Wednesday, April 11, 2007

Whose Responsibility?

Today's Wall Street Journal reports that ConocoPhillips has become the first US integrated oil company to call for a cap on greenhouse gas emissions. This is a noteworthy development, because until now, only European oil firms such as BP and Shell had endorsed aggressive action to control climate change. The article supplies several good reasons why an oil producer and refiner might support a measure that would ultimately require it to reduce its own emissions, but it leaves open the question of who will be responsible for the much larger pool of emissions resulting from the use of petroleum products. With oil and auto firms pointing at each other in this regard, it's easy to ignore the role consumers must play. Unless we are willing to pay more for fuels or voluntarily conserve, emissions reductions from the transportation sector will be elusive.

Based on detailed well-to-wheels emissions analysis by the Argonne National Laboratory of the Department of Energy, the entire process of producing oil, refining it, and delivering gasoline to service stations consumes about 20% of the energy content of the original crude oil. Greenhouse gas emissions are directly correlated to energy use, so for every gallon of gasoline we buy, the supplier emitted up to 5 lb. of CO2-equivalent, compared to the 20 lb. that will be emitted when we burn it in our cars. However, because much of the energy used in the refining process comes from natural gas or electricity, rather than the oil itself, actual "upstream" emissions are generally lower than that 5 lb. estimate. Even if an oil company can reduce its emissions by 25%, that only cuts the total emissions from the gasoline value chain by 3-5%. In order for transportation emissions to come down materially, someone needs to take responsibility for that downstream 20 lb. of CO2 per gallon.

As I discussed yesterday, carmakers can contribute by producing more efficient cars, and that will almost certainly happen. But unless consumers buy them in large numbers, the net result will be that the manufacturers will pay fines, but emissions will remain unchanged or grow. Oil companies can also contribute by blending up to 10% ethanol into the fuel they sell. If that ethanol is derived from corn, this will only reduce vehicle emissions by about 2%. So unless consumers buy more efficient cars and/or drive less, we're looking at a maximum reduction of about 7% of the total emissions from the oil well to the tailpipe. That's not enough to reach a target like California's, which would require a cut of 25% by 2020.

Unless lawmakers are willing to let consumers shoulder a large part of the burden, as the ones using most of the energy that creates these emissions, then the producers of energy must ultimately slash their own emissions and offset ours. At $20/ton of CO2 credits, that would equate to another 5 cents per gallon in added cost for a 25% reduction in emissions. One way or another, consumers will pay more at the pump, because the cost of producing and distributing motor fuel will go up significantly under an emissions cap.

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