Climate Change and the Role of the Chemical Industry

1. 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

2. Contents • Context and objectives for the study undertaken for ICCA • Methodology • Results

3. 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 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

4. Peak at 550 ppm, 3.0°C • Peak at 510 ppm, 2.0°C • Peak at 480 ppm, 1.8°C 70 • Current pathway / Business-as-usual (BAU) • Technical measures < €60 per tCO2e • Focus of the study -38 • Additional measures Behavioural changes & expensive measures 32 -9 23 Containing global warming below 2°C requires reductionof GHG emissions by 35-50 GtCO2e vs. BAU by 2030 • Global GHG emissions • GtCO2e per year 70 60 50 40 30 20 10 0 • 2005 • 2010 • 2015 • 2020 • 2025 • 2030 SOURCE: McKinsey

5. 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

6. Share of projects Jan - Mar 2009 by service line2 Percent Share of projects Jan - Mar 2009 by region Percent Climate change related McKinsey projects1 Numbers, 2002 to March 2009 McKinsey's experience in climate change related work • NOT EXHAUSTIVE • Other • Water • Environmental Finance • ~510 • Biosystems • Energy Efficiency • Abatement & Regulation • Sustainability Transformation • Clean Energy Technologies • Other/tbd • Asia • Europe • South America • 2004 • 05 • 06 • 07 • 08 • 2009 • North America • Middle East 1 Not exhaustive 2 Energy Efficiency incl. Sustainable Cities; Clean Technologies incl. Renewables, EV, CCS; Biosystems incl. Biofuels SOURCE: CCSI

7. 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

8. Contents • Context and objectives for the study undertaken for ICCA • Methodology • Results

9. Life cycle emissions of chemicals cover entire life cycle of products • Extraction (feedstock and fuels) • 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 SOURCE: McKinsey/ ICCA

10. All cLCAs externally validated by the Öko Institut More than 100 CO2e life cycle analyses (cLCAs) were made … • Number of cLCAs • Category • Subcategory • 19 • Autom. weight reduction • Lubricants • Lower friction • Transportation • Engine efficiency • Aviation weight reduction • 19 • Marine fuel reduction • Building insulation • Insulation • 10 • Fridge insulation • Construction material • Building • Piping • 17 • Windows • Feed supplements • Fertilizer & crop protection • Agriculture • Overall abatement potential • Preservation • 13 • Food production efficiency • Food packaging • Packaging • 18 • Shopping bags • Electronic components • Consumer goods • House ware • Service wear • Textile • Low temp detergents • 4 • District heating • Power • Solar power • Wind power • 2 • CFL lighting • Lighting • LED lighting SOURCE: McKinsey/ ICCA

11. ... 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 • Non-chemi-cal product emissions over life • cycle of non-chemical alternative • Difference in in-use emissions due to per-formance difference between chemical and non-chemical product • Gross emissions savings SOURCE: McKinsey/ ICCA

12. Results presented in two ways – Gross savings ratio or X : 1, and net emission abatement Gross savings (or X : 1) ratio Net emission abatement "Chemical industry saves X kgCO2e for every 1 kg emitted" "Global CO2e emissions would be Y Gt higher without chemical industry" Emissions, GtCO2e (2005 example) • 46+Y • Y • X • Chemical industry emissions • Gross savings • World as-is • World w/o extensive use of chemicals SOURCE: McKinsey/ ICCA

13. The impact of the chemical industry was evaluated under threescenarios – current and two forward looking • 2030 BAU scenario • 2030 abatement scenario • 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 • 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 • 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 SOURCE: McKinsey/ ICCA

14. Contents • Context and objectives for the study undertaken for ICCA • Methodology • Results

15. Total life cycle CO2e emissions linked to the chemical industryamounts to 3.3 Gt GHG life cycle emissions of chemical products, 2005 GtCO2e • 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

16. 1 Production emissions are composed of energy and process emissions • Production emissions • Production emission methodology • Chemical industry production emissions • Type of emission • Sources used • Rationale • GtCO2e, 2005 • Fuel consumption required for process to run (excluding fuels for feedstock purposes) • IEA • Direct energy emissions • 2.1 • 0.6 • Overall • production emissions • Indirect energy emissions* • Electricity generated off-site • IEA • 0.8 • Process emissions • N2O (adipic acid/nitric acid, caprolactam) • CO2 (ammonia, calcium carbide, titanium dioxide, soda ash, methanol, ethy-lene, EDC/VCM, ethylene oxide, acrylonitrile, carbon black) • HCFC-22 • IPCC emission factors • SRI/Tecnon production values • 0.7 • Production • US EPA SOURCE: McKinsey/ ICCA

17. 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 withalternatives available today, but no cLCAs • made • Gross savings equal to life cycle emissions – conservative compared to using average CO2e savings from case studies • Zero savings (only emissions) – very conservative • Products1 with no realistic alternativeavailable today 1 Or applications SOURCE: McKinsey/ ICCA

18. 0 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 • Gross savings (savings factor) • Net emission abatement • Chemical industry emissions • 3.30 • 1.45 • Products1 with alternatives available today and for which cLCAs were calculated • 1.45 • 6.01 • 7.46 (5.1) • Products1 withalternatives available today, but no cLCAs • made • 1 • 0 • 1.00 • 1 (1.0) • Products1 with no realistic alternativeavailable today • 0.85 • 0 (0.0) • -0.85 • 0.85 • 3.30 • 5.16 • Total • 8.46 (2.6) 1 Or applications SOURCE: McKinsey/ ICCA

19. 0 The main contributors are insulation, fertilizer & crop protection, and lighting Net abatement 2005 MtCO2e • Insulation • 2,400 • Lighting • 700 • Packaging • 220 • Marine antifouling • 190 • Synthetic textile • 130 • Automotive weight • 120 • Low-temp. detergents • 80 • Net abatement volume per chemical application • Engine efficiency • 70 • Piping • 70 • Wind power • 60 • District heating • 60 • Green tires • Solar power • 40 • Other • 230 • Sub-total • 4,410 • Fertilizer & crop protection • 1,600 • Total • 6,010 • Not explicitly calculated • 1 : 1 • 0 : 1 • 850 • No realistic alternative available • Net • 3,560 • 5,160 • w/o fertilizer & crop protection SOURCE: McKinsey/ ICCA

20. 2 • 2005 • 2030 BAU • 2030 Abatement Gross savings ratio could reach 4.7 : 1 and net emission abatement could reach 18.5 GtCO2e if the appropriate abatement measures are taken • 3.1 : 1 • Gross savings ratio • 2.6 : 1 • 4.7 : 1 • 6.5 • 5.0 • 3.3 • Own emissions and gross savings • 8.5 • 20.3 • 23.5 • 18.5 • 13.8 • 5.2 • Net abatement • GtCO2e SOURCE: McKinsey/ ICCA

21. 5.0 • 2005 • 2030 BAU • 2030 Abatement 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 50% • Chemical industry is expected to double its output by 2030 • 0.5 • Emissions, 2005 • BAU volume growth effect • Improve-ment of efficiency • Geogra-phic shift effect • BAU emissions, 2030 • Beyond BAU improve-ment measures • Effect of volume growth beyond BAU • Emissions after • abatement measures implement-ed 2030 SOURCE: McKinsey/ ICCA

22. GHG abatement cost curve for the chemical industry • Society view1 • Business view2 CCS Direct energy Process intensifi-cation level 3 • EUR per tCO2e • 140 Process intensification level 1 Fuel shift coal to biomass • 120 Process intensification level 2 Catalyst optimization level 1 • 100 • 80 • 60 Motor systems • 40 • 20 • 0 • 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 • -20 • -40 • -60 CCS Ammonia • -80 Catalyst optimization level 2 Catalyst optimization level 3 • -100 Fuel shift oil to gas CHP Decomposition of N2O from adipic and nitric acid 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

23. 15,950 In the abatement scenario, the net abatement is 3.5times higher than in 2005 Net abatement MtCO2e • Insulation • 6,800 • Lighting • 4,100 • Solar power • LC-ethanol • Wind power • CCS • Marine antifouling • Synthetic textile • Net abatement volume per chemical application • Packaging • Automotive weight • Green tires • Low-temp. detergents • Engine efficiency • Piping • District heating • Other • Sub-total • 17,150 • Fertilizer & crop protection • Total • 19,650 • Not explicitly calculated • 1 : 1 • 0 : 1 • No realistic alternative available • 15,950 • Net • 18,450 • w/o fertilizer & crop protection SOURCE: McKinsey/ ICCA