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Carbon Standards: What Is the Right Choice for the United States and Canada?

October 02, 2008 // 8:00am2:00pm
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Low carbon fuel standards (LCFS) remain a controversial and closely followed issue in both Canada and the United States that could affect trade and industry in both countries. The Canada Institute's tenth Cross-Border Forum on Energy Issues, held in collaboration with Global Public Affairs, the Canadian Centre for Energy Information, and the Canadian Consulate General in Chicago, explored the potential impact of carbon standards on the economies of Canada and the United States, as well as whether carbon and lifecycle standards are being developed in a realistic manner.

The Forum, held at the Standard Club in Chicago, Illinois, provided an opportunity for more than 50 senior level Canadian and U.S. government officials, industry representatives, and energy experts to discuss whether the implementation of low carbon fuel standards represent a wise policy choice for Canada and the United States to pursue. The Forum began with a keynote breakfast featuring the Honorable Warren Chisum, Member of the Energy Resources Committee in the Texas House of Representatives. The breakfast was followed by panelist presentations and a closed-door dialogue session, and concluded with a keynote luncheon with remarks from the founder of Baron Communications LLC, Jonathan Baron. The Forum was sponsored by the American Petroleum Institute, Flint Hills Resources, Nexen, Shell, and Suncor Energy.

Putting the LCFS Debate in Context

The debate over whether implementing LCFS is a wise choice for Canada and the United States highlights the need to develop more precise ways to measure the environmental gains and economic impact of proposed policies to lower carbon emissions, said Greg Stringham of the Canadian Association of Petroleum Producers. Given the nature of the highly integrated North American market, it is imperative that Canadian and U.S. policymakers pursue environmental policies that will not seriously impede cross-border trade and negatively impact both economies. The fallout from LCFS could put Canada and the United States at risk of an economic downturn by restricting oil imports from Canada's oil sands, which are currently the United States' largest source of oil imports.

Though environmental groups continue to make the case that the United States should not import oil from Canada's oil sands due to the carbon intensive process needed to refine oil from such deposits in Alberta, Stringham maintained that this argument fails to take into account the improvements made in refining Canadian oil and the amount of greenhouse gases being emitted in sources outside of Canada. He noted that Canada only accounts for 2 percent of total global greenhouse gas emissions and Canada's oil sands only account for 0.1 percent of global energy-related greenhouse gases. In addition, industry has made strides in reducing its carbon footprint in Alberta, reducing the level of greenhouse gases emitted in refining oil sands oil by 27 percent since 1990.

John Disharoon of Caterpillar echoed Stringham's remarks noting that U.S. policymakers should keep in mind that the demand for fossil fuels continues to increase globally and that maintaining a well functioning U.S. economy will require stable and secure sources of oil. For the United States, Canada's oil sands represent an essential and stable resource that will remain vital to sustain the U.S. economy and would be extremely difficult to replace. Though renewable fuels continue to be developed, said Disharoon, all forms of energy, including fossil fuels, will have to be used in order to meet projected future demand for energy. Efforts to reduce carbon emissions must reflect the reality that fossil fuels, like it or not, will remain a major part of the global energy mix for the foreseeable future.

Disharoon commended states for taking the lead to reduce carbon emissions, but cautioned that the emerging patchwork approach to CO2 reduction will make it increasingly difficult for businesses to sustain operations across the United States. What is needed, therefore, is a national framework to address rising CO2 emissions. Stringham stated that in order for a national framework to succeed governments must strive to implement policies that are clear, realistic, and do not discriminate against certain industries. Governments must also ensure that proposed environmental policies will not adversely affect their country's international competitiveness in the global economy.

Choosing the Right Path

Leaders in Canada and the United States continue to struggle to find the right policy mix to reduce carbon emissions at both the national and subnational level, said Steven Holland of the University of North Carolina at Greensboro. Although a carbon tax and cap and trade system are the standard policy choices for most jurisdictions attempting to lower emissions, a carbon tax has proved politically untenable in most areas, while huge questions regarding allocation and enforcement continue to plague the implementation of a national cap and trade system. Consequently, policymakers have turned to LCFS as an alternative tool to lower emissions, noted Holland.

According to Holland, LCFS do not represent the best policy choice to reduce CO2 emissions. Holland cited findings from his own research on the subject that found LCFS to be five times more costly to achieve an emissions target than a carbon tax or cap and trade system. He also cautioned that a LCFS does not prevent increased production of low carbon fuels, which may inadvertently lead to higher carbon emissions.

Tom Mullikin of Moore and Van Allen cautioned that in the rush to create policies to address global warming, not enough time is being spent to ensure those policies will have the desired effect of reducing carbon emissions while maintaining economic competitiveness. He stressed that policies intended to lower greenhouse gas emissions will only be successful if the public is made aware of the actual costs of their implementation. Mullikin referenced a recent poll conducted in two dozen states which revealed that while a majority of Americans believe in climate change, few would be willing to make significant personal financial sacrifices in order to reduce carbon emissions. In order to successfully reduce carbon emissions, argued Mullikin, policymakers must have a better understanding of what their constituents are willing to sacrifice economically before moving ahead with potentially costly environmental regulations.

A Call for Dialogue

California, viewed by many as a leader in taking bold initiatives to reduce its carbon emissions, continues to struggle to find a coherent energy plan that would meet the ambitious carbon reduction targets set in the state's Global Warming Solutions Act, said Catherine Reheis-Boyd of the Western States Petroleum Association. The central problem in meeting the targets, said Boyd, is the disconnect between the goals of government policies calling for reduced petroleum dependence and lower greenhouse gas emissions at a time when overall energy demand is increasing and the alternative fuels available are simply inadequate to replace fossil fuels on a mass-scale. Addressing this disconnect will require additional forums where open and honest dialogue can take place between government, industry, and environmental representatives on the real costs of implementing carbon policies, including LCFS, on consumers and businesses in California. According to Boyd, such forums would be a highly useful way of fostering discussion on establishing realistic compliance timelines on carbon legislation and would help determine the ability of California's carbon legislation to harmonize with other states and international programs.

The need for dialogue at both the national and international level to develop a comprehensive and coordinated strategy to reduce carbon emissions was a major theme highlighted among participants during a closed-door discussion period, which followed panel presentations. Participants often pointed out that any gains made in North America to lower carbon emissions would be completely offset if other major polluters such as India and China are not making similar efforts to reduce their emissions. International policies will therefore be needed to make serious gains toward reducing carbon emissions. While moving toward an international agreement will unquestionably be a daunting challenge, participants noted that there is a role for industry to continue to press policymakers on the necessity of establishing a global regime to combat climate change.

On the subject of LCFS, several participants reiterated that Canada's oil sands remain the United States' number one source of oil and that legislation aimed at restricting oil from Alberta may not be the most prudent approach for the United States to combat climate change. The alternative to importing oil from Canada, noted one participant, is the importation of oil from countries that are less friendly to the United States, cannot ensure the same reliability of supply, and may be imports from sources where the United States has significantly less influence over environmental standards.

Energy Security in the 21st Century

The first of two keynote speeches at the Forum was delivered by Warren Chisum, Member of the Texas House of Representatives' Energy Resources Committee, who discussed the importance of the bilateral trading relationship between Canada and the United States as well as Texas' efforts to reduce carbon emissions. Chisum cautioned that federal mandates to reduce carbon emissions are coming and that states must be prepared for such initiatives. Meeting future carbon mandates, stressed Chisum, will require the continued development of wind and other sources of renewable energy, as the well as the implementation of clean coal and carbon sequestration technology.

Jonathan Baron of Baron Communications LLC and consultant with Securing America's Future Energy, delivered the second address and argued that issues related to energy security must figure more prominently in legislation designed to reduce CO2 emissions. Baron maintained that while policymakers, NGOs, and industry often focus on the environmental and economic aspects of oil extraction, little attention is paid to the security implications of buying a barrel of oil from various sources around the globe. Until a security premium is incorporated on oil imports, we will never know the true cost of oil, said Baron. Thus, when energy security is factored into the financial equation, maintained Baron, buying oil from a stable and peaceful nation such as Canada becomes significantly less expensive for the United States than purchasing oil from petro-regimes.

Drafted by Ken Crist
Program Associate, Canada Institute

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