From green ammonia to lower-carbon foods

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Agriculture is one of the primary contributors to greenhouse-gas emissions (GHG) and climate change. Agriculture is responsible for about 24 percent of global emission, making agricultural emissions a major focus of decarbonization efforts. Unless addressed, emissions from agriculture production and land use are likely to grow by 15 to 20 percent by 2050.1 Limiting the impact of climate change to 1.5°C will be difficult without cutting agricultural emissions substantially.

Reducing GHG emissions fast and effectively may be more challenging for agriculture than for other sectors.2Reducing agriculture emissions through improved farming practices,” McKinsey, May 6, 2020. While other sectors have a set of technologies through which they can choose to substantially reduce emissions, such options are less available in agriculture, and most known levers could disrupt existing production processes. In this article, however, we focus on one decarbonization lever that has great potential: replacing fossil-fuel-based ammonia (so-called gray ammonia) with green ammonia for fertilizer production. Fertilizer is the main application of ammonia; about 70 percent of global ammonia is used in its production.

Ammonia production from fossil fuels is a sizable emissions contributor because the conventional gray ammonia production process generates carbon dioxide as a byproduct. Between 1.9 and 2.6 metric tons (t) of carbon dioxide are generated for every t of ammonia produced.3 In 2020, global ammonia production accounted for about 450 million metric tons (Mt) of carbon dioxide emissions—about 1.2 percent of global emissions—which is about 37 metric gigatons (Gt) of CO2 equivalents. In comparison, crop and livestock rearing generate about 5.3 GtCO2 per year.4 Eliminating those emissions would contribute substantially to GHG reduction, equivalent in size to 1.5 times France’s fossil-fuel emissions, or two-thirds that of international shipping (about 700 MtCO2 in 2021).5

The good news is that ammonia production can be almost fully decarbonized by switching to green ammonia. To understand this potential impact for producers and consumers of food products, we analyzed ten agricultural end products that may be in a typical consumer basket in Europe. We found that changing the production method from gray to green ammonia can reduce carbon emissions by an average of 5 percent, which is a substantial share of the emissions that are addressable in food products. Green ammonia is a direct replacement for gray ammonia, and the technology to realize these reductions is available today. But making the switch financially attractive will require most actors in the food industry value chain, from fertilizer producers to consumer goods companies, to increase collaboration, adjust buying models, and rethink pricing and premium distribution.

Importantly, transitioning to green ammonia and fertilizer is only one step in reducing agriculture’s GHG emissions. It will require actions beyond the farm and throughout the agriculture value chain, making this an “all hands on deck” moment for the industry to transform and move in parallel on a range of decarbonization efforts.6The agricultural transition: Building a sustainable future,” McKinsey, June 27, 2023.

Potential impact of green ammonia in food products

Agricultural-product value chains and their associated emission footprints are complicated, especially given the distributed nature of the sector, including about 570 million farms globally (most of the world’s farms are small and family-run, but 16 percent are larger than two hectares, representing 88 percent of the world’s farmland).7 An agricultural product has many potential sources of GHG emissions, such as fertilizer and other input chemicals production, on-farm equipment usage, feed production for livestock, enteric fermentation, transportation, industrial processing, and packaging. Exhibit 1 shows the distribution of emissions along the value chain for a package of potatoes. Ammonia production is found at the start of the value chain; in this example, it accounts for about 6 percent of the total emissions associated with the product.

Ammonia production contributes to greenhouse-gas emissions for a package of potatoes in the early stages of the value chain.

But a change in the production process can make ammonia virtually free of carbon dioxide. Renewable power, for example, can be used in electrolysis to create green hydrogen. In turn, the Haber-Bosch process converts hydrogen and nitrogen into ammonia (Exhibit 2).

Electrolysis powered by renewables can create green hydrogen, with green ammonia and fertilizer to follow.

Replacing gray ammonia with green ammonia has big implications for the chemical industry involved in ammonia production. Green-hydrogen and green-ammonia projects are being announced worldwide, spurred by favorable governmental policies and climate commitments. In fact, more than 1,000 hydrogen projects larger than one megawatt have been announced, of which more than 400 are for large-scale industrial use, including ammonia production.8

Several fertilizer producers are starting to experiment with lower carbon production, targeting 20 percent to 50 percent reductions in their Scope 1 and 2 GHG emissions and moving toward fossil-free fertilizers. A recent example is the fertilizer producer Yara and Swedish agricultural cooperative Lantmännen, which have signed a world-first commercial agreement to produce green fertilizer.9 In Denmark, an industry consortium of the country’s four largest agricultural companies are exploring whether more sustainable fertilizer can be produced in Denmark. In the US state of Iowa, Greenfield Nitrogen, a green-hydrogen and green-ammonia company, is developing a $400 million green-ammonia plant to produce 96,000 t of zero-carbon fertilizer.10

For the consumer and the world at large, the impact of green ammonia could be sizable, although it is one of many actions that will be necessary to decarbonize agriculture. We estimate that green ammonia for fertilizer production could decarbonize 3 percent to 8 percent of emissions associated with a range of consumer food product emissions. This means that for a representative consumer basket illustrated in Exhibit 3, emissions of about 0.6 kilograms of carbon dioxide could be reduced, or an average reduction of 5 percent, which is a substantial reduction compared to other levers and how much of the emissions that can be addressed.

In this example, green ammonia for fertilizer production can reduce emissions by about 5 percent.

For most products in our analysis, green ammonia would reduce a meaningful share of emissions but add a relatively low share of cost to the full production cost. Notably, this cost analysis is highly sensitive to the future cost of green ammonia compared to gray ammonia (for a breakdown of the costs considered in our analysis, see sidebar, “Getting to green ammonia”), and there is no industry consensus on the size of the cost gap between gray and green production in different parts of the world. However, green ammonia may become increasingly attractive by 2030 at least in Europe and the United States, as the European Union tightens policies and requirements on carbon credits and the US Inflation Reduction Act offers incentives for green-hydrogen production.

There are compelling reasons to move toward green ammonia in fertilizer besides the size of the impact (about 315 MtCO2, because about 70 percent of ammonia is used for fertilizer application). First, there is less implementation complexity compared to other levers because reductions can be achieved without changes in farming or production practices (green-ammonia fertilizer is chemically identical to the conventional product). In contrast, we recently identified 28 other levers at the farm level that have major impact potential but largely require changes to the process and ways of working.11The agricultural transition: Building a sustainable future,” McKinsey, June 27, 2023. Second, there are relatively few fertilizer producers, which makes it easier to achieve emissions reductions compared with trying to encourage millions of farmers to take action. Last, green ammonia offers a relatively high abatement level relative to costs, and the costs are expected to decrease in the coming years.

Making green ammonia for fertilizer a reality

Market demand for materials that are more sustainable is clear. For example, recycled plastics command price premiums of up to 60 percent12Capturing the green-premium value from sustainable materials,” McKinsey, October 28, 2022. because demand exceeds supply. Consumer goods companies are committing to increasingly ambitious Scope 3 (purchased goods and services) emission-reduction targets, with leading confectionery brands, for example, aiming for cuts of more than 40 percent by 2030. Consumers are also demonstrating a willingness to pay for sustainable products.13Consumers care about sustainability—and back it up with their wallets,” McKinsey, February 6, 2023.

Despite the advantages of green ammonia, work still needs to be done to realize its potential at scale and at pace. Prerequisites include the following:

  • Because green-ammonia plants are capital-spending-intensive, developers of green ammonia could benefit from increased access to green financing. As we highlight in a recent article, climate capital deployment will require a collaborative effort among stakeholders—alongside dedicated fiscal and regulatory tools and risk-sharing financial mechanisms, such as blended finance—but it also offers massive opportunities.14Financing the net-zero transition: From planning to practice, McKinsey, January 13, 2023. For green ammonia, it is clear that the sector requires investors with a long-term horizon and risk appetite.
  • Green-ammonia production requires a massive capacity expansion in renewable power such as solar and wind to ensure there is enough green power available at an economical price. Governments and companies around the world are accelerating their commitments for renewables, but there are still substantial gaps to close.
  • Prospective producers are facing uncertainty about future prices of green ammonia, raising questions about how long it would take to make projects financially sound. It is clear that the higher cost of green ammonia must be absorbed throughout the value chain until it can become more competitive with gray ammonia. Farmers alone cannot bear the higher costs. As we note in a recent report,15The agricultural transition: Building a sustainable future,” McKinsey, June 27, 2023. a range of barriers are preventing farmers from adopting decarbonization solutions at scale. Farmers, who are key to the sustainability transition, lack incentives to adopt new methods and technologies. Measures to encourage farmers to decarbonize could include green premiums, subsidies, rebates, or other incentive mechanisms.

Using green premiums as an example, one way to think about this is to start from the consumer level and work back in the value chain to explore the economic impact for different players. In Exhibit 4, we illustrate that even a premium of 10 percent could provide sufficient premiums per t of green ammonia to finance higher production costs. Such premiums could encourage large-scale green-ammonia production and green fertilizer application when distributed fairly throughout the product value chain to avoid margin loss. To do this, offtakers (food companies) could contract directly with growers on their farming practices and green price incentives. Increased understanding of and commitment to green fertilizer targets in the industry will also be essential.

Consumers’ willingness to pay for more-sustainable products can create an opportunity that maintains gross margins and benefits the entire value chain.

Creating functional offtake markets for green ammonia will be key to taking advantage of this decarbonization opportunity. Agriculture could even lead the way as other industrial sectors start to address their ammonia needs and carbon emissions. We see a clear opportunity for players in the agriculture value chain to forge new partnerships and to rethink collaboration and purchasing models to make the use of green ammonia for green fertilizer a reality within the decade.

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