Fickle Regulators Chill Climate Investments

Source: By GREGORY J. MILLMAN, Wall Street Journal • Posted: Monday, March 24, 2014

Fear of fickle regulators is discouraging companies from investing in climate-change initiatives. Executives of E.I. du Pont de NemoursDD +0.60% & Co. spoke with Risk & Compliance Journal about two investments into which the company has poured hundreds of millions of dollars, only to learn how risky it can be to trust regulators.

E.I. DuPont de Nemours & Company
DuPont cellulosic ethanol facility under construction in Nevada, Iowa.

As we reported last month, companies invested on average 22% less in emissions reductions in 2013 than in the prior year, with investments down in seven out of 10 industrial sectors, according to asurvey by CDP and Accenture. Companies are also demanding shorter payback periods on the investments they do make, to reduce their risk.  Nine out of 10 companies responding to the survey cited regulatory risk as a barrier to investment

When regulatory requirements are uncertain it can cause paralysis,” Gary Hanifan, who leads sustainable supply chain services at Accenture, told Risk & Compliance Journal.

DuPont’s experience shows why. Regulatory surprises mean that the Wilmington, Del.-based chemical maker is facing the prospect of smaller markets and longer payback periods than originally anticipated on two projects in the U.S. and Europe, respectively.

Jan Koninckx, global biofuels director for the company, explained in an interview that in 2003 DuPont started researching technology to make cellulosic ethanol out of corn stover, the leaves and stalks left in a field after the corn has been harvested. After receiving encouraging results from a demonstration plant launched in 2009 in eastern Tennessee, DuPont broke ground on a large-scale plant in Nevada, Iowa, in 2012. DuPont has invested more than $200 million in that plant, Mr. Koninckx said, not including all that the company had invested previously in R&D. The company expects the plant to go online in the fourth quarter of this year, and to produce 30 million gallons of cellulosic ethanol a year when fully operational.

“Our work is based on the vision that was laid out in the renewable fuels standard, which was embedded in legislation called the Energy Independence and Security Act of 2007,” Mr. Koninckx said. That legislation requires the Environmental Protection Agency to set annual standards for production of renewable fuels to be blended with gasoline and diesel fuel. Mr. Koninckx said that DuPont’s business model for its cellulosic ethanol technology is “one of licensing and in supplying licensees with consumables” and affirmed that, “This technology is dependent on this policy framework to create a market for the product in the long term.”

But last November, the EPA announced a proposal to cut total renewable fuel requirements for 2014 below the prior year’s level, citing falling gasoline use in the U.S. and what it called “practical limits on ethanol blending”.  The comment period on this proposal ended in January of this year. Although the EPA in the past faced calls to cut the requirements and did cut cellulosic ethanol requirements because of supply constraints, this was the first time the total renewable fuel requirement has been cut, Mr. Koninckx said.

According to Mr. Koninckx, DuPont had long been in discussions with parties interested in investing in cellulosic ethanol plants, but while those conversations continue outside the U.S., they have slowed “to a trickle” in North America since the EPA proposal. He said DuPont plans to complete the Iowa plant, but the regulatory shift “makes it more challenging to find partners to work with on a second wave of plants. That is unfortunate.”

Meanwhile, in Europe, the company faces regulatory risk on another big climate-related investment. Thierry Vanlancker, president of Chemicals & Fluoroproducts at DuPont, pointed to a European Union directive aimed at replacing the most commonly used automotive air conditioning refrigerant with something delivering less than about a tenth the global warming potential.  It did not specify what should be used, but mandated a Jan. 1, 2011, deadline after which the old refrigerant could not be used in new types of vehicles. At the time of the Directive 2006/40/EC, no suitable replacement was commercially available or ready for market.

As a supplier of the incumbent refrigerant, R134a, DuPont considered simply exiting the market, but instead opted to develop a new refrigerant, HFO-1234yf, which it markets under the trade name Opteon. Mr. Vanlancker said the company collapsed development timelines in a crash program to have this refrigerant in production by the deadline, and said that DuPont has invested “well over $100 million.” He explained that the manufacturing process now in use is not the final, optimal process, but “the only one we could get ready on time.”

Although other tests have found the new refrigerant safe, in 2012, Germany’s Daimler AG claimed that its own tests showed a fire risk with the new refrigerant.  A laterstatement from the European Union noted that German regulators had notified the EU that they “accepted Daimler’s request to extend a previous type-approval to the vehicles covered,” thereby allowing the use of the old, banned refrigerant in what were new vehicle types.  In January of this year, the EU opened infringement proceduresagainst Germany to compel enforcement of the directive banning the old refrigerant.

Mr. Vanlancker said that the ensuing legal process may be lengthy, and in the meantime, the directive that led to the new refrigerant “has been a law that has been followed sometimes voluntarily but almost a la carte by different OEMs [original equipment manufacturers] in Europe,” as some other manufacturers wonder why they should adopt the new refrigerant if German manufacturers need not.  He concluded, “It gives us somewhat cold feet. If you do a longer term investment in the industry, it takes years to build a full scale plant. You want to have a payback. We can’t put hundreds of millions of dollars in a full-scale plant then see the law change and there is no market any more.”

(Gregory J. Millman is a senior columnist with Risk & Compliance Journal  He is the author of The Vandals’ Crown: How Rebel Currency Traders Overthrew the World’s Central Banks, and several other books. He can be reached at +1 (212) 416-2352 or by email at Follow on Twitter @GregoryJMillman)