, cement plant emissions declined 44% iv, reflecting both a large decline in demand and the closure of two cement plants over the period. In 2014, a former U.S. cement producer returned to cement making through its purchase of a U.S. cement company. The purchase involved two cement plants in California and two in Texas, and was followed by the sale in 2015 of the larger plant in California to another California producer and the closure of the smaller facility which might have lead to a decline in total cement production in California in 2015 v California Carbon 2

3 Overview of emissions from the cement manufacturing sector Of the 804 reporting entities in 2015, Cement manufacturers accounts for 8 entities that meet the minimum threshold of 25,000 metric tons of CO2 emissions per year, to qualify as mandatorily-covered entities under the program. The top five greenhouse gas emitting cement manufacturing plants are responsible for 79% of the total covered emissions for this sector in Covered Emissions for the second compliance period (CP2, ), distributed by industrial sector According to 2015 data, the cement manufacturing sector cumulatively accounts for approximately 2.2% of the total covered emissions under the second compliance period of the cap-and-trade program. Between 2008 and 2010, the absolute covered emissions from these entities registered a fall of 33%, but increased significantly by 10% between 2010 and 2011 and by 13% between 2011 and For the year 2013 and 2014, emissions from cement manufacturing sector keeps increasing at 4.1% and 6.3% respectively before registering a decline of 2.6% between 2014 and 2015 from 7.7 MMtCO 2 e in 2014 to 7.5 MMtCO 2 e in Source: California Air Resources Board This decline in emissions can be mainly attributed to over 24% decline in reported emissions by Cal-Portland Company, Oro Grande Plant between 2014 and California Cement Plant Fuel Use in % Electricity 62% 7% 4% 12% 1% Coal Petroleum Coke Scrap rubber tyres Natural gas Source: California Air Resources Board Biomass, wood, diesel & dries sewage sludge 2017 California Carbon 3

4 Largest GHG emitters among the covered entities from the cement manufacturing plants sector, Name of entity The total covered emissions from the cement manufacturing plants declined drastically by 30% from (the year of the economic downturn), before following a relatively steadier decline of approximately 5% between 2009 and In and , the sector recovered, with production rising by 10.7% and 8.5%, respectively. As a result, total covered emissions from cement manufacturing plants registered a gain of 10% and 13%, respectively. For the year 2013 and 2014, covered emissions from this sector registered a gain of 4.1% and 6.3% over 2012 and 2013, to reach 7.19 MMtCO 2e and 7.65 MMtCO 2e in 2013 and 2014 respectively. For the year 2015, emissions from this sector declined for the first time in last five years by 2.6% to reach 7.46 MMtCO 2e. % share Cemex Construction Materials Pacific 22.2 LLC - Victorville Plant Mitsubishi Cement CalPortland Company, Mojave Plant 13.9 TXI Riverside Cement (Oro Grande Plant) Lehigh Southwest Cement Co Cupertino Forecast of cement production and emissions This analyst note aims to forecast the covered emissions of entities in the cement manufacturing sector that are covered under the California cap-and-trade program. This is done by generating forecast for California s cement production in line with macro economic growth, fuel usage, real-estate growth rate, technological improvement along with policy implication such as The Fixing America's Surface Transportation Act or "FAST Act". Forecast Methodology The Gross State Product (GSP) is one of the most important indicators of economic activity. Macro-level analysis suggests that development in an industrial sector has a very high correlation with the GSP growth rate, making the latter a reliable indicator in the forecast of annual cement production from cement manufacturing plants in California. In order to account for all possible GSP growth rate scenarios, three alternatives are selected for this analysis: Reference scenario: 2.0% real GSP growth rate ( ) and 1.5% 2021 onwards Optimistic scenario: 3.0% real GSP growth rate ( ) and 2% 2021 onwards Pessimistic scenario: 0.5% real GSP growth rate Annual Cement Production (In MillionTones) Annual Cement Production Forecast Historical Base Case High Production Low Production 2017 California Carbon 4

5 Cement Production Forecast Using the above scenarios for macro economic growth rate and production elasticity of cement manufacturing sector with reference to the real GSP growth rate (i.e. % change in cement production due to 1% change in the macro- economic parameter), we arrive at an estimated growth rate for cement production for the next one and a half decade. Under the reference GSP growth rate scenario and with a production elasticity of 1.85, annual cement production is expected to reach 13.0 Million Metric Tones (MMT) by 2020, a rise of approximately 19.9% between 2015 and Further, it is expected to reach 14.9 MMT and 17.0 MMT by 2025 and 2030 respectively. Under the optimistic scenario (GSP) or high production scenario, annual cement production is expected to reach 14.2 MMT by 2020, a rise of approximately 31.0% between 2015 and Further, it is expected to increase at a decreasing rate to reach 17.0 MMT and 20.3 MMT by 2025 and 2030 respective Under the pessimistic scenario (GSP) or low production scenario, annual cement production is expected to reach 11.8 MMT by 2020, a rise of approximately 9.6% between 2015 and Further, it is expected to reach 13.0 MMT and 14.2 MMT by 2025 and 2030 respective. Estimated Trend of Covered Emissions Emissions (In Million Tonnes) Historical Base Case High Case Low Case Emissions Forecast The cement industry is an energy-intensive industry with energy typically accounting for 30 40% of production costs. More than 50% of the total CO 2 from cement production results from the chemical reaction that converts limestone into clinker, the active ingredient in cement. The next 40% of emissions result from burning fuel, and the final 10% are from transportation and electricity vi. The cement industry is an energy-intensive industry with energy typically accounting for 30 40% of production costs. A large proportion of emissions from this sector is a result of fuel combustion and any change in the combination of fuel used will have significant impact on the emissions associated with cement manufacturing sector. Basis the cement manufacturing forecast and keeping technological improvement and alternative fuel use scenario (which impacts the emissions factor of the total cement production), we came across three scenarios for emissions forecast for this sector. Under the base case scenario for cement production, we expect emissions from cement manufacturing sector to reach 8.7 MMTCO 2e in 2020, an increase of approximately 16% between 2015 and The emissions factor (Emissions in tonnes/ Cement 2017 California Carbon 5

6 Production in tonnes) is expected to decline from 0.69 in 2015 to 0.67 in 2020 which restricts the increase in emissions up to some extent with reference to the increase in cement production during the same time period. The emissions are expected to increase further at a decreasing rate to reach 9.7 MMTCO 2e and 10.8 MMTCO 2e by 2025 and 2030 respectively. Under the high emissions scenario, emissions are expected to reach 9.5 MMTCO 2e by 2020, a jump of approximately 27% over 2015 level. Further, it is expected to reach 11 MMTCO 2e and 12.9 MMTCO 2e by 2025 and 2030 respectively. Under the low emissions scenario, emissions are expected to reach 7.9 MMTCO 2e by 2020, a jump of approximately 7% over 2015 level. Further, it is expected to reach 8.5 MMTCO 2e and 9.0 MMTCO 2e by 2025 and 2030 respectively. Policy Implications and use of alternate fuel The Fixing America's Surface Transportation Act or "FAST Act" On December 4, 2015, then President Obama signed into law the Fixing America s Surface Transportation (FAST) Act that authorizes Federal highway, highway safety, transit, and rail programs for five years from Federal fiscal years (FY) 2016 through The Fixing America s Surface Transportation (FAST) Act will provide more than US$305bn to maintain and improve the nation s surface transportation. This ACT will have direct consequences on the cement sector in California. FAST has seen improvement over the previous MAP-21, with funding levels modestly higher, and represents a multi-year commitment that allows states to engage in multi-year projects. With the passage of a five-year federal transportation bill, cement manufacturers will see a rise in consumption, according to the Portland Cement Association (PCA) vii. California's estimated annual allocation including all Federal Transit Administration (FTA) Programs is as follows: Billions $1.45 $1.40 $1.35 $1.30 $1.25 $1.20 $1.15 California's Estimated Annual Allocation - ALL FTA Programs Source:- California State Transportation Agency Use of Alternate Fuel in Cement Manufacturing Cement production has advanced greatly in the last few decades. The traditional fuels used in traditional kilns include coal, oil, petroleum coke, and natural gas. The substitution of fossil fuels by alternative fuels in the production of cement clinker is of great importance both for cement producers and for society because it conserves fossil fuel reserves and, in the case of biogenic wastes, reduces greenhouse gas emissions. In addition, the use of alternative fuels can help to reduce the costs of cement production. Energy costs and environmental concerns have encouraged cement companies worldwide to evaluate to what extent conventional fuels can be replaced by waste materials, such as waste oils, mixtures of non-recycled plastics and paper, used tires, biomass wastes, and even wastewater sludge. The clinker firing process is well suited for various alternative fuels; the goal is to optimize process control and alternative fuel consumption while maintaining clinker product quality. The potential is enormous since the global cement industry produces about 3.5 billion tons that consume nearly 350 million tons of coal-equivalent fossil and alternative fuels. Most of the California based cement plants have replaced part of the fossil fuel used by alternative fuels, such waste recovered fuels. Many years of industrial experience have shown that the use of wastes as alternative fuels by cement plants is both ecologically and economically justified California Carbon 6

7 Conclusions The cement manufacturing plant sector accounts for 2.2% of the total covered emissions in CP2 of the California cap-and-trade program. Emissions from this sector are expected to rise steadily, which suggest a significant shortfall of allowances for this sector is likely. Though for the initial years of the programs cement manufacturing entities are entitled to free allocation of allowances in line with their annual emissions. In case of no free allowances post 2020, cement sector s year on year demand for allowances will keep on increasing resulting into higher shortage for this sector by Endnotes ii Cement: Domestic Production and use, United States Geological Survey, January, ement/mcs-2016-cemen.pdf iii Cement Sector Public Report, California Air Resources Board, Stationary Source Division, August 26, ment.pdf iv California Greenhouse Gas Inventory for by Category as Defined in the 2008 Scoping Plan, California Air Resources Board, June 17, inventory_scopingplan_ pdf v Cement: Mineral Commodity Summaries, United States Geological Survey, January, ement/mcs-2016-cemen.pdf vi Cement Sustainability Initiative, Guidelines for the Selection and Use of Fuels and Raw Materials in the Cement Manufacturing Process (World Business Council for Sustainable Development, 2005). vii Fixing America s Surface Transportation Act (P.L ), State of California, Department of Transportation, December 11, ntation/ca_ftl_fastact_pl pdf References Brooks and Morris, B., Saraf, A., California s Carbon Allowance Pricing and Offset Supply through 2020 and the Market Effects of Setting a 2030 Target. American Carbon Registry. Cement Sector Public Report, California Air Resources Board Stationary Source Division, August 26, 2013http:// s/cement.pdf Cement sector: Greenhouse Gas Emission Reduction Case Study, California Energy Commission GHG Facility and Entity Emissions Detailed, California Air Resources Board. California Greenhouse Gas Emissions for 2000 to 2011 Trends of Emissions and Other Indicators, California Air Resources Board. nventory_trends_00-11_ pdf California Cement Industry: Portland Cement Associations California Carbon 7

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