Drake Hernandez, Senior Research Fellow, Tulane Energy Law & Policy Center & Associate Principal, Charles River Associates
I recently had the opportunity to read The Alchemy of Air by Thomas Hager (2008), a book recommended to me by a colleague deeply involved in the development and commercialization of clean ammonia projects. Hager offers a meticulously researched historical account of fixed nitrogen products, examining how geopolitical conflicts and advances in chemical engineering, particularly the development of synthetic ammonia production, have shaped the modern world. His analysis of the social, economic, and technological ramifications of fixed nitrogen synthesis is compelling and highly relevant to current discussions about clean energy. I would highly recommend this book to anyone interested in the intersection of technological innovation, global development, and history.
While reading, I was struck by the contrast between the long-standing global dependence on ammonia and the way it is often portrayed today: as a novel solution for meeting decarbonization targets. Current discourse around ammonia typically centers on two themes:
- decarbonizing existing demand, and
- supplying new, incremental demand through low-carbon production pathways.
Today, ammonia is predominantly produced via steam methane reforming (SMR) of natural gas, a process that emits carbon dioxide. There are, however, pathways to reduce or eliminate these emissions. These include integrating carbon capture and storage (CCS) technologies into conventional natural gas reformation processes (such as steam methane reforming or autothermal reforming) or producing ammonia via hydrogen produced via an electrolyzer that uses renewable electricity (“green” ammonia).
Reflecting on The Alchemy of Air, the historic demand for fixed nitrogen was primarily driven by the need to grow food and produce industrial chemicals, drivers that remain relevant today. These fundamental needs have underpinned substantial global investment in ammonia production infrastructure. However, the transition to low-carbon ammonia introduces a fundamentally different dynamic: its development is not currently driven by traditional market fundamentals, but rather by policy.
The cost of producing low-carbon ammonia is generally higher than that of conventional ammonia. Even in a scenario where global demand for ammonia increases, the capital and operational costs associated with low-carbon projects remain higher than for conventional counterparts. Demand for low-carbon ammonia will likely be driven by outside pressures to consume it versus ammonia that is produced with unabated carbon dioxide emissions. These pressures could come in the form of “carrots” or “sticks.”
In framing energy policy solutions, “carrots” and “sticks” are metaphors that economists and policymakers use to refer to the mix of rewards (carrots) and punishments (sticks) an energy policy or program deploys to implement its desired solutions by influencing public behavior. A “carrot” policy comes in some form of positive reinforcement, such as through governmental programs to offer tax credits or abatements, tariff relief, direct grants and subsidies, including payments in the form of regional development and foreign aid, and the like. A “stick” policy comes in the form of a top-down mandate or imposition of negative consequences or penalties designed to actively deter unwanted behaviors. Stick policies impose a direct or indirect cost of non-compliance, making it less likely that the public will want to violate a governmental restriction or disregard a proposed policy. Some examples of “stick” enforcement mechanisms in an energy context include carbon taxes, fines for noncompliance, trade sanctions and environmental restrictions.
Some jurisdictions have introduced regulatory “sticks” to drive decarbonization. The European Union’s Emissions Trading System (ETS) is a prime example. The ETS is a classic example of a “cap-and-trade” mechanism, i.e., a governmental mandate used at times to influence policy outcomes through the imposition of excess costs. For example, this program could be designed to reduce atmospheric greenhouse gases or otherwise restrict the total amount of a particular pollutant in the atmosphere, on the land, or in the waterways and streams. The “cap” is a designated maximum amount, and while the “trade” element enables companies to buy and sell permits, or allowances, to emit. In the context of climate policy, the idea of the cap-and-trade mechanism is to essentially create a price on carbon dioxide emissions that effectively increases the cost of products with embedded emissions. Over time, the added cost of emission allowances may justify the investment in low-carbon production technologies that, while initially more expensive, avoid the penalty imposed by having to pay added emissions-related costs.
In contrast, other regions have implemented “carrots” to lower the cost of clean production. In the United States, for example, tax incentives like the Section 45Q credit encourage investment in carbon capture, utilization, and storage (CCUS). The credit value varies based on the method of CO₂ disposal or reuse but provides meaningful financial support for projects incorporating these technologies.
Ultimately, these types of energy and environmental policy mechanisms, both punitive and supportive, alter the normal economics of clean ammonia projects. They aim to accelerate deployment, reduce costs over time through scale and experience, and foster innovation. The success of similar strategies can be seen in the renewable power sector, where the levelized cost of electricity from solar and wind in the United States has fallen dramatically over the past decade, thanks in large part to early policy support for these types of renewable sources, which may not have been commercially bankable on their own.1
The open question is whether similar supply-side policies will be sufficient to enable widespread adoption of low-carbon ammonia, especially given the added complexity and capital intensity of the production process. Or will demand-side measures, such as procurement mandates, clean product standards, or carbon border adjustment mechanisms, also be required to create a sustainable market? And finally, if supply-side or market-side policy enforcement mechanisms are imposed, how long will governments be willing to support these mechanisms?
This paper represents the research and views of the author(s). It should not be construed as legal or investment advice. It does not necessarily represent the views of the Tulane Energy Law & Policy Center or Charles River Associates. The piece may be subject to further revision.
