The fertilizer industry is proactively looking to reduce its carbon footprint and improve sustainability.  It has two major challenges: to reduce the greenhouse gas emissions associated with ammonia production, which amount to around 1.2% of all human-caused net GHGs[1], and to reduce further emissions associated with actual mineral fertilizer use (in the form of CO2, but more importantly nitrous oxides), which account for a further 1.3%. This article focuses on the challenge for decarbonizing ammonia production used as raw material to produce nitrogen fertilizer.

Carbon intensity of ammonia production is falling

Ammonia production is highly energy intensive, making up around 85-90% of the fertilizer industry’s energy consumption. Almost all the ~150 million tons of nitrogen which are produced annually are manufactured using steam methane reforming (SMR) technology which starts with hydrocarbons, primarily natural gas (producing ‘grey ammonia’), but also coal, to produce hydrogen which is then combined with atmospheric nitrogen using the Haber process. Improving the efficiency of energy use of this conventional process directly reduces the carbon intensity of production, and some significant gains have already been made. A survey from the International Fertilizer Association (IFA) calculates the average carbon intensity (CI), measured as the CO₂ emissions per ton of ammonia production, fell by 15% since 2004.

[1] 2022 IFA Systemiq, Reducing Emissions from Fertilizer Use Report

New technology necessary to realize greater ambition

However, the potential gains from improving the efficiency of existing fossil fuel-based technology are limited, and even if all hydrocarbon-based ammonia plants could use best available technology (BAT), the industry would still be left with a substantial carbon footprint.

There is much greater potential to reduce nitrogen’s environmental impact by using technology to capture carbon released when producing ammonia with SMR, and store (CCS) or use (CCU). Or to use alternative electrolyzer technology to make the raw material hydrogen based on renewable energy, which would lead to virtually zero carbon emissions. These alternatives are frequently described using a nomenclature which ascribes a color to ammonia according to the process used – for example, blue ammonia where carbon is captured or stored, or green ammonia where a renewable energy source like solar or wind is used[1].

These lower carbon alternatives come with significant hurdles however, which need to be resolved for the fertilizer industry to achieve its sustainability ambitions.

[1] Note that these colours are used only to distinguish different methods of producing ammonia, not its actual physical appearance which is the same. See Argus Hydrogen Taxonomy (https://www.argusmedia.com/-/media/Files/white-papers/2022/argus-insight-hydrogen-taxonomy.ashx) white paper for more information.

New technology comes at a cost

Producing low or zero carbon nitrogen generally comes at a significantly higher levelized cost than the existing carbon-intensive alternative. Argus has calculated comparative costs of these alternatives in our Green Ammonia Strategy report. The order of magnitude cost difference varies according to which assumptions are made, but our calculations indicate that the levelized cost of green ammonia is two to three times higher than the carbon intensive grey ammonia alternative. With costs of producing renewable power continuing to fall, and the technology to produce green ammonia/hydrogen from electrolysis also projected to decline significantly, the production cost gap between carbon free and carbon intensive is expected to reduce significantly. Nevertheless, it is sufficiently significant to have so far restricted the progress of green ammonia supply development.

Affordability of low carbon fertilizers in question

Using low or zero carbon ammonia to produce more sustainable nitrogen fertilizers would be viable if these additional costs of carbon abatement could be passed on to the consumer. According to Argus estimates, the cost of carbon-free nitrate fertilizers (based on green ammonia) would be 1.5 to 2 times more than the carbon intensive equivalent. Various market calculations suggest that by the time the additional fertilizer input cost is diluted through the agricultural value chain, its cost impact is only a small percentage increase on a loaf of bread for example. However, the agricultural value chain is complex with a multitude of stages and participants, which makes passing on substantially higher fertilizer input costs to consumers complicated. It is often the case that higher input costs are faced by farmers who find it difficult to pass them on and simply respond by buying less fertilizer. Anecdotal evidence suggests that farmers in Europe might be willing to pay more for low or zero carbon fertilizer, but at no more than a 20% premium to carbon intensive equivalent products.

The recent fly-up in international nitrogen fertilizer prices provides a reminder of farmer fertilizer price sensitivity. Farmers have not been fully compensated by higher crop prices and the resulting reduction in fertilizer affordability (see chart 1) has resulted in significant demand destruction in many important nitrogen consuming locations. This is likely to lead to lower crop yields and output, potentially elevating concerns around food security.

[1] Note that these colours are used only to distinguish different methods of producing ammonia, not its actual physical appearance which is the same. See Argus Hydrogen Taxonomy (https://www.argusmedia.com/-/media/Files/white-papers/2022/argus-insight-hydrogen-taxonomy.ashx) white paper for more information.

The market won’t deliver so intervention is necessary

Without a market incentive to produce lower-carbon-intensity ammonia or downstream nitrogen fertilizers, some form of market intervention is necessary in order to accelerate progress toward a cleaner fertilizer industry. Lower carbon ammonia cannot compete with its higher carbon intensity substitute. This explains why when we look at investment activity in clean ammonia at world-scale, we see many projects, but few getting past the financing hurdle (see chart 2).

Until very recently, progress made by national and regional governments in enabling large emission cuts has been patchy at best. At macro level, carbon pricing and trading schemes have been introduced in some locations and the price of carbon is generally rising. This has encouraged implementation of investments in improving the energy efficiency of existing ammonia production technology. However, interventions providing enough support and with sufficient clarity to enable commitment to invest in world-scale projects with new technology, which would bring about production of much lower carbon intensity ammonia, have been largely absent. Nonetheless, we are starting to see more concrete government schemes among the leading developed economies.

For example, in the United States, the cost of producing blue ammonia can be reduced with the 45Q tax credit scheme, which allows participants to offset tax liabilities by capturing and using CO2. The size of the credit depends on whether the carbon is permanently stored or used in processes like enhanced oil recovery (EOR). However, there are significant doubts about the long-term efficacy and safety of some forms of CCS and CCU. For example, it is questionable whether EOR can be truly carbon negative, capturing more carbon than is released in the subsequent combustion of the oil produced. This means sector, national or regional institutions intending to consume low carbon ammonia with more stringent criteria, are likely to be unwilling to accept EOR-based product.

The US recently passed the Inflation Reduction Act (IRA) 2022, which develops the 45Q tax credit scheme further, providing tax credits amounting to $85 per metric tonne of carbon captured, so long as certain employment and welfare standards are met. EOR remains a part of the scheme. A further element of the 2022 IRA Act will attempt to create a more level competitive playing field between low or zero carbon green and blue hydrogen and its carbon intensive grey substitute. A Clean Hydrogen Credit will provide a tax credit of up to $3 per kg of clean hydrogen produced which would likely be sufficient to make clean hydrogen and ammonia production competitive with their grey substitutes. Only hydrogen production with lifecycle GHGs of less than 0.45kg of CO2e per kg of H2, will be eligible to achieve the maximum credit amount.

While the US and other supply-based schemes in Europe are highly promising, they represent a relatively small proportion of the global ammonia supply base. We’ll need to see the rollout of similar programmes in the biggest ammonia producing countries like China and India before the global fertilizer industry will see significant progress toward a net zero position.

Demand for clean energy could constrain nitrogen supply

Further hurdles lie ahead for the fertilizer industry in addition to those already outlined. It seems likely that that even if we see a substantial acceleration of clean ammonia investment, it will bring about limited benefit to the fertilizer industry. Indeed, it could even have a negative impact on nitrogen fertilizer supply.

Almost all of the existing demand for ammonia is for its nitrogen content, for fertilizers and other inorganic chemistry. However, substantial new demand is emerging for ammonia as a carrier of clean energy in the form of hydrogen. This is the subject of an Argus presentation that will be shared at the 12^th GPCA Agri-Nutrients Conference in Dubai. According to projections from Argus Analytics, demand for ammonia as an energy carrier to reduce the carbon footprint of power generation in East Asia, and as a clean bunker fuel is set to reach millions of tons within the 5-10 years (see chart 3).

Rationally, producers of clean ammonia will seek to sell their product at the highest price, and it seems likely that these new energy end-use sectors will be better able to pay the premium price for low carbon product. So even though we may see the development of clean ammonia supply on a large scale, little of it will be used to produce low carbon nitrogen fertilizers. This is borne out by looking at the target end-uses of clean ammonia projects. Most are targeting the merchant ammonia market. Only a handful are configured to the production of nitrogen fertilizers, and these are at pilot scale, or not much bigger.

Furthermore, we can already see that some existing ammonia producers whose assets have traditionally been positioned to serve nitrogen markets are repositioning these facilities toward clean hydrogen markets. This has the potential to reduce the existing nitrogen fertilizer supply base, which would lead to higher nitrogen fertilizer prices with no direct benefit to the fertilizer sector.

In summary, the global fertilizer industry is making progress to decarbonize nitrogen production and reduce its contribution to global warming. However, in order to make really significant progress, there remain a series of hurdles which require facilitating interventions by national and regional governments.