Finding Gold in Low-Carbon Commodities

Executive summary  

Low-carbon commodities closely mirror fixed-income securities as each commodity has its unique characteristics, and liquidity is not always readily available to facilitate trading. With producers globally developing infrastructure with technology pathways favoring local market conditions with varying prices and "greenness" levels, low-carbon commodities offer lucrative opportunities and frauds, which are anticipated to influence trading patterns for years to come. Through the lens of hydrogen, this article presents specific commercial opportunities and market arbitrages arising from those, discusses challenges in monetizing them, and proposes a solution for producers to become the first movers in seizing them. 

The role of hydrogen in decarbonizing value chains 

Clean hydrogen is pivotal in facilitating the transition of the industrial complex toward achieving its climate objectives. While much attention is given to its utility as a clean transportation fuel or to address renewable energy intermittency, its most significant current impact lies in its role as an industrial feedstock. We can produce greener materials and chemical compounds or indirectly through derivatives like ammonia and methanol. These intermediary products offer the added benefit of being easier to transport and store, enhancing their utility in various applications. Furthermore, clean hydrogen offers a transformative pathway for decarbonizing industrial processes like cement and steel production.   

As part of the overarching shift toward net-zero solutions, global industries are exploring hydrogen through diverse technology pathways that leverage the value of local market conditions to price their products competitively:  

• Brazil: Abiclor plans to commercialize hydrogen derived from chlorine-alkali production 
• India: Reliance Industries intends to produce hydrogen through biomass gasification 
• USA: Air Product aims to establish a hydrogen hub using steam methane reforming and carbon capture technologies 

• China: Sinochem opened the world's largest clean coal-to-hydrogen project 
• Saudi: NEOM is building a hydrogen facility powered by 4GW solar energy

Challenges and opportunities with green hydrogen 

Green hydrogen has gained attention due to its potential to be 100% decarbonized. However, several concerns surround it, ranging from the complexities of assessing its carbon footprint to logistical considerations, such as placing electrolyzers next to demand centers due to high transportation costs.  

For instance, should electrolyzers be coupled with new renewable energy projects to avoid cannibalizing existing renewable energy sources? Are 100% renewable energy certificates sufficient even with the presence of intermittency? If not, how should congestion be addressed when electrolyzers are not attached to renewable energy projects or within a 24/7 framework? These factors affect the carbon intensity and cost of the resulting hydrogen molecules. 

Competitive pricing and carbon intensity 

Considering the current consensus on additionality and renewable intermittency, green hydrogen faces obstacles to cost competitiveness, even with U.S. subsidies of $3/kg. A primary challenge arises from high capital expenses distributed across relatively low utilization rates, owing to the variable nature of renewable energy. We should emphasize that green hydrogen projects in established power markets, such as Texas, should consider renewable electricity's costs and market value. And projects built in stranded locations need to account for the water supply and transportation cost of hydrogen to demand centers. 

Without subsidies, blue hydrogen emerges as both economically competitive and environmentally promising. For example, some U.S. Gulf Coast initiatives can produce hydrogen at $1.40/kg, assuming a natural gas price at $3.00/mmBtu, achieving a 63.5% decarbonization rate while factoring all upstream emissions and environmental considerations covered by the IRA-approved GREET (Greenhouse gases, Regulated Emissions, and Energy use in Technologies) model. For additional details, please refer to Exhibit 1.  

Further decarbonization to 100% is achievable by combining regulatory-approved methane certificates, renewable energy credits under a 24/7 framework, and renewable natural gas. For example, based on current market rates, blue hydrogen can be fully decarbonized at an incremental cost of $0.27/kg, leveraging standards comparable to those in renewable energy and fuel sectors. Exhibit 2 outlines some strategies for enhancing the environmental credentials of blue hydrogen. 

Global market arbitrage 

Low-carbon commodities offer arbitrage opportunities underpinned by fundamental market dynamics, which are anticipated to influence trading patterns for the foreseeable future.  For instance, as outlined in Exhibit 3, the current price disparity in natural gas between the U.S. Gulf Coast (USGC) and Northwest Europe (NWE) results in a $1.50 per kilogram price premium for producing blue hydrogen in NWE, assuming all other variables remain constant. This premium effectively creates an arbitrage opportunity between the USGC and NWE markets for the trading of ammonia, with a corresponding price differential of approximately $100 per tonne. 

However, the blue hydrogen and ammonia trading landscape presents unique complexities compared to natural gas. Unlike conventional commodities, these low-carbon alternatives can vary in their "greenness" degree depending on the producer's or seller's technology pathways and efforts to further decarbonize the product.  

Therefore, the term "low-carbon commodity" is somewhat misleading, as not all blue hydrogen or ammonia products are created equal, unlike conventional equivalents. Adding to the complexity is the fact that the environmental attributes of these products are not readily observable. This raises critical questions: How can buyers trust the seller's claims, or how can sellers reliably command a premium for greener alternatives? 

Building trust to unlock new markets  

Today, end-users are burdened with diligently verifying carbon intensity claims for low-carbon commodities, using data from producers and third-party validators. Valero, a prominent independent oil refiner, suggested to the U.S. Internal Revenue Service that "the burden of tracking, operating, and auditing data based on an hourly analysis is infeasible." This lack of transparency hinders the growth of a global low-carbon commodities market, where trust is not easily transferable across supply chains and counterparties. As Hannah Hauman, global head of carbon trading at Trafigura, points out, oil traders "see distressed or off-spec cargoes" but "don't see defunct assets" referring to the growing asset write-offs happening in the carbon credit markets these days. This burden increases the cost to decarbonize by preventing quality supply and competition from entering the market, as explained by Anaïs Bach, former head of operations for TotalEnergies: "The only way to ensure you have sufficient supply of credits of the right quality at the right time and at an acceptable price is to have an in-house team and build your own supply pipeline." 

This challenge is most evident when attempting to economically decarbonize traditionally resistant sectors to such efforts that rely on highly intermediate supply chains. For example, a European chemical producer wanting to import blue ammonia from the U.S. needs to trust the supplier to assure their customers about the product's carbon footprint of the chemicals they sell. 

Addressing this dual challenge of traceability and credibility is crucial for reducing the associated costs of low-carbon commodities and allowing producers to tap into the potential "green premium" in the market. 

Advancing growth and trustworthiness in exchanges  

Driven by regulation, incentives, and consumer demand, the need for robust carbon accounting solutions is evident. However, existing methods focused on satisfying reporting use cases through estimates fall short of catering to the requirements for using such information in the context of commercial transactions. Examples of such missing features are: 

• Batch-level carbon intensity: Accurate pricing demands precise, actual, time-based tracking of every molecule's carbon intensity, all the processes they went through, and those claims with accessible source-level industrial data and scientific principles. 
• Cost-optimization: Dedicated commercial tools can help buyers pinpoint their lowest-cost opportunities to decarbonize and acquire low-carbon products and certificates in line to match specific decarbonization targets. 
• Confidential transparency: Balancing the need for supply-chain transparency of buyers against the producers' confidential competitive advantage is critical to trusted low-carbon commodities transactions. Employing technologies like zero-knowledge proof and using an independent third party to ensure the accuracy of the information is required to answer these competing forces.  
• Certification flexibility: Producers in competitive supply chains need certifications that can validate the carbon intensity of operations with constantly varying feedstocks, industrial processes, and outputs to capitalize on changes in market prices and reliably deliver on customer expectations, which are often contingent on the specific carbon accounting frameworks they employ.  

A robust, independent infrastructure for secure and transparent transactions is paramount for a resilient, low-carbon future. Such an infrastructure could facilitate competitive pricing, accelerate growth, and maintain global trust without infringing commercial confidentiality. As a result, producers can reliably designate a specific portion of their production as clean products with varying attributes, claim their respective production incentives, and capture the green premium from their production. 

 Our initiative, Thea, aims to bring this vision to fruition by collectively building an industry utility that champions competitive decarbonization, nurtures global trade, and lays down a verifiable groundwork for sustainable practices. The complexities in this emerging market closely mirror those in fixed-income securities—each commodity possesses distinct attributes, and a lack of immediate liquidity sometimes hinders trading. 

Therefore, our overarching ambition is to become for low-carbon commodities what Bloomberg is for the fixed-income sector—a trusted, comprehensive, and indispensable resource that acts as the linchpin for the industry. 

Written by Robin Duquette & Charlie Gascon