Editor’s Note: A motor fuels version of this editorial ran in the January issue of NPN Magazine.
As most readers are abundantly aware, the Obama administration and the Democratic Congressional leadership have a variety of key initiatives that are being pushed early in the first term of his presidency. Healthcare reform is likely dead for now, at least in its current form. The neglected economic downturn will likely receive at least some emphasis next, though it’s difficult to determine if that will be more lip service and theater or real action. The current conventional wisdom suggests that climate change initiatives will be re-addressed after that, perhaps in March, though the senatorial election of Scott Brown in Massachusetts might further erode the drive for what is increasingly becoming unpopular legislation. However, nothing is assured.
This article is actually an editorial – a call to action – on current climate change proposals. The position of the editorial is that current climate change legislation should be aggressively opposed, and not just for reasons related to protecting your interests as a member of our industry. Those impacts will be real, and painful. But, even if you are a staunch environmentalist you can easily oppose what is on the table today and sleep well at night.
For some limited background (much more information is available on the Internet), man-made or anthropogenic global warming is said to be related to the human introduction of high levels of carbon dioxide, a greenhouse gas, into the atmosphere, in large part through the combustion of fossil fuels in power plants, through manufacturing and transportation. Any human activity that touches these areas is said to contribute to AGW. Realistically, that means virtually every aspect of modern life.
Greenhouse gases trap excess solar radiation inside the atmosphere that would otherwise re-radiate back into space. This human-influenced process has been speculated to increase the earth’s temperature over time leading to such calamities as the melting of the ice packs (flooding low-lying areas), dramatic and damaging changes in weather such as increased hurricane activity and potential drought, disease and famine.
The House already has a bill ready to go (H.R.2454, the Waxman-Markey American Clean Energy And Security Act of 2009), and the Senate has passed a similar bill (S. 1733, the Kerry-Boxer Clean Energy Jobs and American Power Act) out of the Senate Environment and Public Works Committee that is ready for debate and a vote on the Senate floor. In general, the House bill calls for a 17 percent reduction by 2020 in the greenhouse gas carbon dioxide and the Senate requires a 20 percent reduction by 2020. Both work towards an approximate 80 percent reduction below recent levels by 2050, which, as Washington Post columnist George Will noted, is comparable to the amount of CO2 emitted in 1910 and on a per capita basis to that in 1875. This is the level cited as being needed to stop “global warming.” Both bills mandate renewable energy content such as wind and solar.
Getting the votes required for the Senate bill is currently seen as an uphill battle, so a new bill is working its way into the process. “(The current Senate bill) was clearly not a bipartisan effort and since then, Senators, Kerry, Lieberman and Graham have been working to put together a different type of proposal which they think will be able to sustain 50 votes to break a filibuster,” said John Eichberger, vice president of government relations for the National Association of Convenience Stores. “I have no idea what’s going to be in the new bill. Clearly they are going to continue with an emissions reductions plan that will be (at least) 17 percent by 2020 with a far more serious ultimate reduction some point down the road.”
On top of this, the EPA was given the authority by the Supreme Court in 2007 to address CO2 as a pollutant under the Clean Air Act. It should be noted, however, that in addition to being a combustion byproduct, CO2 is a natural component of human respiration and an essential compound for photosynthesis in plant life.
What does this mean for energy? For starters, fossil fuels are on the chopping block and the current legislation places most of the CO2 reduction burden on liquid fuels with the least amount of transitional coverage.
After 20 years in the news, the issue of climate change and the various proposals to solve the issue should be well known by most readers. That science is far from as solid, or universally accepted in the scientific community as AGW supporters, particularly those in the media, would suggest. A variety of recent developments cast serious doubt over the accuracy of the science and the motivations of many individuals and institutions that have been pushing for dramatic action on climate change. However, given that this is currently such an uphill fight, the legislative initiatives are being fought more on the economic impacts – which are severe.
If AGW is real, there are a variety of solutions that could be applied. The one that is most favored today in both the House and Senate bills involves a process known as cap-and-trade. In a nutshell (again, more detail is available on the Internet) emissions are capped at a certain level and companies are allowed an amount of emissions that cannot exceed the capped threshold. The capped threshold will decrease over time forcing a decrease in emissions. Should a company exceed that cap, it has the option of buying credits/offsets.
The specific approach will vary, but in general the credits themselves can be auctioned to companies by the federal government as a tax mechanism for a revenue generating fee, given away free to companies and industries to subsidies the transition process, and traded between companies that have a surplus and those that come up short on an exchange.
The Congressional Budget Office projects that an economy-wide cap-and-trade program would generate/cost at least $50 billion per year, but could reach up to $300 billion through the auction process. In addition to this cost, hopefully forcing industries to make the “appropriate” green decisions to reduce CO2, the pass along costs to end users (a hidden tax) will encourage the end users to make the "right" choices in their personal lifestyles or business operations as the source of energy they use for heat, the type of vehicles they drive and fleets they operate, the type of homes they live in and facilities they operate in and the type of appliance and equipment they use.
Unfortunately, cap-and-trade is already being tried in Europe with no real success from an environmental standpoint (though the current recession has allowed some goals to be met). This was been pointed out by the New York Times, hardly a conservative leaning source, in an article that ran on June 20, 2008:
<i>Yet in Europe, which created the world's largest greenhouse gas market three years ago, early evidence suggests the whole approach could fail. Carbon dioxide emissions are still rising in many industries, not falling.
"We currently are in danger of losing yet another decade in the fight against global warming," said Hugo Robinson of Open Europe, a research group in London.
This week, the European Environment Agency reported that emissions from factories and plants that trade pollution permits rose 0.4 percent in 2006 over the previous year, and 0.7 percent in 2007, the first two years of the system's operations.</i>
Similarly, Bonner R. Cohen, a senior fellow at the National Center for Public Policy Research in Washington, DC noted in an article published by the Heartland Institute: “In fact, emissions for all EU countries went up on average 2.1 percent between 2000 and 2004. Compare this with the United States where currently no such regulatory regime exists and yet emissions went up only 1.3 percent during the same time period.”
The reason for the shortcomings are linked to the politics involved with such schemes, where favors are cut for one sector or another that ultimately reduce the effectiveness of the concept. Similarly, it’s been noted that some polluters simply buy offsets and pass along the costs without focusing on significantly reducing carbon output. Neither issue would be absent from a U.S. cap-and-trade scenario. In fact, the current proposals indicate this clearly with the favoritism showed to some industries and constituencies (coal) and not others (liquid fuels).
One alternative for addressing AGW is a straightforward carbon tax. It would be simple, non-volatile and would encourage carbon reduction without energy reduction, while providing tax revenue. Unfortunately, a straightforward carbon tax is too transparent for politicians. The increases in the cost of energy through cap-and-trade will be easier for politicians to pass off as an outside entity such as an electric utility or oil company (or retailer for that matter) “gouging the public.”
The EPA Steps In
The final mechanism of note for CO2 reduction, and perhaps the most likely, is that the U.S. EPA will regulate CO2 emissions under the Clean Air Act as it announced on Dec 7, 2009, with its endangerment finding. This allows the EPA to consider CO2 a pollutant, and it has indicated it will apply regulation to big emitters that produce 25,000 tons of CO2 per year. While politically convenient, this contradicts the legal CAA threshold of 250/100 tons of carbon dioxide per year. The impact should the EPA proceed would start to be felt in 2012.
This threat is also being used as a stick to encourage cap-and-trade legislation instead of EPA regulation. There is some blowback to EPA rulemaking on CO2, but that is stalled politically, at least for now.
“Senator Lisa Murkowski (R-AK) is now pushing legislation that would stop EPA from doing a rule and he has some Democrat support among moderates, but Barbara Boxer still chairs the Environment and Public Works committee and it has no chance of getting out of that committee unless 30 senators sign a petition initiative that would force it to the floor for a vote,” said Dan Gilligan, president of the Petroleum Marketers Association of America. “But it would die in the House – Waxman and Pelosi would not allow that and, of course, President Obama would veto it. It’s probably more about getting people’s votes on the record.”
However, Gilligan noted that the argument behind the legislation was entirely valid. The CAA as revised in 1990 had no consideration of climate change and in fact the worry was more about global cooling than global warming.
All for Nothing?
The most disturbing aspect of the entire process is that even if the regulatory initiatives – cap-and-trade, carbon tax or EPA reach their most ambitious current goals, the impact on AGW (if it is itself a reality) will be minimal to the point of insignificance unless there is full cooperation throughout the world. As EPA Administrator Lisa Jackson has herself confirmed, a unilateral U.S. action to reduce greenhouse gas emissions would have no effect on climate.
Countries like China and India are already reaching or surpassing the United States (and the Western and developed Asian countries) as the leading emitters of CO2 and will far outpace the developed, post industrial nations as the years pass. However, these countries fully appreciate the negative economic impact climate change policy will have on their growth and are highly reluctant to make such commitments. They have proposed making such cuts if heavily subsidized by the post industrial nations, a position that would certainly be politically untenable at least in the United States.
U.S. climate legislation does contain a solution, in the form of tariffs on products from the countries that fail to adopt such stringent goals. “What I’m most worried about in that bill are the provisions that say: ‘Don’t worry about the Chinese or Indians, if they produce twice as much CO2 – we have tariff powers,’” said Joe Petrowski, CEO of the Cumberland Gulf Group. “I hear that and I think Smoot Hartley (an act in the 1930s that fueled a damaging trade war). I know there are a bunch of unions that are probably licking their chops to exclude certain Chinese and Indian goods, and that scares the heck out of me because the last time we ended up in a global trade war really bad things happened to us.”
Even with the full participation of the post industrial nations, the sought environmental goals would come up short as a variety of sources on both sides have noted. As National Defense and Technology Magazine outlined in an October 2009 article: <I>Furthermore, environmentalists in the United States realize that the politicians are not delivering on a plan that can actually stop or even slow global warming. The metrics indicate that not only would nations need to cut back equally by 2050, they would also need to cut back even more. If India and China were to reconsider and sign off on the G8 summit targets, it still wouldn’t change a thing. Global warming would still happen, at least according to the computer models.</I>
Even James Hansen, who heads the NASA Goddard Institute for Space Studies in New York City, a part of the Goddard Space Flight Center and an ardent and central supporter of AGW theory considers cap-and-trade to be a disastrous policy approach to the issue.
What does this mean to you?
Of all the solutions to carbon emissions, the one chosen is the least effective and the most destructive to your sector of livelihood.
“The most expensive reductions in greenhouse gases are in the transportation sector,” said Lou Hayden, policy analyst at the American Petroleum Institute. Although Hayden focuses on the transportation fuel aspects, the same can be said for distillates used in home heating. “The least expensive reductions in greenhouse gases come from efficiency improvements. The next least expensive reduction comes from electricity – fuel switching, etc. Then you have carbon capture and storage solutions. In the transportation sector we do not have commercial-scale alternatives. We don’t have low carbon fuels. And a lot of people have no alternatives but to drive their vehicle to work. So we have a disproportionate burden with only 1.8 percent of allowances (under current proposals) but 44 percent of the obligations combined with the most expensive emission reductions of the alternatives.”
As noted, the CBO predicts the impact on the economy at somewhere between $50 and $300 billion per year. Given the usual Washington realities, the $300 billion figure is likely just a starting point. At the household level the impact was pegged by the CBO at $175 a year by 2020. However, that figure only covers direct costs, and not pass along costs from the impacted parties. An MIT study placed the direct costs at $800 paid annually per household but noted potential pass along costs at $3,128 per household. Some outlier estimates even double that figure.
Closer to home for fuel oil dealers and marketers, extrapolating estimates from the National Association of Manufacturers and the Heritage Foundation relative to motor fuels costs, distillates for heating oil use could increase from between 20 percent to 60 percent. A wide range but then the market behavior factors have yet to be experienced.
Natural gas is currently not a favored fuel long-term, but it does come out ahead on the initial allowances receiving 9 percent of these out to 2025 compared to 1.88-1.5 percent for heating oil and propane. It should be more cost effective under a trading scheme given its lower carbon content.
Where raw fuel commodity prices are concerned, it could be expected that electric utilities will make a major, medium-term commitment to natural gas as a replacement for coal (but in combination with the long-term favorites like wind and solar) impacting demand and increasing prices. But making that complicated are the politically motivated allowances for electricity (roughly 36 percent) and coal (roughly 5 percent) that could impact both the speed and depth of conversion. Similarly, major investments in natural gas by the oil companies (Shell and ExxonMobil have made some major, recent asset acquisitions) as well as new techniques for extracting natural gas will undoubtedly bring more gas online and increase supply. Legislatively, while the major oil companies have no incentive to support cap-and-trade on the motor fuels side, that cannot be said on the heating side. “There is no doubt that they would come down on the side of more natural gas vs. more heating oil,” Gilligan said.
And finally, given the negative national politics of higher utility prices and the significant campaign being undertaken by the gas industry in recent months to enhance its position at the table, an even more generous treatment of that industry is not unlikely.
On the propane side, like natural gas it should benefit on the carbon credit market, though like heating oil it does not receive the upfront transition cost reduction benefits found with other fuels like coal. The propane industry is working hard to address these concerns.
So, in a nutshell under cap and trade, heating oil (and currently propane) becomes even more disadvantaged against the gas utilities from a price standpoint. The only question is the degree, and the ancillary opportunity that will be created for competing fuels to work legislation to push out the industry outside of normal market factors.
“The No.1 concern for a fuel oil dealer has to be the inclination of environmentalists to push switching from heating oil to natural gas,” Gilligan said. “That is going to keep coming up and it is a huge concern. Our industry has to come up with a fuel that is as friendly or as close to friendly as natural gas.”
This fuel would be a combination of ULSD and biodiesel. Gilligan noted that a variety of heating oil states such as New Jersey, Vermont and Maine have bills moving to mandate these fuels. The refining community opposes this for obvious reasons, but it is likely essential to fight the battle on the ground.
Will this Happen?
There is plenty of talk about the cap-and-trade bill dying, but nothing is assured. And even if it does, the fight will not be over. Brown’s victory in Massachusetts certainly helps cement the thought that cap-and-trade legislation is likely dead legislatively. But given the administration and Congresses’ full-speed and damn-the-torpedoes approach with healthcare legislation, nothing is assured. And then there is the EPA option should the approach fail legislatively.
“The single event that made this policy somewhat inevitable is when the Supreme Court gave EPA the authority to regulate CO2 under the Clean Air Act,” said Gilligan. “That single decision is mind boggling in both its breadth and depth of effect. And I know that President Obama, whether he wins in 2012 or not, is not going to leave the White House without signing some kind of carbon regulation into law.”
Can this policy be turned around by a future Congress and president? Perhaps, but it would be an exceptional result.
Time to fight back
Your livelihood is under attack. If you think the good of the planet will be served by accepting what is happening in Washington, then by all means follow your conscience. However, if you believe that the proposals will do great harm to your business and the national economy with little to nothing in return, you can have a say in the matter.
“Unfortunately, one of the things that has happened is that the traditional retailer believes this is a refiner problem and they think: ‘Oh the refiners will figure it out,’” said Gilligan. “But it is not a refiner problem; it impacts anyone in the business of liquid fuels in a very serious way in terms of cost and supply.”
The associations will be fighting this battle. If you are a member of PMAA, the Society of Independent Gasoline Marketers of America, NACS, National Propane Gas Association, the New England Fuel Institute and many state associations, then you are making a worthy – but partial – contribution with your dues money. If you are not a member then you should consider joining one of these groups.
From the PMAA perspective: “We are in the process of developing a very aggressive cap-and-trade initiative,” Gilligan said. “Our members own 60,000 stores and they supply fuel to an additional 40,000. We need to get those 100,000 sites out opposing cap-and-trade. We are in the process of designing some pump toppers and store cards that marketers can put in their stores.”
From the NACS perspective: “We are going to be going to the Senate saying look, we’d rather you not do anything, but if you’re intent on doing something, look at the numbers,” said Eichberger. “Look at the impact you’re going to have on the economy not just business owners but your motoring constituents and then compare that to the benefits you are going to accrue from your benefits structure.”
From the API perspective: “The good news is that the oil and gas industry employs 9.2 million people – direct jobs and indirect jobs through service companies – we are not an industry that went looking for a handout or a bailout from Congress,” Hayden said.
Your individual voice is critical in this fight. Your voice is a force multiplier. In fact, your voice might carry even more weight with a particular legislator than an association lobbyist. While Fuel Oil News will be providing in-depth edit in an upcoming issue on how to be politically active, here is how you can get started today.
An e-mail to your representative or senator is the least you can do and a call is much better. A letter is even better than that. A short personal visit at your representative’s office is even more impactful. A fundraiser, well, that can certainly help. As for the message, a calm, honest statement of the facts works great.
1. This legislation will negatively impact my business. I may be forced to slow down hiring or conduct layoffs if my cost of doing business increases while margins decrease. I will make it no secret why this is happening.
2. I will work with the trade groups to make sure your constituents know who and what is really responsible for their higher heating costs – and it’s not us.
3. I will be happy to support candidates that support me during the campaign season, and I hope that is you and not your opponent.
What if legislative efforts are defeated and the EPA takes over? This actually might be the best alternative for the petroleum industry. Our industry loses under any scenario, but the political favorites that are currently somewhat protected by cap-and-trade could not be legally protected under CAA regulation. They would have to fight in the courts equally instead of trying to cut deals. And they would be pressuring Congress to support their needs along side those of the oil industry.
In the courts, there are numerous legal challenges that can be made, though at some expense. As noted, even the basic science behind the EPA finding on CO2 is now more questionable than ever. Once you get away from the legislative process and start addressing the EPA, the scientific angle becomes far more useful.
Among many recent cracks in the scientific façade perhaps most noteworthy is the “Climategate” scandal. In November, 2009, a computer hacker, or more likely an inside whistleblower, passed along 61 megabytes of e-mails (over 1,000) and other files including modeling code (2,500 files) from the Climatic Research Unit at the University of East Anglia, in Norwich, England. The CRU is one of the world's leading research bodies and a leading proponent of AGW. Its work directly underpins much of the most critical research into AGW, and specifically the positions of both the UN’s Intergovernmental Panel on Climate Change and the EPA’s position on CO2 as a “pollutant.”
At best, the e-mails (from some of the giants in the field) indicate sloppiness in research and a disregard for many common scientific practices. At worst, they represent massive fraud. Some of e-mails discuss tricks to hide contradictory data, how to evade Freedom of Information Act requests, how to play the media, how to diminish uncomfortable realities like the Medieval Warming Period and the fact that the cooling trend of the past decade is unaccounted for, and how to stack peer review journals so that only favored (pro-AGW) papers get published.
This comes during the same time that some of these same researchers claim to have thrown out the original “raw” data used in developing their climate models leaving only the adjusted data for independent review, and when Russian scientists are claiming that their climate station data was used in an oddly selective manner. Similar disturbing patterns have been found in a variety of other major research outlets throughout the word.
More detail on all of these issues can be found from reliable sources on the Internet. Even the Himalayan glacier melting has been found to be highly exaggerated and was apparently knowingly promoted with this knowledge to achieve political ends.
Finally, should we have a significant shift in Congress, and a change in the administration in 2012, your legislative involvement will help legislators like Lisa Murkowski pass legislation that will curb a runaway EPA. Your involvement in the legislative process is equally, if not more, critical for this to happen.