Sustain to gain: July 2010 Archives

Until recently, the CO2 intensity of fuels was regarded as something fixed. Gasoline and diesel dominated and still dominate the transport fuel market. Their relative CO2 emissions are mostly fixed. However, with the rise of alternative fuels, carbon intensity becomes an issue and discussions on electric vehicles, hydrogen powered cars, and the life cycle emissions of biofuels become more abundant. One ugly species is unconventional fossil fuels, produced from heavy oil, oil shale, coal, or bitumen. The latter is a substance extracted from Canadian tar sands which is upgraded - by energy intensive processing - into synthetic crude oils. Because of the energy needed for extraction and processing, petroleum from Canadian oil tar sands has higher life cycle emissions then convention fossil fuels, up to 25% more.

The EU and California regulate the carbon intensity of fuels by the so-called Fuel Quality Directive and the Low Carbon Fuel Standard respectively. These regulations incentivize the use of low-carbon fuels and punish high-carbon fuels. Hence, there does not seem to be much place for bitumen oils or similar products in the California or EU markets. From a marginal abatement point of view things look good. But what happens when one looks at "emission capacity" (=long-lived capital stock emitting or enabling the emission of CO2)?

Recently, Chevron tried to expand its Richmond based refinery, in Northern California - an unsuccessful endeavor that was beaten back by local protests. However, some refineries in the US are scheduled to expand capacities by 2012, adding 500.000 barrels a day (EIA, 2010a). Several of these expansion products in the Midwest are designed for processing heavier crude oil. In addition, a new refinery with capacity of 400,000 barrels per day is being planned for South Dakota specifically to process tar sands. Hence, refineries are expanding their "emission capacity". At the same time a number of pipeline projects are being planned out of Alberta (home of the tar sands), significantly expanding Canadian exports of oils to the US (EIA, 2010b).  For example, the Keystone and Keystone XL pipelines would bring tar sands oil from Alberta to the Midwest and would have a capacity of 1.1 million barrels per day (already 435,000 barrels per day of capacity has been constructed) (Transcanada, 2010).  For comparison, U.S. crude oil imports in 2009 were 9 million barrels per day (EIA, 2009).

Investing into heavy oil refineries and pipelines is probably reasonable business as conventional oils are running out. Perhaps heavy oils will replace only some fraction of conventional oils while the rest is left to low-carbon fuels.

The problem here is that US infrastructure is once again running into a carbon lock-in. When costly refineries and pipelines are built, political pressure increases to avoid carbon regulation policies which would render this "emission capacity" into sunk investment. 

While California has a LCFS, carbon intensity of fuels is not regulated nationwide. One solution to avoid further carbon lock-in is an immediate implementation of a nationwide LCFS (or carbon tax for that matter), sending credible signals to investors that heavy oil infrastructure bears a mid-term financial risk. However, if such a solution is currently not feasible, is there a second-best option? Perhaps, EPA could regulate oil infrastructure to induce lower than average life-cycle emissions of their product (or some other plausible threshold). Such a maximum emission requirement could then be adaptive in the sense of the Japanese top-runner standard which requires products like electronic equipments to become more efficient following the state-of-the-art equipment. Similarly, "emission capacities" could be required to have always lower CO2 lifecycle emission then the current average "emission capacities", thus inducing a race to the good.

EIA (2010a) US Energy Information Administration. Annual Energy Outlook.

EIA (2010b) US Energy Information Administration. Country Analysis Briefs: Canada.

EIA (2009) US Energy Information Administration. US Imports by Country of Origin.

Transcanada (2010) Keystone Connection Cananda, http://www.transcanada.com/docs/Key_Projects/keystone_connection_spring_2010.pdf.