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How U.S. Federal Climate Policy Could Affect Chemicals’ Credit Risk

Standard & Poor's and WRI examine how potential U.S. climate change policy scenarios could have credit implications for the U.S. chemicals manufacturing industry. In both Standard & Poor's and WRI's view, their respective findings indicate that environmental policy issues could play a role in the evaluation of credit quality.

Any significant federal action to address climate change would likely be most relevant for subsectors of the U.S. chemicals industry that have significant greenhouse gas (GHG) emissions or a high dependence on natural gas- or oil-derived raw materials. Almost half of the 2007 value of shipments of the $724 billion(i) U.S. chemicals manufacturing industry—mostly commodity chemicals—fit this description. These include the following 13 manufacturing subsectors, which comprised more than 90% of the U.S. chemicals industry's direct GHG emissions in 2006(ii):

  • Alkalies and chlorine,
  • Carbon black,
  • Cyclic crude and intermediates,
  • Ethyl alcohol,
  • Industrial gas,
  • Nitrogenous fertilizer,
  • Noncellulosic organic fiber,
  • Other basic inorganic,
  • Other basic organic,
  • Petrochemical,
  • Phosphatic fertilizer,
  • Plastic material and resin, and
  • Synthetic rubber.

In the first part of the analysis, WRI describes scenarios under two types of potential federal climate policy—an economy-wide market-based system (specifically, cap-and-trade legislation) and Environmental Protection Agency (EPA) regulation of GHGs (see "U.S. Climate Policy Scenarios,"below).

In the second part, WRI and, in certain discrete issues, Standard & Poor's look at how these policy scenarios could influence credit risk factors in 13 greenhouse gas-intensive(iii) chemicals subsectors (see "Subsector Analysis," below). I

n the final, third part, Standard & Poor's applies these findings with a view to assessing the potential credit impact on two hypothetical companies—one carbon black manufacturer and one industrial gas manufacturer (see "Company Case Studies," below).

In Standard & Poor's and WRI's opinion, key indicators of credit impact under any U.S. policy to significantly reduce GHG emissions would likely include factors such as:

  • Macroeconomic and energy-related factors including:
  • Industrial growth forecasts and the effects on demand for chemicals products;
  • Prices of fuel, feedstock, and electricity and their effects on input costs;
  • Compliance-related factors, including:
  • Costs, or in some cases, revenues, related to climate policy provisions;
  • Capital expenditures or other spending to reduce/meet compliance obligations; and
  • Competitive factors, including:
  • Effective management of the above factors, including the ability to pass along costs to customers,and/or in a few cases, to take advantage of new market opportunities.

The effects of these factors on creditworthiness would likely vary by policy design and implementation.

To illustrate, rather than predict, WRI created scenarios based on two types of policy. The first type of policy envisions U.S. Congress using a market-based system—such as cap-and-trade policy—to reduce GHG emissions across the economy. Here, WRI uses the American Power Act (APA)—the most recently proposed economy-wide cap-and-trade bill in the Senate (May 2010)—as a proxy, since any future market-based policy would likely draw from APA.

The second type of policy examines how the EPA would regulate chemicals-related GHGs using its existing authority under the Clean Air Act. As the EPA's GHG regulatory form, timeline, and scope are currently unclear, WRI only examined which of the 13 subsectors are most likely to face GHG regulations rather than analytically examine credit impact on the 13 subsectors.

While WRI and Standard & Poor's considered these policy types separately in their respective analyses, they are not mutually exclusive because Congress and the EPA (as well as state governments and other federal agencies) could simultaneously establish policies to address climate change.