The dollars and cents of decarbonization

While producers increasingly are interested in lowering their carbon footprints, questions remain on whether greener products can be sold at premium prices.

I can’t count the number of times I’ve encountered some form of the word “decarbonize” in recent years. From metals to resin producers, they all are interested in lowering their carbon footprints, and one of the easiest ways to do that is to increase their use of recycled content. But whether these greener products can be sold at a premium price seems questionable in some cases.

In a net-zero scenario, McKinsey & Co. says global demand for steel would be about 10 percent greater in 2050 than it is now. “Most of this production would be decarbonized by installing carbon capture and storage equipment or by replacing furnaces with electric arc furnaces (EAFs) using scrap and hydrogen-based direct-reduced iron,” the company writes.

Aluminum also is feeling pressure from original equipment manufacturers (OEMs) to decarbonize. “Green aluminum supply, which encompasses low-CO2 (fewer than 4 tons of CO2 per ton) and secondary aluminum, is expected to grow from 44 million tons to 71 million tons from 2021 to 2030, driven by smelters switching to renewable energy, higher recycling rates and technological advancements,” McKinsey writes in an Oct. 28, 2022 article, “Capturing the green-premium value from sustainable materials.”

“One could argue the more carbon-intensive products should be more expensive to disincentivize their use.”

McKinsey sees demand for green aluminum growing from 26 million tons in 2021 to 62 million tons by 2030 but sees little possibility for a green premium. Its outlook is more favorable for green steel, with the company saying it expects “significant green premiums to emerge by the mid-2020s” and for these premiums to increase further when hydrogen DRI plants come online after 2025 before gradually decreasing as more capacity comes online.

Regional variations also will occur in McKinsey’s estimation. Steel production in the U.S. is dominated by scrap-fed EAF mills, providing less opportunity for green premiums, while flat steel in Europe primarily is produced using blast furnace-basic oxygen furnace processes. Considerably more investment will be needed to transfer to EAF production, and a green premium could help offset those investments.

Natural recycled high-density polyethylene has commanded a premium over virgin material, and clear polyethylene terephthalate has done the same because of limited supplies, but reprocessors are feeling the pressure of lower virgin plastic prices.

One could argue the more carbon-intensive products should be more expensive to disincentivize their use, which is the aim of a U.S. proposal that would levy tariffs on steel and aluminum based on how much carbon the producing country’s industries emit. Reuters cites two people familiar with the plan, which is an attempt to address climate change and “dirty” metals made in China.

Green premiums are not always welcomed by scrap consumers, who worry that they will lose business to less-expensive, higher-carbon-intensity products if OEMs prove to be less committed to decarbonization than they originally pledged.

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January 2023
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