Capturing the green-premium value from sustainable materials

Materials value chains—including metals and mining, building materials, plastics, and packaging—account for around 20 percent of global greenhouse-gas (GHG) emissions. Some of these value chains are also often wasteful: 98 percent of construction materials end up in low-value end-of-life applications, and only 17 percent of annual virgin plastics are recycled.

Industry leaders are under pressure as climate targets aim for net-zero GHG emissions by 2050—which means materials players have only 30 years to transform a manufacturing and energy landscape that took more than a century to evolve. Doing so requires increasing annual spending on physical assets across sectors by 60 percent (from an estimated annual $5.7 trillion to $9.2 trillion).¹“The economic transformation: What would change in the net-zero transition,” McKinsey, January 25, 2022.

This is not only a supply-side challenge. Demand for low-CO₂—or “green”—products is ramping up as end customers, manufacturers, and governments push for increased sustainability and circularity.²For more on circularity, see “Circular economy introduction,” Ellen MacArthur Foundation, accessed October 13, 2022. Primary materials processing makes up the majority of GHG emissions for many industrial products, which has led to increased attention on decarbonizing core contributing commodities. In turn, time-bound green premiums are emerging for certain commodities, depending on supply-side flexibility and cost.

This article lays out the observed and potential supply–demand balances across four core commodities: steel, aluminum, copper, and plastics. Understanding where green premiums exist today and where they will emerge over the short or medium term can help materials players capture economic benefits for sellers and secure supplies of low-CO₂ products for buyers. Although we primarily focus on the CO₂ intensity of these commodities, given its impact on emissions reduction targets, other dimensions are increasingly important for both producers and purchasers, including water consumption and the impact on local communities and biodiversity, to name just a few.

A closer look at green premiums

Steel, aluminum, copper, and plastics make up a significant portion of industry materials demand (Exhibit 1). Some of these commodities also have significant carbon footprints.

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Green premiums are emerging for several commodities and, in addition to factors such as pressure from inflation and the cost-of-living crisis, will increasingly shape the balance between supply and demand. For example, in the past decade high-quality recycled plastics reached an average premium of up to 60 percent over virgin plastics, depending on the product. In the case of low-CO₂ steel, premiums could also be significant by 2030. However, this is not a one-size-fits-all story. Green premiums depend on supply–demand balance, since they require a lower supply of green materials than demand.

That said, the window of opportunity to capture benefits during the transition to green materials is rapidly closing. Incumbents are ramping up the supply of green materials, new challengers in the space are emerging, and forward-thinking customers are beginning to lock in long-term green-supply agreements.

Three archetypes for supply–demand balance

Green commodities vary in their pathways to decarbonization, their supply-and-demand market outlooks, and any resulting green premiums (or lack thereof). In addition, ambiguity exists in how players use the terms “low CO₂” or “green” regarding the carbon footprint thresholds for their respective products (see sidebar “Modeling low-CO₂ demand, supply, and premiums”). However, three archetypes of supply–demand balance and their respective pricing dynamics show how sustainable materials are expected to affect the supply and demand of different materials (Exhibit 2).

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Structural undersupply of low-CO₂ materials

Commodities such as steel and plastics face low-CO₂-supply shortages, which are difficult to resolve by bringing additional green capacity online and lead to green premiums.

Steel: The European market for low-CO₂ flat steel is expected to remain undersupplied until 2030 because of rapidly growing demand and long lead times to bring green assets online, leading to significant premiums from 2025 to 2030.

To promote circularity and reduce emissions, some steel consumers have set ambitious end-to-end value-chain decarbonization targets (for example, up to 100 percent decarbonized for automotive OEMs by 2030³“Porsche aims for CO₂-neutral balance sheet in 2030,” Porsche Newsroom, March 18, 2021. and up to 50 percent decarbonized for construction players⁴“Committed to the most ambitious temperature reduction path to address climate change,” VELUX, accessed October 13, 2022.) and recycled-content targets (40 to 80 percent by 2030 for some OEMs). Accordingly, demand for low-CO₂ steel is expected to surge from around 84 million tons in 2021 to nearly 200 million tons in 2030, mainly driven by automotive and construction demand in Europe and China.

In response, European steel producers have announced intentions to open low-CO₂ steel factories and replace existing assets with green assets, most of which will produce flat steel. That said, the speed of the transition depends not only on the adoption of electric arc furnaces (EAFs) and customers’ commitments but also on the prices and availability of natural gas, of green-hydrogen production at scale, of equipment from technology providers, and of raw materials of sufficiently high quality, among other factors.

With this in mind, increased supply is expected across both flat and long steel in Europe:

• In flat steel, emerging trends find that the market for low-CO₂ steel (less than 0.6 tons of CO₂ per ton) will be undersupplied until 2030. Specifically, the total supply is expected to be around 25 million metric tons, whereas there will be demand for 39 million metric tons of low-CO₂ flat steel. The reasons for the undersupply are twofold: first, less than 5 percent of the steel produced in Europe is currently green; and second, steelmaking plants require significant capital expenditures to switch from carbon-intensive blast furnace–basic oxygen furnace (BF-BOF) technology to environmentally friendlier BF-BOF in combination with carbon capture, utilization, and storage (CCUS) or direct reduced iron (DRI) in combination with EAF or smelter technologies.⁵For more on green steel in Europe, see “Safeguarding green steel in Europe: Facing the natural-gas challenge,” McKinsey, June 21, 2022. Green-premium levels will depend on the transition scenario and market tightness. In our base-case scenario, we expect significant green premiums to emerge by the mid-2020s, increase further when hydrogen DRI plants come online after 2025, then gradually decrease as additional capacity comes online. These premiums result from the production-cost differential of low-CO₂ steel and the supply–demand balance. In addition, selected segments (end industries or ultralow products⁶“Ultralow” refers to the carbon levels of products that are significantly lower than usual. For instance, low-CO₂ aluminum is produced using less than 4.0 tons of CO₂ per ton, whereas ultralow aluminum is produced using less than 1.5 tons of CO₂ per ton.) could capture even higher premiums because of specific quality requirements.
• In long steel, low-CO₂, scrap-based supply is expected to be sufficient to meet demand, with only selected specialized products potentially capturing a green premium.

Finally, steel premiums will depend on the region. Taking Europe as an example, where flat steel has historically been produced using BF-BOF, processes will need to go through expensive transitions to lower emissions. That said, the pressure to decarbonize is significantly reduced in regions where steel has historically been produced in EAFs, such as North America.

Plastics: The market for high-quality recycled plastics is expected to remain undersupplied until 2030 and likely beyond because of rapidly growing demand and limitations in proper collection and sorting infrastructure, leading to significant premiums, depending on the plastic grade.

The sustainability of plastics is centered almost entirely on recycling and circularity, with emissions reduction also important and addressed by recycling.⁷For more on the climate impact of plastics, see “Climate impact of plastics,” McKinsey, July 6, 2022. Plastics consumers often determine recycled-content targets, and governments around the world are implementing regulations that require increases in recycling or that ban single-use plastics.⁸For more on packaging and plastics recycling and on regulation in packaging sustainability, see “Sustainability in packaging: Global regulatory development across 30 countries,” McKinsey, February 7, 2022.

Plastics recycling rates are currently low—approximately 17 percent, or 30 million tons, of plastics enter a circular economy, of which only 20 million tons are recycled—but they are expected to increase to more than 100 million tons in 2030. This picture, however, is different between high-quality recycled plastics (plastics recycled to a similar product grade) and low-quality recycled plastics (plastics recycled to lower-quality grades):

• In high-quality recycled plastics, supply could grow from around five million tons to around 20 to 30 million tons by 2030. This increased supply still lags significantly behind demand from applications such as packaging, consumer electronics, and automotive, which is expected to grow from 11 million tons in 2020 to 66 million tons in 2030. The supply–demand imbalance for high-quality recycled plastics is thus expected to reach more than 35 to 45 million tons by 2030, leading to the potential for high premiums. These high premiums are already observed for several plastics categories. For instance, from 2010 to 2022, there have been premiums of more than 60 percent for natural recycled high-density polythene (rHDPE) and premiums of more than 10 percent for high-intrinsic-viscosity recycled polyethylene terephthalate (high IV rPET). These premiums will likely remain high until 2030 and beyond.

  Plastics recycling is top of mind for fast-moving consumer goods (FMCG) companies and, increasingly, for OEMs of durable products, making them more willing to pay for recycled products. Consequently, the race for recycled materials and biomaterials is in full swing through acquisitions and partnerships, with access to feedstock a top priority, since many plastics players have already announced plans to further expand recycling capacity. Moreover, because the imperative for sustainable products is primarily driven by consumers,⁹Greg Petro, “Consumers demand sustainable products and shopping products,” Forbes, March 11, 2022. producers are expected to continue to react to high green premiums with additional supply beyond what is currently captured in our scenarios.

• In low-quality recycled plastics, supply is expected to grow from 21 million tons in 2020 to 39 million tons in 2030. This will be sufficient to meet growing demand throughout the period, which is expected to increase from ten million tons in 2020 to 26 million tons in 2030.

  Thus, only specialized products can potentially capture a green premium, as illustrated by downcycled polymers being historically traded at lower prices than virgin polymers, as in the 10 to 15 percent discount on both mixed-color recycled polyethylene (rPE) and low IV rPET.

Considering the public interest in sustainable plastics, government involvement and regulations will significantly define the speed of scaling recycling capabilities. The European Union, for example, has set targets to develop its circular economy.¹⁰For more, see “Circular economy action plan,” European Commission, accessed October 13, 2022. In addition, the quality of plastics waste and the speed of implementing advanced sorting and recycling technologies can significantly impact the split between high- and low-quality recycled plastics, further influencing supply–demand balances.¹¹For more on advanced recycling, see Zhou Peng, Theo Jan Simons, Jeremy Wallach, and Adam Youngman, “Advanced recycling: Opportunities for growth,” McKinsey, May 16, 2022.

Growing demand and supply of low-CO₂ materials

Commodities such as aluminum show high momentum around low-CO₂ materials. Furthermore, the supply of these commodities can rapidly adjust to meet demand, leading to limited or no green premiums, except for ultralow-CO₂ grades or specific subsegments.

Aluminum: The green (low-CO₂ and secondary) aluminum market is expected to stay balanced by 2030, leading to limited premiums. That said, ultralow-CO₂ aluminum requires technology changes and is thus expected to be undersupplied by 2030, reaching significantly higher premiums.

Like steel, aluminum faces increasing pressure from OEMs with action-oriented climate targets. Green-aluminum supply, which encompasses low-CO₂ (less than four tons of CO₂ per ton) and secondary aluminum, is expected to grow from 44 million tons to 71 million tons from 2021 to 2030, driven by smelters switching to renewable energy, higher recycling rates, and technological advancements (including regulations and customer recycling programs). On the demand side, demand for green aluminum is expected to grow exponentially from 26 million tons in 2021 to 62 million tons by 2030, mainly driven by automotive and packaging demand in Europe and China. The green-aluminum market will thus remain balanced or see slight oversupply. However, demand could emerge for ultralow-CO₂ aluminum grades (less than 0.5 tons of CO₂ per ton of aluminum from the electrolysis process, or five million tons of demand by 2030), driven by the luxury-automotive and energy sectors. This means that pushing beyond rates of less than four tons of CO₂ per ton of aluminum is the next frontier, requiring advances and significant investments in technologies, such as inert anodes, to enable the required increase in capacity.

As a result, premiums for green aluminum are expected to be limited, while premiums for ultralow-CO₂ aluminum could be significant. Furthermore, since electricity accounts for more than 70 percent of the CO₂ emissions for aluminum, the growth of the green-aluminum supply is primarily correlated with the availability of renewable power, which is also a prerequisite for zero-carbon technologies.

Tight overall market, with a balanced to oversupplied low-CO₂-materials market

Commodities such as low-CO₂ copper will face a balanced or oversupplied market, although the overall copper market could be undersupplied.¹²Thus, even though there is a balanced, oversupplied market of low-CO₂ copper, prices for copper are still relatively high. In such situations, prices are typically driven by overall demand, independent of CO₂ emissions, leading to average, marketwide trends showing little or no green premiums. Nevertheless, a premium for ultralow-CO₂ grades or specific subsegments could still emerge (see sidebar “Uncertainties around future estimates”).

Copper: The low-CO₂ copper market is expected to be balanced or oversupplied by 2030 as supply increases with grid decarbonization and demand for low-CO₂ grades lags, leading to small premiums. There is more opportunity for premiums for ultralow-CO₂ copper and selected subsegments.

Today, the copper sector is incentivized to decarbonize because of increased regulations and highly motivated purchasers, such as electrical and electronics players. Other reasons include emissions-reduction targets, often through partnerships, such as Schneider Electric’s partnership with Rio Tinto to source green copper and aluminum.¹³“Rio Tinto partners with Schneider Electric to drive decarbonisation through circular and sustainable market ecosystem,” Rio Tinto, June 23, 2021.

However, copper typically makes up a small share of the overall cost and Scope 3 emissions for most end products, leading to less interest in its potential for emissions abatement. For example, copper contributes only 2 percent of the materials emissions of a typical electric vehicle in 2021, compared with 29 percent for aluminum, 21 percent for steel, and 8 percent for plastics.

Low-CO₂copper (less than 1.5 tons of CO₂ per ton) supply is expected to grow from two million tons in 2020 (around 8 percent of global supply) to three million to four million tons in 2030 (around 13 percent of global supply) because of increased electrification of mining operations and decarbonized electric grids. Meanwhile, low-CO₂ copper demand is expected to grow from nearly zero in 2021 to two million to three million tons in 2030 (around 8 percent of global demand). This is primarily driven by the energy, appliances, and automotive sectors, particularly in Europe.

That said, the overall copper market is structurally undersupplied. Demand growth is expected to outpace supply through 2030, driven by an increasing need for copper in modern applications, such as batteries and energy infrastructure, and by a slow project development pipeline. Thus, copper purchasers will likely focus on accessing copper, regardless of its carbon intensity.

As a result, there could be little incentive for purchasers of low-CO₂ copper to pay additional premiums. In that regard, the decarbonization pathway (via grid decarbonization rather than process changes) and premium potential (most likely for select ultralow-CO₂ grades for specific applications, such as luxury automotive) will probably be more similar to the pathway for aluminum rather than steel or plastics.

Charting a path forward

Across different value chains, players will need to lay a foundation for transparency about carbon emissions, including baselining and benchmarking against peers, implementing carbon-accounting tools, and embedding internal carbon prices in decisions (see sidebar “Discover the Sustainable Materials Hub”).

That said, charting the path forward will require materials producers to focus on operational decarbonization, including circularity, green commercial excellence, associated capability building, and green innovation. In contrast, materials purchasers will need to focus on value-chain decarbonization, procurement, and operational excellence, including securing sustainable supply early on, potentially through closed-loop agreements and product design or redesign for sustainability.

Implications for producers

The window for capturing green premiums can quickly close. Once producers assess their footprint and develop their road maps, leaders should rapidly implement capability building across groups and business units, including operational, commercial, and R&D functions. Recommendations include the following:

Develop carbon value-chain scenarios: Green production and decarbonization decisions should rely on well-grounded estimates of upstream and downstream value-chain decarbonization scenarios. If not already completed, leaders should begin their journeys toward capturing green premiums by baselining their Scopes 1, 2, and 3 emissions, as well as building marginal abatement cost curves (MACCs) across all corporate levels, from group to plant, and per individual commodity and product line, where applicable. Accompanying these efforts, companies should develop scenarios for future green demand, supply, and premiums.

Launch operational decarbonization: Materials producers should go about operational decarbonization in an impact-oriented, cost-efficient way. For example, gray-aluminum producers should switch their production to green aluminum to continue supplying automotive, packaging, and select construction segments. Understanding the abatement levers at the disposal of individual assets—and their respective costs—is crucial. In many cases, net-present-value-positive impact levers can be the first step in reducing carbon footprints. In aluminum, for example, given the MACCs and decarbonization levers available to the industry, switching from coal to renewable energy is an efficient decarbonization path, since it abates 80 percent of production-related emissions.

Stay agile in the face of uncertainty: Materials producers operate in sectors across geographies, commodities, and customer bases, which means that changes require differentiated approaches. Producers should therefore develop granular plans when the outlook is clear. Conversely, where there is uncertainty or path dependency, these plans should maintain a high-level view that embraces flexibility and modularity. On this point, materials producers should pay particular attention to timing any changes to their operations and build flexibility to meet sustainable demand at the pace of their customers. Important points to focus on include identifying so-called trigger points to act, such as changes in regulation or customer commitments, and building flexibility into the investment strategy to allow throttle control as change speeds up or stalls. For example, they should closely follow leading indicators of standards, such as the Aluminum Stewardship Initiative (ASI) standard for green aluminum.¹⁴For more, see “ASI standards,” Aluminum Stewardship Initiative, accessed October 13, 2022.

Aim for green commercial excellence: Leaders should ramp up green commercial excellence, including customer segmentation based on willingness to pay for green premiums and Environmental Product Declarations (EPDs) or life cycle assessments (LCA). They can also provide green-materials certificates to marketing and sales teams based on the carbon profiles and build capabilities of carbon-related products.

Develop green innovation: The next level of decarbonization—meeting ultralow-CO₂ demand—will require disruptive technologies. To stay ahead of the curve, materials producers should dedicate time and resources to innovation. There are multiple approaches for this, such as launching ambitious R&D initiatives internally, partnering with actors across the value chain or players that complement their technology base, or even taking advantage of the start-up ecosystem to identify and secure new technologies early. The preferred approach will depend on the company and the commodity. For instance, significant investments associated with step changes should be expected in commodities in which a process change is needed to decarbonize, such as in steel and plastics. In contrast, smaller investments and a more incremental approach can be undertaken in aluminum and copper, for which grid decarbonization drives product decarbonization.

Implications for purchasers

Most operational and commercial best practices also apply to purchasers, including incorporating green materials into product marketing and operational decarbonization. That said, recommendations for purchasers include the following:

Aim for green-procurement excellence: Leaders should understand the unique supply landscape for each low-CO₂ commodity, based on purchase agreements and current emissions levels. With that information in hand, they can embed CO₂ and other environmental, social, and governance (ESG) factors into procurement decision-making processes, including defining potential tradeoffs between price and carbon intensity. From there, they can also evaluate partnerships across the broader ecosystem of purchasers—for example, GM and GE recently partnered on magnet procurement in the United States.¹⁵“General Motors signs MoU with GE renewable energy to develop supply chain of rare earth and other materials to support EV and renewable energy growth,” General Motors, October 2021. In addition, companies can work to develop novel sourcing strategies to lock in the supply of green materials at the required grades and carbon profiles, such as partnering with raw materials providers to lock in volumes, engaging with producers in earlier stages of development of projects, and leveraging the order book to incentivize production. Finally, moves should be taken to start a procurement transformation that focuses on both cost and carbon reduction.¹⁶For additional procurement strategies and cost- and carbon-reduction, see Anna-Christina Fredershausen, Eric Hannon, Stefan Helmcke, and Tomas Nauclér, “It’s not easy buying green: How to win at sustainable sourcing,” McKinsey, February 25, 2022; see also Johan Bengtsson, Erik Dellborg, Mikael Hanicke, and Yvonne Huemer, “Mastering the dual mission: Carbon and cost savings,” McKinsey, June 17, 2022.

Embrace circularity: In addition to the aforementioned operational levers, downstream purchasers of low-CO₂ materials should consider taking a circular approach for critical materials. For example, Coca-Cola has recently prioritized recycling schemes for its packaging, with the goals of making 100 percent of its packaging recyclable globally by 2025 and of using at least 50 percent recycled material in its packaging by 2030.¹⁷“World Without Waste – Sustainable packaging,” The Coca-Cola Company, accessed October 13, 2022.

Innovate on product design and materials usage: Materials purchasers will require innovation on several fronts to decarbonize their products. Besides implementing new procurement models, materials purchasers should focus on developing new products and redesigning existing components to allow customers to use or replace certain high carbon-intensive materials less often. One multinational technology company has already committed to 100 percent carbon neutrality in its supply chain and products by 2030, which it plans to achieve by using low-CO₂ product design (increasing the use of low-CO₂ and recycled materials in its products, innovating in product recycling, and designing products to be as energy efficient as possible), among other methods. This may also lead to a different set of specifications for suppliers, such as for different materials or alloys; purchasers should therefore work closely with suppliers when establishing new requirements.

The world is quickly decarbonizing—and the window of opportunity for materials producers and purchasers is rapidly closing. In the years to come, the value from green premiums will be accrued by those who make quick and bold decisions. An understanding of how and when these green premiums will emerge, as well as how the implications of a green-materials strategy will affect the business, can make the difference between leaders and laggards.