Business implications of climate change for the fertilizer industry.
All industrial sectors are facing expectations to contribute to global efforts to reduce greenhouse gas emissions, but energy-intensive activities (like the manufacture of nitrogen fertilizers) are subject to particular scrutiny.
Climate change has emerged as a major issue with implications for the markets, operations, logistical systems and stewardship of fertilizer companies. Many fertilizer companies are responding to these challenges by taking steps to understand the risks and other implications. They are adopting targets and strategies to reduce their emissions and to take advantage of new opportunities.
Among the most significant challenges of integrating climate change considerations into their operations are the twin imperatives of identifying the relevant issues for the company and establishing priorities for the deployment of limited resources.
Managing complex risks and balancing competing priorities
For fertilizer companies, long-term and short-term goals need to be reconciled, as do global concerns with local objectives, and all without losing sight of the basic goals of profitability and increasing shareholder value. In this context, there is a trend for companies to orient their risk management toward broader categories of risk, with targets and measures extending over longer time frames than were customary in the past.
Any approach to climate change must keep in mind other key sustainability issues, such as achieving food and nutrition security for all and managing natural resources sustainably. Strategies should seek to obtain the greatest net gain across all of these objectives.
New product and service opportunities
The fertilizer industry’s efforts to reduce its greenhouse gas emissions go beyond modification of existing production processes. Companies are also exploring new market opportunities created by concerns over climate change.
Some companies have developed slow-release and controlled-release fertilizers and stabilized products that help to reduce N2 O emissions and to increase crop yields by providing greater control over nutrient release rates and timing.
Specialized software, chlorophyll sensors, satellite mapping and other tools improve the precision of fertilizer applications, thus increasing fertilizer use efficiency and reducing emissions from agricultural soils.
Other companies are helping the livestock sector to address its emissions through the application of nitrification inhibitors to pasturelands.
Adopting goals and strategies and reporting achievements
Some companies have adopted specific goals and strategies to reduce their direct and indirect greenhouse gas emissions. These include setting targets to reduce emissions per tonne of product by a specific amount over the full range of a company’s fertilizer production within a defined time frame.
Dialogue between the industry and policy makers is important in order to give due consideration to the fertilizer industry’s diversity. For example, early adopters of Best Practice Technologies have little room to make further emissions reductions in their operations. Their sites already operate so efficiently that, given the current state of technology, further capital expenditure would yield few additional emissions reductions.
The Kyoto Protocol’s Clean Development Mechanism and Joint Implementation projects have provided companies with opportunities to help reduce emissions at other companies’ production facilities.
Companies demonstrate their commitment and accountability by reporting on their performance in reducing and mitigating direct and indirect emissions of greenhouse gases. Such reporting takes place against established standards, including the Global Reporting Initiative, the Carbon Disclosure Project and the Greenhouse Gas Protocol.
In some jurisdictions, fertilizer companies are subject to regulatory compliance with regard to greenhouse gas emissions and are providing audited reports on their emissions and on initiatives to reduce them.
Planning for an unpredictable agricultural landscape …
One challenge is the high degree of uncertainty that accompanies projections about climate change and its repercussions on the agricultural economy, including the nature and amplitude of impacts that farmers will face and the resilience of existing agricultural systems.
Forecasts provide little or no indication of what agricultural producers can expect locally. They are therefore unsure about the risks they face with regard to the frequency, severity and extent of extreme events (e.g. extended droughts and heavy rain) and increased variability. Some current agricultural practices will prove to be poorly adapted to changing growing seasons and rainfall patterns. Agricultural conditions will become less favourable in many places, while growing seasons are expected to lengthen in some cooler regions.
Climate change also presents some opportunities. Farmers can foster carbon capture in increased biomass, which helps prevent deforestation, makes it possible to increase carbon stored in the form of soil organic matter and provides the raw material for biofuels that displace some fossil fuels.
These factors together could affect fertilizer demand, both in terms of volume and product choices.
…in an evolving regulatory context
Measures that raise the price of carbon – such as taxes or caps – are likely to raise the price of natural gas and other fossil fuels that serve as a major feedstock and source of fuel for fertilizer production. Natural gas prices could rise as a result of fuel-switching triggered by the relatively lower carbon content of natural gas compared to other fossil fuels.
Emissions of nitrous oxide and carbon dioxide associated with inefficient fertilizer production and use could result in more stringent regulation of fertilizers.
While it is difficult to be precise about legislative outcomes or the impact on markets in light of current and projected climate risks, fertilizer producers need to be aware of the range of possibilities, so as to make appropriate and effective choices.
Differing regulations from one market to another will also affect competitiveness. The fertilizer industry is truly global, with a large volume of international trade. Stricter regulations in one jurisdiction could drive up production costs, thus making it difficult for the domestic industry to compete on world markets. Shifting production to countries that are less strictly regulated could lead to “carbon leakage”. Such carbon leakage has implications for national economies, environmental protection and national food security.
It is also unclear what regulatory and market-based measures governments will put in place for the post-2012 period (while the fertilizer industry is making long-term investments in new production capacity today).