AGC’s Path to Sustainability: Carbon Cost and the Real Economy
November 23, 2023
AGC’s Path to Sustainability: Carbon Cost and the Real Economy
Interview
Summary
AGC, a major flat glass producer, faces increasing financial pressure from EU carbon emission regulations (EU ETS), spending a significant portion of its operating profit on carbon allowances. To mitigate costs and maintain competitiveness, AGC is investing in decarbonization strategies, including the VOLTA project with Saint Gobain, aiming for substantial CO2 emission reductions and supporting green finance and responsible investing. The company views decarbonization as essential for survival and is adapting to increasing demand for low-carbon materials and socially responsible investments.
The green deal aims at achieving “carbon net zero” by 2050. By then, emissions of carbon dioxide due to human activities and removals of these gasses should be balanced out. In response, more and more corporations have adopted the same decarbonation target. Since June 2022, the number of companies with this climate target has increased by 40%, reaching a total of 1003. 66% of the annual revenue generated by the world’s largest 2000 companies now falls under a net zero target.
The flat glass industry, a structurally carbon-intensive sector
AGC is one of the world leaders in flat glass production. It stands as a key competitor to the French holding Saint Gobain. The group operates in one of the most carbon-intensive sectors. It specializes in the production and distribution of flat glass mainly for the building industry. Buildings are a major contributor to CO2 emissions in Europe, accounting for 36% of all power-related emissions (the power sector being the most polluting, responsible for 34% of the EU ETS coverage). AGC’s 11 float factories in Europe operate 24 hours a day, 7 days a week, as the complex machinery cannot be switched on and off on demand. In 2022, the company’s plants under the EU ETS emitted over 1.3 million tonnes of CO2.
Homaio x AGC: Translating European Policies into Real-Life Practices
Homaio is excited to present an interview with Niels Schreuder, shedding light on the company’s journey towards decarbonization.
Homaio : Why is decarbonization such a priority?
Niels Schreuder : Bringing down carbon emissions is a survival strategy for the European flat glass industry as a whole.
From a regulatory standpoint, it is as simple as that - failure to do so will represent a regulatory breach, gradually banning glass production in Europe. Industries that do not comply with the Emissions Trading Scheme (ETS) will have their operating licenses removed.
On top of this, there is an increasing demand for low-carbon materials from our clients and this market share is very important for us. The demand for low-CO2 products is driven by pressure from regulators. For example, in France, construction companies have to ensure that materials used are with a low carbon footprint. Similarly, car manufacturers have to furnish clients with CO2 reports, tracking emissions related to every component. To avoid losing a substantial market share in Europe, the European glass industry needs to adapt to lower-carbon solutions.
H: What are the different ways to decarbonize?
NS: We tackle decarbonization through different prisms:
Raw Materials: We want to minimize emissions from production inputs. In order to make glass, some materials have to be melted. So, we are considering alternatives like broken glass to produce new one (recycling), instead of the usual carbon-intensive raw materials.
Energy Usage: It is not always easy to use renewable energy for such elaborate industrial plants. Solar panels are installed across AGC’s production sites, but the generated energy is not sufficient. Wind energy faces regulatory hurdles, with local authorities deciding on the mill locations. Even if renewable energy generation is very enhanced, the current technologies do not allow for glass production with 100% green energy.
Transportation: For example, in Italy, we have shifted to green fuel transportation.
H: What is the magnitude of the carbon-related expenses incurred by AGC?
NS: AGC, falling under the EU ETS coverage, is required to track its CO2 emissions. For each tonne of CO2 emitted, it is obligated to buy a carbon allowance (EUA). At the end of every year, the company must surrender an equivalent number of EUAs to match the total tonnes of CO2 produced.
AGC has had carbon compliance obligations since 2005. In 2022 alone, the EUA expense was around €24 million. AGC’s European operating profits the same year were €190 million - so, the company has spent around 13% of its operating profit to purchase carbon allowances.
Carbon Expenses as a proportion of Operating Profits (2022)
In the first years of existence of the scheme, some part of the allowances were given for free by the European Commission. However, the number of freely distributed allowances has been decreasing over time. Also, the price of EUAs has been increasing. Yet, the volumes of CO2 emitted by AGC have remained relatively stable. Hence, the cost of carbon is becoming a substantial financial challenge for the company. In our ESG report from September 2023, we highlight that an increase in carbon prices is the only short-term transition risk to be on the lookout for.
AGC’s CO2 emissions have been relatively stable since 2013. Despite some EUAs being allocated for free, the increasing price of carbon is translated into a drastic climb in compliance cost for the company.
H: Are those increasing expenses for carbon a threat to AGC’s competitiveness?
NS: Yes - they will bring European glass prices higher than those of international competitors. To account for the EUA costs, European firms have to increase their consumer prices. In contrast, numerous glass-producing companies outside of Europe operate without these constraints. To keep being competitive globally, AGC must cut carbon emissions to diminish the exposure to EUAs.
H: In response, you are working in collaboration with Saint Gobain on the VOLTA project. It is publicly acclaimed by the European Commission. Could you please walk us through?
NS: Both AGC and Saint-Gobain, the leading players in the European glass market, face financial challenges from carbon allowance costs and regulatory obligations. They have launched the VOLTA project together and the European Commission’s president Ursula Von der Leyen has been very supportive of it.
It is aiming to introduce innovative technology that will reshape the future of the glass industry in Europe. The VOLTA project sets an ambitious target of reducing direct CO2 emissions from glass production by 50 to 75%. For now, it is only implemented in one production plant during a test phase. If everything goes well and the company is able to replace all of our ovens with this innovative tool in the future, emissions reductions will be considerable. If we are able to cut their emissions by 50% and hence cut in half spendings on EUAs, this will represent yearly savings of up to €12 million. And the more EUAs increase in price, the greater the savings..
EUAs are expected to increase in price over the next few years and decades. This makes projects like VOLTA all the more important to lower the exposure of industrials.
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