The Great Carbon Shuffle

Government programs designed to reduce greenhouse gases in the atmosphere appear to be having the unintended consequence of actually increasing the amount of carbon dioxide being emitted.  Programs at both the federal and state level in California intended to reduce the amount of carbon dioxide (CO2), a greenhouse gas produced from among other activities, the combustion of fossil fuels in cars, trucks and other forms of transportation, are a particularly noteworthy example.  Unfortunately, the old adage that unintended consequences will frequently result from changes made with the best of intentions is truer than ever in the area of climate change-related policy and regulation.

When fossil fuels, which contain carbon, are burned in a vehicle’s engine, the carbon is converted to CO2 and, unless somehow trapped, this gas is emitted into the surrounding air.  The general objective of climate change-related policy and regulations is to reduce the overall amount of CO2 and other greenhouse gases that are being emitted into the earth’s atmosphere in order to slow global warming.

At the federal level, a regulation known as the “renewable fuel standard program” or “RFS2” requires that ethanol, which generally has a lower carbon content than the crude oil used in most petroleum-based transportation fuels, be added during the fuel manufacturing process to reduce the fuel’s overall carbon content.  An increasing amount of ethanol is required to be added during manufacturing over the multi-year life of the program.  To even further reduce the carbon content, the RFS2 regulation requires that a certain percentage of “advanced biofuel” be used in fuel manufacturing and, in essence, requires fuel manufacturers to select only those ethanols that contain the very lowest levels of carbon.

Almost all ethanol produced in the United States is made from corn and, unfortunately, corn-based ethanol tends to contain relatively high levels of carbon.  Brazilian ethanol, on the other hand, which is made from sugarcane, contains relatively low levels.  As a result, sugarcane-based ethanol produced in Brazil is being shipped by tank vessel to the refineries in the United States that manufacture transportation fuels and corn-based ethanol produced in the United States is being shipped back to Brazil, where it is refined into fuel to power that country’s large and growing vehicle population.

Because a molecule of CO2 emitted anywhere in the world has exactly the same impact on the earth’s atmosphere as a molecule emitted anywhere else, the actual effect of this cross-shipping program is a net increase in the amount of CO2 being emitted into the atmosphere, along with an increase in product costs, because of the not insubstantial CO2 emissions that result from the long tanker voyages that are required to make it work.  This “crude shuffling” and its adverse effect on overall CO2 emissions is an unintended consequence of a program that was designed to reduce CO2 emissions from the combustion of domestic transportation fuels.

Another example at the federal level is the debate over the XL Keystone Pipeline proposed to transport Canadian crude oil, much of it from that country’s vast stores of oil contained in tar sands, to refineries on the U.S Gulf Coast.  Opposition has been mounted to the project because Canadian crude oils tend to be higher in carbon content than most domestic crude oils.  One of the arguments made against approving the pipeline is that the United States should not be encouraging the use of higher carbon-containing crude oils in domestic fuel production.  As a result, the project has been delayed and the Canadians have advised that, if the delays continue or the project is ultimately disapproved, they will have no choice but to construct a pipeline to Canada’s west coast to allow shipments of their crude by tank vessel to refineries in Asia or Europe that would be happy to receive the product.  If this were to occur, the Canadian crudes containing higher levels of carbon would still be refined into transportation fuels which are combusted in vehicles, and the resultant CO2 would still be emitted into the atmosphere.  The emissions would simply occur in another part of the world.  There would again be an overall net increase in the amount of CO2 emitted because of the much greater level of crude transportation emissions associated with shipping the crude to the other side of the globe.

In California, one of the climate change-related programs being aggressively promoted by the state’s Air Resources Board is the Low Carbon Fuel Standard or “LCFS.”  Like the federal renewable fuel standard program, the LCFS seeks to reduce the level of carbon that exists in the components that make up petroleum-based transportation fuels, but do so by penalizing the use of higher carbon containing crude oils in gasoline and diesel fuel manufactured at California refineries.  The difference is that the LCFS focuses on the crude oils, rather than the ethanols, that are used to manufacture transportation fuels.  While the objective of the program is to encourage California refiners to lower the amount of CO2 that results from fuel production, it is questionable whether there are really any feasible or cost-effective ways of achieving that result.  Instead, the effect could be to force California crude oil producers to either ship their crude to out-of-state or out-of-country refiners that are not subject to the LCFS or to shut in existing production that tends to have higher carbon content and therefore lower profitability.  A likely result is that most California crudes that would be penalized if used by nearby California refiners will be used somewhere else in the world instead, with an attendant increase in overall CO2 emissions due to the transportation-related emissions required to ship to these more remote refining locations.

Whether the foregoing result will in fact occur is now in doubt because of a December ruling by a federal judge in consolidated cases brought by major trade groups for both the petroleum refining and ethanol production industries challenging the legality of the LCFS program.  The court enjoined enforcement of the program, which was scheduled to commence on January 1, 2012, on the ground that it violates the Dormant Commerce Clause of the United States Constitution.  The Air Resources Board, which promulgated the LCFS, has appealed that decision to the 9th Circuit Court of Appeals.  Whether the LCFS will ultimately be put in place is therefore currently unclear.

One may wonder why such programs, that result in unintended adverse consequences despite their good intentions, remain in place.  Unfortunately, policy makers and regulators often adopted a narrow and parochial focus on the issues they must deal with, while remaining oblivious to the more global consequences of their actions, or they incorrectly assume that the rest of the world will quickly follow their example.

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Greg McClintock