How Is Expanding Oil and Gas Production Consistent with Addressing Climate Change?

Last month the International Energy Agency (IEA) reported that the amount of carbon dioxide emitted for each unit of global energy use was essentially unchanged between 1990 and 2010, despite the implementation of global climate agreements and the expenditure of hundreds of billions of dollars for renewable energy projects and incentives. Just a few days earlier, the US Environmental Protection Agency released its annual inventory of US greenhouse gas (GHG) emissions, showing a 1.6% reduction from 2010 to 2011. US emissions were up 8% since 1990 but have fallen 5% since 2000 and nearly 8% from their pre-recession peak in 2007. Much of the US's recent divergence from the global trend is attributable to the displacement of coal from the power sector by shale gas.

As unwelcome as the IEA's finding was, it is unlikely to have shocked anyone who understands the scale of global energy systems and the continued reliance of many developed and developing countries on coal for power generation. The transition to lower-carbon energy systems is underway, as reflected in the details of the IEA report. However, it will take additional decades to reach targets consistent with limiting the projected global temperature increase to 2° C, which the IEA indicates would require a 60% reduction in the carbon intensity of energy by 2050 from current levels. That implies that energy companies still need to develop additional oil and gas resources in the interim, in order to support the economic activity that--among other things--will be necessary to fund the recommended investments in cleaner energy and energy efficiency.

At first glance that might seem paradoxical. After all, oil and gas account for 55% of US GHG emissions and around 40% of global emissions today. However, when gas displaces a higher-emitting fuel like coal, global emissions fall. This has been a matter of some controversy, due to uncertainty about the contribution of fugitive methane emissions from shale gas wells. Yet the estimates in the EPA inventory indicate that methane emissions from US natural gas systems actually fell by 9% between 2005 and 2011, even though US natural gas production grew by 27% over that interval, with shale gas output increasing by 950%. A new analysis from ExxonMobil indicates that on a lifecycle basis, replacing coal with shale gas in power generation reduces GHG emissions by an average of 53%, while also reducing overall freshwater consumption by half.

Assessing the role of oil in the decarbonization of global energy is more complicated. Oil exploration and development must continue, even in a static or eventually shrinking market, because reserves that have been produced must be replaced, by either new discoveries or further development of existing fields. Simply allowing today's oil fields to decline and hoping to make up their energy contribution from other sources would be very risky, particularly for the transportation sector with its extremely high reliance on oil. Moreover, four-fifths of the emissions from petroleum occur during end-use combustion. That means that most emission reductions from petroleum must come about through reduced demand, via some combination of increased fuel efficiency, fuel substitution--particularly in those markets where oil is still used in electricity generation--and/or reductions in transportation metrics such as vehicle miles traveled.

In a recent Bloomberg op-ed, Michael Levi of the Council on Foreign Relations considered the impact of increasing US oil production from the standpoint of both the "social cost of carbon" and its incremental contribution to global emissions. He concluded that even at a high estimated environmental cost, the climate impact of an extra barrel of US oil would come in under $10 per barrel, well below its economic value. He also concluded that significantly higher US oil production would add little to global emissions. Its impact would be even smaller if OPEC producers reduced output to try to preserve high oil prices. Mr. Levi addressed that scenario in an earlier op-ed.

Last month's IEA report concluded that the world is not yet on track to reduce emissions by enough to limit temperature increases to 2° C, and more must be done. Yet even if we were on that track, the IEA forecasts upon which the report was based suggest that combined oil and gas consumption in 2035 would still be about 2% higher in 2035 than in 2010, with a bit of a shift from oil to gas. On today's trajectory, both oil and gas will grow, even as renewable energy and energy efficiency expand significantly. On either basis, an all-of-the-above approach to energy encompassing oil and gas, along with renewables, carbon sequestration, nuclear power and efficiency is fully consistent with addressing climate change.

A slightly different version of this posting was previously published on the website of Pacific Energy Development Corporation. 

B.C. Aims to Sell Cleaner LNG

I just ran across British Columbia's new provincial natural gas strategy, which includes a specific strategy for expanding liquefied natural gas (LNG) production as a way to mitigate global climate change. That might sound odd to those who are worried--unnecessarily--that gas might be even worse than coal, emissions-wise, but the province seems to have a good grasp of the benefits of replacing coal combustion in Asia with cleaner fuels like natural gas. They've also come up with a unique selling point for their LNG, on the basis that it would be produced using low-emissions electricity and thus have an emissions edge over other LNG sources. Whether this will confer an advantage on B.C.'s LNG by enabling it to collect a premium or capture a larger share of rapidly growing global LNG trade remains to be seen.

This story caught my eye because it fit neatly with one theme of a webinar in which I recently participated at The Energy Collective. Although most greenhouse gas emissions from fossil fuels occur at the point of combustion in a car, truck, plane, train, ship or power plant, the upstream emissions aren't insignificant and can be reduced in some cases by employing renewable energy in their production. Examples I cited in the webinar included an enhanced oil recovery demonstration project in California that employs concentrated solar power to produce some of the steam used to extract oil from an old oil field, and another project to extract geothermal energy from hot fluids brought to the surface as part of the oil production process.

The case that B.C. makes for reducing greenhouse gas emissions from LNG production by relying on the province's bountiful hydro- and wind power resources is a different application of the same principles. That's because whether the energy for cooling billions of cubic feet per day of natural gas to its liquefaction temperature of -162ºC comes from a local electricity grid or from burning some of the gas in a dedicated cogeneration facility, in most locations this adds significantly to the lifecycle emissions of the LNG. One study that I found on the California Energy Commission's site, produced by PACE Consultants, indicates that liquefaction accounts for around 10% of the lifecycle emissions of LNG converted to electricity in an efficient gas turbine power plant. Eliminating those extra emissions by powering a liquefaction plant with green electricity would bring the emissions from LNG much closer to those from pipeline natural gas and increase its advantage versus coal.

So now what B.C.'s LNG projects need is customers in Asia who will put a premium on "cleaner LNG"--presumably in countries that have committed to large greenhouse gas emission cuts that they can't achieve with indigenous fuels. Japan comes to mind, but I'm sure there are others. These customers would also have to be willing to deal with the longer voyage times from Kitimat, northern B.C. to Asia, compared to competing projects in Australia. That extra 1,000 miles or so translates into higher freight costs and a larger tanker fleet, along with somewhat higher emissions from transportation--though not enough to negate the liquefaction advantage. With so many new and expanding LNG projects around the world competing for market share, I'll be very interested to see whether B.C.'s new strategy pays off.

Because That's Where the Emissions Are

Yesterday the Environmental Protection Agency released its tabulation of greenhouse gases (GHGs) from large facilities in the US. In perusing the data I couldn't help thinking of the quote attributed to Willie Sutton concerning why he robbed banks. Even if he never actually said, "Because that's where the money is," the simple logic of that analysis transfers neatly to the question of why we might be interested in assessing and ultimately managing GHG emissions from such installations. While there are other important sources, notably including motor vehicles and aircraft, the more than 6,000 sites reported in the agency's online registry account for roughly half of all US GHG emissions. Furthermore, just a quarter of these sites--power plants--contribute nearly three-fourths of US emissions from large facilities. That's where the emissions are and where US climate policy should focus.

Although that doesn't dictate that we should entirely ignore all the other facilities, it certainly raises serious questions about the threshold of reporting for the hundreds of installations emitting less than 10,000 tons of CO2-equivalent gases per year, compared to the top-100 facilities, the smallest of which emitted nearly twice that much every day.

It should also challenge the belief systems of some members of Congress concerning the relative importance of different sectors. The highest-emitting oil refinery in the country is also one of the biggest in the world by throughput capacity, at 573,000 barrels per day. Yet it comes in at #45 on the list, with only one other refinery appearing in the top 100. The entire refining sector, comprising 145 plants, emitted around 5.7% of the total GHGs represented in the registry, and thus less than 3% of the US total. Why does that matter as more than an industry talking-point? Because reducing emissions from refineries by 10%--no easy task when they are already roughly 90% efficient in terms of their total energy output vs. inputs--would be lost in the rounding in our national emissions statistics. We won't get very far chasing expensive diminishing returns.

By comparison, reducing emissions from the 1,555 power plants on the list by an average of 10% would reduce US emissions by more than 3%. And because we are blessed with many more processes for generating electricity than for refining oil, this could be achieved in a variety of ways, nor does 10% represent any kind of ceiling for what might be possible. One option would be to retire the least-efficient coal-fired plants and take up the slack at existing gas-turbine power plants, plus some additional renewables. That may happen anyway, as a consequence of other EPA regulations. We could also replace the worst coal plants with near-zero-emission nuclear power plants of advanced design, such as the AP-1000 reactor that won NRC approval late last year, or the various modular nuclear reactors now under development. Capturing and sequestering the CO2 from coal-fired power plants would be another option, if it can be perfected at a reasonable cost.

I would never suggest that climate policy could be truly simple, but the numbers the EPA just reported, combined with what we know about the lifecycle emissions from the petroleum value chain, indicate that the scope of the US climate policy debate could usefully be narrowed to focus on just two main emissions sources: power plants and the end-use combustion of hydrocarbon fuels. On the scale of overall US emissions, almost everything else is noise. Of course that leaves plenty of room for discussion and disagreement on the most effective ways to address these emissions at the lowest cost and least disruption to an already-fragile economy. We can still argue endlessly about the relative merits of putting a price on emissions, providing incentives for emission-reducing technologies, and setting command-and-control regulations. Yet when we contrast the potential effectiveness of such a limited approach with the intricacy and distortions entailed in "comprehensive" efforts like the failed Waxman-Markey climate bill of 2009, it looks like a very helpful simplification to pursue.

Time to Choose

Last week's finding by the US Environmental Protection Agency that greenhouse gas emissions "threaten the public health and welfare of current and future generations" should not have come as a surprise. It has been virtually inevitable since the Supreme Court decision in Massachusetts v. EPA two years ago, and it was rendered imminent by the election last November of Barack Obama, who made responding to climate change a centerpiece of his presidential campaign. Whatever you might believe about the risks of climate change, we no longer have a choice between addressing them or ignoring them. Representative Edward Markey (D-Mass.), who chairs the Select Committee on Energy Security and Global Warming, responded to the finding by saying, "It is now a choice between regulation and legislation." I don't think that's quite accurate, particularly since his own proposed climate legislation includes many strong regulatory features. Instead, I believe the choice lies between relying primarily on an explicit price for emissions to nudge consumers and businesses away from emissions-intensive activities, and employing a more prescriptive approach using mandates, "standards", and air pollution-style rules on smokestacks and tailpipes. Long-time readers won't need to infer my position on this matter from the way I've described that choice.

I've argued the case for cap & trade numerous times on this blog and in front of various audiences, corporate and public. I've also expressed my misgivings about the imposition of a strict cap & trade system in the middle of a recession, particularly if the government intends to use the revenues from cap & trade to fund a dog's breakfast of non-energy programs, rather than returning the bulk of it to taxpayers. I've even suggested that under some circumstances a simple carbon tax might be preferable to cap & trade, since both serve the purpose of establishing a price for emissions, to which our market economy must respond by shrinking emissions-intensive sectors and growing low-emissions ones, including the renewable energy sector with its vaunted "green jobs." I've spent less time, however, examining the regulatory approach, perhaps because I regarded it as self-evidently inferior, particularly if it looks more constraining than the version of cap & trade that might accompany it. It is abundantly clear that many others do not share that view.

The main appeal of the regulatory path is that it would build on long experience in managing other environmental impacts--including many from energy systems--under existing federal and state air and water quality regulations, the federal Renewable Fuel Standard (RFS), and numerous state-level renewable electricity standards (RPSs) and other regulations. But these programs also illustrate some of the severest drawbacks of this approach, in the complexity and overlapping nature of these rules. Regulating emissions that are not incidental to, but rather a fundamental consequence of the use of our principal energy sources would add further layers of complexity without subtracting any, as cap & trade might eventually be expected to. We already have trading in Renewable Energy Certificates (RECs) for state RPS compliance, Renewable Identification Numbers for compliance with the federal RFS, and sulfur and nitrogen credits for compliance with the Clean Air Act's rules for criteria pollutants. And because the GHG emissions from motor vehicles are determined largely by how much fuel they consume, efforts at regulating tailpipe emissions become de facto fuel economy regulations, in conflict with the federal Corporate Average Fuel Economy regs. (This is the matter on which California eagerly awaits a waiver from the administration to pursue its legislated Low-Carbon Fuel Standard.) With all due respect to the dedicated professionals at the EPA, anyone contemplating leaving the regulation of greenhouse gas emissions to that agency should be required to pass a test demonstrating that they understand the EPA's notice implementing the RFS for 2009, which involves the comparatively much simpler task of setting the required ethanol percentage in gasoline for the year.

We are now at the point that I have long feared we would be, if we mislabeled carbon dioxide as a pollutant. While the consequences of excess CO2 and other naturally-occurring greenhouse gases certainly live up to the terms the EPA has applied in its finding, unleashing a pollution mentality to solve climate change will be counter-productive and unnecessarily expensive, when dealing with a phenomenon for which a ton of CO2 emitted, captured or avoided in Boston is exactly equivalent in its climate impact to a ton emitted, captured or avoided in Beijing. We would have been much better served if the Supreme Court had paraphrased the Hitchhikers Guide to the Galaxy and found that CO2 was "almost, but not quite, entirely unlike" pollution, yet here we are.

By next year's Earth Day, the 40th anniversary of the first one, I expect that we will have made our choice between these competing approaches. We see signs of this in the apparent determination of the administration to arrive at the Copenhagen climate conference this December having taken concrete steps here, and in the competing cap & trade bills making their way through the Congress. I can understand that opponents of strict legislation on climate change might regard the EPA's endangerment finding as a high-stakes game of chicken. But whether it serves as an implicit threat or merely an insurance policy against protracted legislative delay, it--rather than inaction--represents the new baseline. Anyone who has been sitting on the fence must now decide which approach is likely to be more effective in dealing with the US contribution to global warming, while simultaneously doing less harm to our economy. After long and careful scrutiny of the options, and after spending a career in an industry that has already been regulated to the gills, I find pricing emissions by far the most attractive solution. This is anything but a trivial decision, though it is one that must be made, and soon, before the default option becomes as inevitable as the endangerment finding was.

Zero Emissions?

The other day I ran across reports of a curious event, in which the Attorney General of the state of Vermont convinced Entergy, which owns or operates 11 of the nation's 104 active nuclear power plants, to back away from characterizing nuclear power as having zero emissions. Technically, of course, the AG was correct. However, as a reader reminded me, it is equally true that such unambiguously "green" energy sources as wind and solar power also entail emissions greater than zero--a fact that appeared not to trouble Mr. Sorrell. This situation highlights another important gap in the public debate over energy and the environment. The solution lies in better public education and clearer reporting of absolute and relative emissions, based on numerous studies detailing the lifecycle emissions of our various energy sources. We might also apply some common sense to this complex technical issue. Unfortunately, the resolution of the Vermont dispute leaves the public with the mistaken impression that, at least in terms of greenhouse gas emissions, nuclear power is not in the same league as our favored renewables.

The misunderstanding in the Green Mountain State reflects a common inconsistency in the way that we look at the emissions of energy sources. In the last few years it has become pretty routine, at least in the better-informed media, to report the emissions from fuels and the vehicles and stationary facilities that consume them on the basis not just of what comes out of a tailpipe or smoke stack, but by tallying all emissions from extraction and production through to end-use: a technique referred to as "well-to-wheels" analysis, or more generically as "lifecycle" analysis when no actual wheels are involved. Energy sources that don't burn fuels have often escaped this level of rigor and tended to be clumped together as zero-emission sources. That includes nuclear power, wind, solar, geothermal, and hydropower. All of these entail a modest level of "embodied" emissions associated with their construction or manufacture, including the direct and indirect emissions from the conversion of raw materials, machining and assembly of components, and transportation to their operating sites. Nuclear power is different in one respect, in that it also consumes a fuel, the production of which--though not its use--results in some emissions. That hardly justifies lumping nuclear power in with coal, oil and natural gas burners, and drawing a misleading distinction from the embodied emissions of other low-GHG energy.

A web search turned up numerous references that quantify the lifecycle emissions from all these electricity sources. A recent report to the International Energy Agency on electricity in Japan, for example, cited cradle-to-grave GHG emissions from nuclear power at 29 grams of CO2 per generated kWh, equal to those from wind power and roughly double those from geothermal and hydropower, but half the emissions from solar photovoltaic power (PV). By comparison, the lowest fossil fuel emissions in Japan come from combined-cycle gas turbine plants running on imported LNG. Those averaged 519 g/kWh. Then there's the study from the University of Wisconsin, which shows nuclear at 17 g/kWh, beaten only by wind and geothermal, but exceeded by every other renewable source. Finally, I was amused to find the website of the Windham Regional Commission in Vermont hosting a report from the Nuclear Energy Institute bracketing nuclear power between hydro and geothermal and lower than PV and biomass power.

Rather than seeking to highlight the inconsistency of a government official--cue Captain Renault, here--I'd like to propose the common-sense application of a two-tier standard to this problem. All energy and environmental decisions involving comparisons of different energy sources and devices, particularly when they result in money changing hands, should certainly be made on the basis of full and careful lifecycle analysis. For general discussion purposes, however--most likely including the ads that offended the group that appealed to the Attorney General of Vermont--the emissions from wind, solar, geothermal, hydroelectric and nuclear power are all so much lower than those from coal, oil and natural gas that it seems entirely reasonable to treat them as effectively zero. Perhaps Entergy should reconsider its retraction on this basis.

Cooler Is Relative

Well, it's official; the average global temperature for 2008 was 14.44° C (57.99° F.) That's 0.13° C (0.23° F) cooler than 2007's 14.57° (58.23° F.) In fact, according to NASA's Goddard Institute for Space Studies (GISS), 2008 was the coolest year since 2000. However, it was also the 9th warmest year since at least 1880, and warmer than any year on record prior to the mid-1990s. The average temperature for the current decade is running 0.2° C warmer than the decade of the 1990s, and 0.3° C warmer than the 1980s. Being as objective as possible, I have a hard time interpreting last year's slight dip as providing much support for the notions of "global cooling" that I began noticing on the Internet a year ago. That's a pity, considering last week's sobering report from the National Oceanic and Atmospheric Administration (NOAA) on the likely duration of the effects of global warming on the climate, even after we eventually get greenhouse gas emissions under control.

As I noted in my posting on the subject last February, the global cooling hypothesis rests not just on the observed slight decline of average temperatures since the peak year of 2005--including a sharp monthly drop last January, compared to January 2007--but also on concerns about tardy sunspots and the recent decline in solar output. NASA's graph of "solar irradiance", the energy in sunlight reaching the earth's orbit, confirms that the sun's activity is at a periodic low point within the approximately 11-year sunspot cycle. It also indicates that this cyclical low is somewhat lower than recent lows, and that it seems a bit overdue for a cyclical uptick. (To put this in perspective, we are currently receiving about 0.02% less solar energy than average.) However, unless the scientists at a recent conference on solar activity were wrong in concluding that were are not headed into a sustained solar minimum of the kind associated with the Little Ice Age, then the implications of this graph and of GISS's commentary on solar irradiance look ominous in the other direction: We could be in for some sharply warmer temperatures in the next decade, a few years after sunspot cycle #24 reaches its peak, when the "non-negligible effect on global temperature" of variability in solar irradiance would reinforce, rather than partially canceling out the effects of greenhouse warming and the Southern Oscillation (El Nino/La Nina.) As a result, my money is still on warming, not cooling.

That makes the NOAA findings worrisome, even if one doesn't expect to be around to see whether their assessment that the adverse consequences of global warming could persist for as long as 1,000 years after our emissions have completely ceased proves correct. On a more personally-relevant timescale, however, it suggests that we shouldn't expect the climate to return smoothly to the previous "normal" after we stop nudging it, whenever that might be. That kind of systemic irreversibility is distinct from the idea that plant and animal species that become extinct along the way won't be retrievable; it speaks to the basic hospitableness of the earth to the levels of human population we're asking it to carry. (If you think that sounds extreme, you should read James Lovelock's recent thoughts on the subject.)

If the aim of policy makers is to create a sufficiently robust public consensus to support a cap on carbon emissions and a big investment in low-carbon energy over the span of time necessary for them to have the desired results, then their explanation of the problem must encompass the variability inherent in the interaction between greenhouse gas emissions and the complex cycles and systems that governed the climate long before the first factory began burning coal, or the first Model T was built. "Global warming" implies a steadier process than we are likely to experience. Some years will be cooler than others, as we've just seen, but the decade-by-decade trend still points higher. Our growing understanding of the consequences of that ought to make this harder to shrug off, even if we assign it a probability lower than 100%. I don't know if we'll end up burying biomass-derived charcoal as Mr. Lovelock suggests, in order to suck CO2 out of the atmosphere, but the longer we delay action, the more dramatic the options we may be forced to consider.

Questioning Cap & Trade

For the last week or so I've been collecting editorials, op-eds and newspaper columns concerning the Senate's debate this week on legislation to cap US greenhouse gas emissions and establish a mechanism for trading credits among emitters. The range of opinion is broad, as are the sources, including the former Prime Minister of the UK, Robert Samuelson, George Will, and the editors of the New York Times, the Wall Street Journal and Washington Post. But whether pro or con, many of them appear to bypass some of the principle questions we should be asking about this legislation. The lead editorial in yesterday's WSJ comes close by focusing on the allocation of the enormous federal revenues that cap & trade would generate, but it misses the mark on the more fundamental question of considering the real alternatives to putting a cost on our emissions of carbon dioxide and the other GHGs.

Long-time readers of this blog know that I have supported cap & trade since before starting Energy Outlook at the beginning of 2004, dating back to my corporate career at Texaco, Inc., where I served on the company's Climate Change Council. I didn't arrive at that view in a single step. Besides undergoing something of a conversion experience on the risks of climate change itself, I spent a lot of time contemplating the various ways to manage these emissions, based on my engineering and financial background and commercial experience. The path by which the Congress is attempting to arrive at cap & trade skips at least one key step, even once you accept that the science is settled--which some still regard a debatable proposition. In particular, where is the vital public discussion on how best to reduce emissions, and why cap & trade rises above the other options?

Consider the Wall Street Journal's lead editorial on May 27. The Journal's editors referred to the pending Climate Security Act of 2008 as "the most extensive government reorganization of the American economy since the 1930s." They aren't necessarily wrong about that. They went on to describe the pitfalls of cap & trade as a "hidden tax" on the economy, and presented some of the obstacles to achieving the bill's emission-reduction goals. Unfortunately, their entire argument appeared to assume that the alternative to cap & trade was to do nothing, or to remain on the current path of voluntary abatement. But if climate change is the threat that most scientists believe, that is surely not possible.

There are two primary options for reducing emissions, with important variations on each. One option would simply extend the kind of environmental mandates that have been used for traditional air and water pollutants to greenhouse gases. This could be done by sector, by industry, or by technology, and it could be as simple as telling every emitter of CO2 and other GHGs--including consumers and the government itself--to begin reducing their emissions by 2.5% per year starting in 2010, subject to verification of compliance and stiff fines. That would deliver roughly the same emissions reductions by mid-century as the Boxer-Lieberman-Warner bill, and it would be much simpler than cap & trade. This approach would be complementary with and reinforce the effect of current incentives for new, less-emitting technologies, such as biofuels and renewable power.

The other main option is to establish a price for emitted greenhouse gases, and then to let the marketplace adjust to the monetization of this formerly free externality. Most economists and business leaders prefer this over mandates, because it would foster greater innovation and allow the most efficient companies and sectors to profit and grow, while gradually reducing the size and importance of the less-efficient. The economy would be transformed in the direction of higher GDP, instead of just lower output. Cap & trade represents an even more market-oriented subset of this approach, because rather than setting the level of a carbon tax and hoping that it reduces emissions by at least the desired amount, it specifies the increment of reduction required and allows the market to set the CO2 price and drive it towards the lowest marginal cost. So rather than seeing cap & trade as a top-down, bureaucratic drag on the economy, it might better be viewed as the means for achieving the necessary cuts in greenhouse gas emissions at the least burden on the rest of the economy.

In the process of selling cap & trade, we should avoid promising the public that it could be implemented at little or no cost to them, even if it generates long-term savings and growth. Yesterday I had a long conversation with Deron Lovaas of the Natural Resources Defense Council on this issue. His organization's analysis suggests that by 2020 consumers would actually spend less on energy than they do now, as higher efficiency vehicles and devices proliferated, and domestic energy production increased. While I certainly see the potential for that, I also definitely expect higher fuel prices short-term, as a result of the higher operating costs that cap & trade would impose on refiners and on oil, gas and power producers. Until vehicle fleets and capital stock have time to turn over, that will raise consumer outlays on energy. Mr. Lovaas also highlighted another aspect of the legislation that would promote carbon capture and sequestration, which when used as part of enhanced oil recovery could bring oil prices down by reducing imports. By its nature this, too, would take time to bear fruit. All of these effects reflect the complexity of the economy with which we would be interfering, and we should expect unforeseen consequences, both good and bad.

It is unlikely that the bill currently being debated in the Senate this week will become law this year. This is the opening salvo--or really just the most recent round--in a longer process that should also feature prominently in this year's presidential campaign, particularly since the remaining major-party candidates all support some version of cap & trade. As we attempt to build a national consensus for this measure, we can't afford to leave the public in the dark concerning the rationale behind the crucial choice between mandates and market-based solutions, and the pros and cons of cap & trade versus a carbon tax.

Unambitious Targets

In the last week or so, the administration has come out with two energy-related plans that merit a few comments here. President Bush's proposal to halt the growth of US greenhouse gas emissions by 2025 has generally been greeted as too little, too late, particularly overseas. With the Intergovernmental Panel on Climate Change having called in their latest report for significant global cuts in emissions by mid-century, a freeze within 20 years seems a slow start, at best, particularly since Mr. Bush's approach would concentrate on a few sectors, rather than the entire economy. But has anyone noticed that US emissions have already ceased growing? Similarly, the implementation plans for the higher Corporate Average Fuel Economy standard that came out of the 2007 Energy Bill, and which the Secretary of Transportation called "historically ambitious" look less so, when compared to the fuel economy of the current new car fleet.

US emissions of the greenhouse gases (GHGs) implicated in climate change have grown significantly over the last couple of decades. Compared to the Kyoto Protocol's baseline year of 1990, we now emit 14% more. Yet from 2001 to 2006, net US emissions--sources minus sinks--have been essentially flat. Slight rises in 2004 and 2005 were offset by a drop in 2006, leaving us with a net of 6.17 billion metric tons per year of CO2-equivalent emissions. That's still too much, but it's a far cry from the projections of a 35% increase over 1990 levels that I used to see when I tracked this issue for Texaco. And while the EPA hasn't reported 2007 data yet, it's hard to imagine that they would reflect much of a jump, given the increases in energy prices we saw last year. So if US emissions have already stalled, and high energy prices appear likely to keep a lid on them for at least the next year or two, then the prospect of beginning to reduce them seems much more realistic than if they were still growing by 1-2% per year. What could we accomplish by 2025, from our actual starting point of a five-year plateau? I'm not sure, but that seems like a better question to be asking, than how to keep them flat for another 17 years.

Turning to CAFE, the proposed timetable for implementing the 35 mpg standard that was signed into law last December would raise the overall fuel economy of the new car fleet, including SUVs, to 27.8 mpg by the 2011 model year and to 31.6 mpg by 2015. In particular, the average for new passenger cars would have to rise from the current 27.5 mpg annual target to 31.2 mpg by 2011 and to 35.7 by 2015. That sounds quite aggressive, until you realize that the data from the National Highway Traffic Safety Administration, under whose authority the CAFE program falls, show that the 2007 model average passenger car fleet already gets 31.3 mpg. For that matter, based on the sales mix reflected in NHSTA's January 2008 CAFE report, the combined 2007 new car fleet delivered an average of 27.2 mpg. With SUV sales having fallen back below 50% from their 2004 high of 53%, it's a reasonable bet that the shifting sales mix alone would allow the fleet to achieve the 2011 goal without any changes in vehicle performance. In that context, the 2015 milestone goal of 31.6 mpg overall looks more like a 2% per year average improvement over the next seven model years, rather than the 4.5% cited by Secretary Peters.

The conservatism embodied in the new CAFE timeline is at least more understandable than that for GHGs. Designing more efficient car models won't be accomplished overnight, and then factories must be retooled to build them. A standard that pushed too hard at the front end would merely result in larger fines for manufacturers, or a bigger shift to imports. What is less understandable is the hoopla the timeline has generated. Perhaps this is aimed at shaping the expectations of consumers. After all, unless they alter their buying habits to prefer higher fuel economy to ever-higher horsepower, CAFE will merely be an accounting system with a relatively weak enforcement mechanism, rather than a serious means of reducing the annual fuel consumption of America's 240 million automobiles.

Sharing the Climate Burden

A recent op-ed in the Asian Wall St. Journal raised some provocative questions about the allocation of responsibility for addressing climate change after the expiration of the Kyoto Protocol in 2012. While some might view the author's arguments as another effort to shift blame away from the US, EU and Japan, which together account for something like 60% of cumulative estimated emissions since industrialization, they highlight the challenges of dealing with this truly global problem in a world that is so inter-connected, and where economic activity no longer neatly aligns with national borders. This is a further indication of how difficult the essential task of crafting a successor to Kyoto is likely to be.

It's not unusual for advocates of an urgent response to climate change to treat such questions of international and inter-generational environmental equity as though the solutions were glaringly obvious. Yet when I assess the conflicting considerations involved, they look anything but simple. Because most greenhouse gases persist in the atmosphere for decades, with a few of them lasting thousands of years, historical emissions will affect the climate for many years and are thus clearly relevant to any allocation of responsibility for mitigating emissions. But emissions alone don't tell the whole story, without including widespread changes in land use that have altered the earth's ability to absorb both natural and man-made emissions. Including this factor for the period from 1950-2000 puts developing countries into a virtual tie with the industrialized nations in term of overall climate impact.

Nor does the inclusion of land-use changes resolve all questions of equity concerning historical emissions. Today's scientific consensus on anthropogenic climate change--widely but still not universally accepted--did not exist prior to the 1980s, and apportioning blame for emissions that predate that consensus seems unproductive. Holding current Americans and Europeans responsible for the consequences of emissions that were generated prior to the signing of the UN Framework Convention on Climate Change in Rio in 1992 seems at least as unfair as asking Chinese and Indians to take as much responsibility for their current and future emissions as developed countries must. While some might see a parallel to the duplicitous arguments of tobacco companies that knew for decades that their products were dangerous, the global warming theories of Arrhenius a century ago hardly count as a "smoking gun." There's legitimate disagreement about the point at which we should have known that fossil fuels and other activities were affecting the climate, but it was certainly no earlier than the last two decades.

Then there's the problem of offshored emissions. With a considerable share of the emissions from Asia's rapid industrialization attributable to products made for export markets in Europe and the US, who should bear responsibility for the CO2 and other greenhouse gases emitted along the way? Producers, who are often making slimmer margins than the retailers selling their output? Consumers, who have benefited from lower prices and thus seen their purchasing power rise, but have also seen jobs sent offshore? While an emissions cap & trade system with accompanying GHG-leveling tariff could resolve this conundrum going forward, by pricing this externality and letting the marketplace apportion it along the value chain, I can't begin to fathom how to allocate the emissions responsibility for the last decade of this phenomenon.

So if it's not fair to include historical emissions but it's equally unfair to ignore them, and with emissions from the developing world rapidly overtaking the developed world's--but including some ultimately attributable to the latter--where can we find middle ground from which to move ahead, together? Not in the past: the only emissions over which we have control are those that haven't occurred, yet. If the negotiations kicked off with the Bali Roadmap are diverted by arguments over history and fail to focus squarely on the output of the world's twenty or so largest emitters between now and 2050, then they will be fruitless, and we will need to shift our attention to more practical matters of adaptation and possible geo-engineering. We should know the outcome of this debate within a year or so.

Friendly Fire

When it first came to light that an obscure provision of the 2007 Energy Bill would bar imports of synthetic oil that entailed higher emissions than conventional domestic crude, and that this might apply to purchases by the Defense Department of fuels sourced from Canadian oil sands, one might naturally have assumed that this was an unintended consequence of the law, as Canada's ambassador to the US has suggested. It now appears this consequence was quite intentional. In light of our concerns about energy security, this looks like an unfortunate case of "friendly fire" against our largest trading partner and our largest oil supplier. While the theory behind this facet of climate change regulation is sound, its application in this case is unwarranted and unwise.

As I noted last week, Canada has a growing problem with the greenhouse gas emissions from oil sands production. I've been concerned about this since the 1990s and have written about it here, going back at least to 2005. The Canadian government has finally recognized this problem and taken strong steps to address it, within the context of their own commitments under the Kyoto Protocol--which they have ratified but we have not--and a recent, stricter national goal. Oil sands emissions can be brought in line through a combination of efficiency and sequestration technology, though this will take time. In the meantime, the extra emissions can be offset either through the official Kyoto Clean Development Mechanism (CDM), or with offsets bought on the Chicago Climate Exchange or the new NYMEX Green Exchange.

This is not to say that the oil sands emissions are not a serious concern, or the tip of the iceberg in terms of the "outsourced carbon" in which we share responsibility, as importers and ultimate consumers. However, the logic behind this provision of the Energy Bill deals with two specific aspects of climate change policy, neither of which applies to Canada's oil sands. First, it is intended to prevent emitters from going offshore to avoid emissions regulations. In this case, the incentive results more from the cumulative effect of decades of federal and state restrictions on drilling for the same lower-emissions domestic oil against which we are comparing Canadian syncrude, thus pushing energy companies to look north of the border, where the oil sands comprise a world-class resource. At the same time, this sort of measure is designed to impose external pressure on countries that are not addressing their emissions, with China as the most frequently-cited example. Canada does not fall into that category. They are tackling this problem head on, and they have the motivation and technical and financial wherewithal to manage their own emissions without prodding from us. Frankly, we are lucky that we have not been on the receiving end of such restrictions by EU countries that have been reducing emissions with almost religious fervor. This situation conjures up the unpleasant image of the US government, which has led the world in foot-dragging on climate change, going after Canada with the zeal of a brand-new ex-smoker who sees someone else light up.

As to the practical consequences of restricting our use of Canadian syncrude, this would harm US industry and consumers at least as much as Canadians, without materially reducing the emissions associated with a product that could be exported to eager customers in Asia. To understand why, look at the market and infrastructure for Canadian crude imports into in the US. The syncrude is blended into the main Canadian export stream coming down the Enbridge Pipeline system into Chicago, and ultimately into the US Mid-Continent. This system provides the primary crude supply for many Midwestern oil refineries. If the DOD is barred from buying fuels containing oil sands components, then any refinery selling to the military would have to certify that it either runs no Canadian crude oil, or that it can segregate its output from other crude oil sources. That's not impossible, but with most refineries operating at much higher rates than their present tankage was built to accommodate, that would be awkward and expensive. The net result would be to reduce the number of refineries willing to bid for DOD business and drive up the price the military--and thus taxpayers--pays for fuel. It would also reduce US imports of Canadian crude and force us to buy more from other, less secure suppliers. That's hardly in sync with our concern about relying on Middle East oil.

Sooner or later, we'll all be paying more for energy, in order to deal with climate change. Some will see no problem with starting here, forcing the government to walk the same talk it wants the rest of us to follow. From my perspective, though, in the absence of any comprehensive US policy on greenhouse gases--the 2007 Energy Bill doesn't qualify as either comprehensive or policy--this seems like a particularly counter-productive and hostile way to begin enforcing new and untested standards. I hope the experts who are crafting the cap and trade legislation that will likely be enacted in the next year or two are paying very close attention to this negative example.

Energy Outlook will observe tomorrow's market holiday for Good Friday.