Cap-and-trade proposal would hit refiners hard


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WASHINGTON, DC — Refiners will be hit harder than other US manufacturers under proposed cap-and-trade legislation, a ConocoPhillips official told the US House Energy and Commerce Committee.

Red Cavaney, the company’s senior vice president for government, public affairs, and communications, said the estimated $68 billion the US Energy Information Administration estimated refiners would pay annually under a $25/ton carbon tax includes collections of end-users’ carbon taxes in addition to levies on refiners’ greenhouse gases under the measure.

“Unlike other manufacturers, we would not be able to pass this on,” he told the committee Apr. 22 during the first full day of hearings on the bill which Reps. Henry A. Waxman (D-Calif.), the committee’s chairman, and Edward J. Markey (D-Mass.), the chairman of its Energy and Environment Subcommittee, introduced on Mar. 31.

Cavaney said when the hearing recessed that the measure also doesn’t consider the impacts of the federal Renewable Fuel Standard, changing blends, growing overseas competition and falling demand on US refiners. The bill also doesn’t recognize contributions from renewable fuels actions that have already occurred or domestic refiners processing heavier grades of crude than their non-US competitors.

“It is vital that the mechanisms for allowance allocation to trade-exposed energy-intensive industries are applied fairly and in a way that comprehends the fundamentals of how these markets work. We are deeply concerned about our ability to fully pass on these costs of compliance and the potential implications that even a small percentage of unrecoverable costs could have on what is historically a low-margin business,” he testified.

Adjustments needed
Oil-state committee members echoed his concern. “Adjustments will be necessary if we’re going to hold refiners responsible for consumer compliance. We need to find a way to make sure the US gets as close to energy independence as it can. Climate issues are important, but so are economic strength and energy security,” said Rep. Charlie Melancon (D-La.).

Reps. Gene Green (D-Tex.) and John Sullivan (R-Okla.) each asked Cavaney if refiners should be eligible for rebates for energy-intensive industries under the proposed program. Cavaney responded that they should. “We’re the second most energy-intensive industry in America, but it’s not clear if we qualify. There are some 6.5 million bbl a day of refining capacity under construction outside our borders, which receive government help. We need to be able to compete with them,” he said.

The ConocoPhillips official was part of a panel of witnesses who testified on behalf of the US Climate Action Program (USCAP), a coalition of businesses, consumers, and environmentalists that produced legislative recommendations for controlling greenhouse gases which the House Energy and Commerce Committee used as it was prepared the current bill.

Cavaney testified that the company believes that a mandatory US national climate protection program linked to other national and international programs offers the best approach for achieving meaningful global GHG reductions.

“First, we believe that a well-designed federal climate protection program, as opposed to multiple state/regional initiatives and other alternatives, would result in a more efficient and less costly approach. Second, industry needs a consistent and enduring climate change program to provide the regulatory certainty necessary to make informed, long-term investment decisions,” he said.

Business case
ConocoPhillips also claims there is a firm business case for this position, according to Cavaney. “For example, we believe US climate policy should be designed to optimize the use of natural gas as a transition fuel to a low-carbon economy. In addition, well-designed climate policy will create new opportunities in areas such as deployment of carbon capture and storage (CCS), and development of new energy technologies,” he said.

He and other witnesses from USCAP members suggested that allowances will be needed in addition to auctions to mitigate climate policy impacts on consumers, businesses, and the overall economy.

“The potential for significant dislocation and value destruction, both to individual companies and regions of the United States, is real but can be effectively addressed with a sensitive balance between auctioned allowances and allowances allocated on an interim basis, and with complementary measures for clean coal and other core technologies, including advance nuclear projects,” said David Crane, chief executive of NRG Energy Inc., an electricity wholesaler, in his written statement.

The group said that the period before the proposed cap-and-trade program took effect in 2012 would be critical. “One of the areas to watch is the price of natural gas. US industries would be placed at a further disadvantage to overseas competitors if it goes too high,” said Chad Holliday, who retired from DuPont Co. Jan. 1 after 10 years as its chairman.

Duke Energy Corp. chief executive James R. Rogers said the proposed legislation recommends an economy-wide cap-and-trade program which falls within the recommendations of USCAP’s Blueprint for Legislative Action. “It also proposes a greenhouse gas registry and acknowledges the need for significant cost-containment mechanisms, including allowance banking and borrowing, multi-year compliance and the use of offsets as a low-cost carbon emissions reduction strategy,” he noted.

‘Good foundation’
The bill also allows for a periodic assessment of the science behind it and has provisions to implement a strategic reserve pool while accelerating development, deployment and commercialization of carbon capture and storage and other zero- and low-carbon technologies, Rogers continued. “There is a good foundation here to build upon and the draft’s 648 pages present enough material to start lively conversations about a proposal that isn’t just about climate change but, in fact, proposes a fundamental shift in US energy policy,” he said.

“Then there is the case of the missing pages. These are the ones that contain the critical decision on how allowances will be distributed. Those pages, for Duke Energy and its customers, are the key to that third tenet of sound climate policy: protecting customers from prices that increase so rapidly that they disrupt their livelihoods. Ensuring that electric consumers are treated fairly and not burdened with unnecessary cost increases is a mission from which I will not retreat,” Rogers said.

“During the evolution toward a comprehensive global emissions trading regime, transitional arrangements for energy-intensive, trade-exposed sectors will be necessary to protect our competitiveness. This will be essential to protect the employment and contribution to the US economy that industries such as aluminum, steel, chemicals, glass and paper represent,” said Meg McDonald, global issues director at Alcoa Inc.

When he testified as part of another panel later in the day, Paul N. Cicio, president of the Industrial Energy Consumers of America, warned that reducing US greenhouse gas emissions from about 7 billion to 5 billion tons in a relatively short period without a readily available supply of low-cost and low-carbon energy would raise energy prices significantly.

“Energy efficiency and renewable energy will help, but will not close the gap. CCS and nuclear will not be contributors over the next 10 years, which means the power sector will be dependent on natural gas for power generation. Expansion of renewable energy means electric utilities will be required to build gas-fired back-up plants,” he said.

‘Significant implications’
“It is extremely important to note that gas-fired power generation sets the marginal price for electricity. The implications are significant. As demand for gas goes up, prices will go up, which will also increase the price of electricity across the country, a double-hit to consumers. Gas demand by the power sector has grown by 28% since 2000 while domestic gas production has increased only 7%,” Cicio observed.

Others agreed that gas prices during the transition need to be considered more carefully. “US chemical makers and other manufacturers simply cannot compete effectively in a global market with such high and volatile costs for a key input. Congress can level the global manufacturing playing field by adopting demand and supply side policies that ensure US companies have access to competitively priced gas,” American Chemistry Council President Cal Dooley said in an Apr. 22 letter to Waxman.

The bill also needs a feedstock credit, he maintained. “Slightly more than half the energy we buy is used as a feedstock, and those purchases account for 70% of industry spending on energy inputs. When used as a feedstock, most of these fossil fuels are converted into products and do not emit greenhouse gases,” Dooley said.

Three prominent Obama administration officials applauded the committee’s efforts to develop cap-and-trade legislation in the hearing’s first panel. “While we are still reviewing the details, it is clear that Chairman Waxman’s legislation would advance the president’s goals of launching a new sector of clean energy jobs, making our economy more competitive, and weaning the nation from its dependence on oil,” US Energy Secretary Steven Chu said.

US Transportation Secretary Ray LaHood also commended the committee for its work, adding that DOT has been and will continue to be a partner in Congress and the administration’s efforts. “This is essential because transportation sources are a significant [GHG] contributor in the US and must be part of the solution. I look forward to working with you as we develop policies to address the transportation system in this climate change bill,” he said.

‘A good start’
“Achieving energy independence and reducing carbon emissions are not easy challenges. But this committee has dealt with difficult challenges before,” said US Environmental Protection Agency Administrator Lisa P. Jackson. She said that when Waxman and his predecessor as chairman, John D. Dingell (D-Mich.), worked with other committee members to pass the 1990 Clean Air Act amendments, they found consensus despite dealing with acid rain, smog, hazardous air pollutants, the threat to the ozone layer, and other controversial issues. “I believe the committee can make history again this year, and this draft bill is a good start,” she testified.

“Now, the ‘no, we can’t’ crowd will spin out doomsday scenarios about runaway costs. We do not claim to be able to do something for nothing. But EPA’s available economic modeling indicates that the investment Americans would make to implement the cap-and-trade program [under this bill] would be very modest compared to the benefits that science and plain common sense tell us a comprehensive energy and climate policy will deliver,” Jackson maintained.

EPA distributed a preliminary analysis of the bill as she testified. It said that the legislation would cost the average US household an additional $98-140/year before appliance efficiency, weatherization, and other cost-saving measures are taken. Its model projected allowance prices of $13-17 in 2015 and $17-22 in 2020, adding that these prices “would be over 96% higher if the discussion draft did not allow substantial use of cost-saving offsets.”

Committee Republicans who had expressed concern that the bill before them contained no cost estimates pressed her for details. Jackson conceded that EPA’s analysis of costs involved only part of the programs in the bill. She said that the agency could provide more comprehensive estimates with additional study.

GOP committee members primarily objected to the missing cost estimates. “This draft has a big, gaping hole because it doesn’t address this question. We’re going to hold our colleagues on the other side of the aisle accountable, especially if they’re from fossil fuel-producing areas,” said Rep. John Shimkus (Ill.).

‘The worst time’
“Every credible study I’ve seen tells me that a cap-and-trade program will increase the cost of energy and hurt businesses and consumers throughout the US. I doubt there’s ever a good time to burden American consumers with extra costs, but I believe that now is probably the worst time to implement an energy program that will pass the costs directly to the consumer every time we flip on a light switch, turn up the thermostat, fill up our [gasoline] tank or purchase an American-made product,” said Rep. Roy Blunt (R-Mo.).

But the committee’s Democratic leaders said that it was time to move ahead on global climate change legislation. “We have reached a crossroads where inaction is simply not an option. Our economy cannot continue to depend heavily on foreign oil. We cannot continue energy policies that look to last century’s energy sources while other nations race ahead to take the lead in developing and marketing clean energy technologies and green jobs,” said Markey, the chairman of the committee’s Energy and Environment Subcommittee.

Waxman said committee members from both parties and their staffs have made a major commitment of their time, which has been crucially important.

“I also want to warn you that as hard as we have been working, the pace is going to accelerate over the next 4 weeks. There are many issues that we need to discuss and resolve between now and Memorial Day. We will be working hard because the goals are so important. The energy legislation we are considering will create millions of jobs, revive our economy, and secure our energy independence. It will also protect our environment,” he said in his opening statement.


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