The New York Times reported yesterday that the Waxman-Markey bill will go to vote and be passed by the House tomorrow. In order to get the required votes, the bill drafters have made a number of major compromises with moderate Democrats. One of those compromises was an agreement that the indirect impacts of land use change would not be accounted for in the accounting for GHG emissions for ethanol produced from corn.

From the NYT:
"Waxman also agreed to exempt ethanol from indirect-land-use analysis for five years. In other words, if corn or soy in the United States is grown for fuel and that, in turn, prompts farmers elsewhere to clear a patch of forest and grow their own corn, well, the EPA can’t consider that in its assessment of the impacts of ethanol. Joe Romm deems this a minimal concession, since corn-based ethanol is already exempt from this sort of scrutiny, and newer biofuels like cellulosic ethanol-where this rule could do a lot of damage-are more than five years away anyway. That’s the optimistic take, at least."

At first glance, this concession to US corn growers and corn-based ethanol producers looks bad for potential US producers of cellulosic ethanol and foreign producers of cellulosic ethanol who want to export product into the US market. The forest accounting methods and definition of "biomass" employed in the proposed climate change bill, as well as the existing Renewable Fuel Standard, mean that indirect land use changes will be accounted for in the establishment of GHG emission factors for cellulosic ethanol and for electricity that derives from wood waste. While the detailed calculations are complex, the general strategy is that only biomass that is material that originates on a "recurring and renewable" basis may be deemed renewable by US regulators, and biomass-based fuels and electricity that derive from material that does not meet this test will be classified as "fossil fuel" under the US RFS and proposed GHG laws. While we have to wait for a final US regulation to be certain, current indications are that US regulators will rule that BC pine beetle waste is not material that originates on a "recurring and renewable". What is less certain is whether or US regulations will assign one single national GHG charge to all Canadian biomass and biomass-based energy exports, or allow Canadian producers to carve Canadian forests into regions to differentiate between biomass originating in sustainably managed stands versus biomass that originates in stands that are significant net GHG sources.

The authors of the NYT article and bill drafters appear to believe (inaccurately, in my view) that cellulosic ethanol is more than 5 years from becoming a commercial reality. They rely on this belief to avoid dealing with the proposed discrimination against cellulosic ethanol.

In fact, however, the deal US House members cut yesterday with US corn producers is potentially the break that Canadian biomass producers have needed. Neither world trade rules nor US law permit US regulators to favour a product (ethanol) on the basis of how it is made when that favour does not reflect "good" or "accepted" science and demonstrable enviornmental impacts. US regulators really only have two choices:

• they can elect to ignore land use-related impacts associated with ethanol and biomass-based electricity products for all biomass-based energy, based on the argument that there is insufficient scientific knowledge to enable them to account for land use change reliably and equitably over all ethanol and biomass-based product sales; or,
• they can elect to try to account for land-use change for all ethanol fuel streams, in the hope that their scientific arguments stand up in US courts and WTO and NAFTA tribunals.

I do not believe, based on my understanding of the international and US domestic laws, that US regulators have the option they elected yesterday–which is to account for land use change for cellulosic ethanol, but not account for land use change for corn-based ethanol.

It is not certain that this erroneous decision will be maintained through the Senate and conference bill development processes still to be completed before the US has a final climate change law. But if the other side of Congress maintains this stance, I would argue that this is a potential source of competitive advantage for Canadian developers of cellulosic ethanol and cellulose-based power projects. The bill now gives 3 US corn-based ethanol producers (ADM, Cargill and subsidiaries of the Carlyle Group combine to account for almost 70% of US production at this time) massive market power at the expense of any other US entities that might be interested in developing cellulosic ethanol production processes to compete with their corn-based supply. This should slow down development of cellulosic technology in the US, which means a reduction in competition for Canadian technology leaders.

When Canadian producers hit the US market with cellulosic ethanol sooner than the US legislators currently believe possible, the government of Canada should back up the Canadian producers with at least the threat of WTO, NAFTA and US court challenges of any US regulations that discriminate against cellulosic ethanol and favour corn-based ethanol based on land use impacts. The faster Canadian producers are exporting cellulosic ethanol, the more likely it is that the US government response will be to settle with a decision to remove consideration of land use change (forest sustainability) from the GHG factor calculation for Canadian cellulosic ethanol and wood waste-based electricity (as opposed to adding consideration of land use change back into the GHG factor calculation for US corn-based ethanol).

A US decision to remove land use change considerations from the wood waste-to-energy GHG factor calculation might give BC, Nova Scotia and New Brunswick the time we need to replant understocked forest lands to get our national forest back into balance. This would be very good for both Canada’s traditional forest industry and the emerging new bioenergy sector. In the absence of this possible bit of luck, Canadian forest products and biomass-based energy exports are likely to wear aggressive US GHG tariffs on their exports.