Any scenario for regulating greenhouse gas emissions will push up the cost of natural gas for chemical companies that rely on it to make plastics, fertilizers and resins, according to a report by the World Resources Institute and the credit ratings firm Standard & Poor's.

"Standard & Poor's views higher natural gas prices, relative to no policy, as a potential meaningful risk factor for companies that compete on price, such as commodity petrochemical and plastics producers," says the report.

"The credit implications of higher natural gas costs, however, will vary depending on chemical industry conditions," it says, "such as the cost position of producers in other regions, the balance of supply and demand, and other cyclical factors that can influence profitability."

Chemical companies have been pressing their concerns about natural gas prices for a decade. Gas price spikes because of supply shortages early last decade are making way for a concern that demand from electric utilities will drive up prices in the coming decade. While U.S. gas supplies are rapidly increasing because of new onshore gas discoveries, electric power companies are expected to eat up more of that supply as they shelve plans to build more coal-fired power plants.

Because power plants consume enormous quantities of gas, chemical companies fear that gas prices will creep up or increase substantially if state and federal climate policies place an emphasis on gas as a fuel for producing electricity.

The study considers a handful of climate policy scenarios. One is that some form of a cap-and-trade program could gain support in Congress in the next five years. WRI and Standard & Poor's model that scenario using last year's Senate proposal.

Will cap and trade rise from the dead?

In July, the Energy Information Administration (EIA) released an analysis of the Senate proposal that concluded the economywide limit on carbon emissions would reduce U.S. gross domestic product by 0.2 percent from 2013 to 2035.

It would reduce household consumption by about $206 a year, but the impact on consumers would be mitigated through funneling some money to low-income people and offering a tax credit.

Sens. John Kerry (D-Mass), Lindsey Graham (R-S.C.) and Joe Lieberman (I-Conn.) spent much of 2010 negotiating with their colleagues and with industry and environmental groups. The trio's hope had been to reach a bipartisan compromise on a broad bill, but they ended up scaling the proposal to a utility-only bill and ultimately dropping the bill once it appeared they didn't have the support from Democratic and Republican leaders to move forward.

The Senate plan, dubbed the "American Power Act" (APA), would have capped carbon dioxide emissions by limiting the supply of emissions permits. Utilities and factories could buy and sell the permits in a "carbon market" designed to build up financing for technology and provide some flexibility for smokestack industries that need time to cut emissions. In the Senate plan, big energy users like chemical companies that could be put at a disadvantage in the global economy would be eligible for free emissions allowances.

Analysts found that most U.S. chemical plants produce 25,000 tons of greenhouse gases a year, which is the threshold for a requirement to hold emissions permits under the Senate's cap-and-trade scenario.

Another scenario is that U.S. EPA will through either market mechanisms or a command-and-control policy dictate carbon reductions in the economy.

Chemical makers could face higher costs, stiffer rules

WRI's assumption in this report is that, under EPA regulations, utilities would be regulated first, followed by industrial plants. In addition, Congress could reconsider a cap-and-trade bill sometime in the next five years, even as states pursue their own clean energy policies.

The study also assumes EPA creates regulations aimed at achieving a 22 percent reduction in U.S. chemical industry emissions by 2020. It also assumes EPA requires efficiency improvements for coal-fired power plants. Whether this leads to higher electricity costs for chemical plants that buy power from coal-burning generators is unclear, says the report, "but it is a potential risk."

Under this scenario, WRI and S&P expect the federal regulations to target an 85 percent reduction in hydrofluorocarbon (HFC) emissions by 2030. This would affect chemical companies making refrigerants and plastics.

Chemicals used for plastic, resins or synthetic rubber "will see a minor negative impact on demand," based on EIA's projections for the Senate proposal's impact on the gross domestic product.

Under the climate policy scenarios, gas prices are up to 25 percent higher compared to if no policy is put in place. Coal and fuel oil prices are on the low end if a climate policy is put in place, as demand drops off.

"Companies with fundamental dependencies on natural gas for feedstock and fuel, such as nitrogenous fertilizer companies, and companies that use basic chemicals derived from natural gas -- such as commodity petrochemical companies -- are likely to see cost increases under the EIA's scenarios," says the report.

"Across the economy, companies dependent on coal and petroleum products are likely to switch ... to natural gas to reduce compliance costs," the report continues, "so it is also likely that natural gas will feature more prominently in many chemicals companies' cost structures."

The report also acknowledges that projections haven't taken into account substantially larger onshore shale gas resources. Those resources could keep gas prices in check. In addition, chemical makers might also decrease their fuel needs by improving energy efficiency. Dow Chemical, for example, has spent a lot of money to improve energy efficiency and keep fuel costs under control.

Click here to read the report.