In summary, US cap and trade will oblige US producers AND IMPORTERS of petroleum products, liquids from coal, natural gas and biofuels to surrender US GHG allowances covering the US GHGs arising from the US end-use of those products. Then, there is a free allocation of US GHG allowances to US refineries and US natural gas distributors. The gas LDCs are obliged to sell their free allowances to raise cash to mitigate the impact of cap and trade on residential and commercial customer prices.

So, the day after the cap and trade law is in full effect, any US entity that imports Canadian crude or refined petroleum products, natural gas or biofuels will be forced to buy US GHG allowances to cover 100% of the US GHGs arising from the US consumption of those products.

Under the cap and trade proposals, there is no consideration of the question of whether or not our exports are less GHG intensive than US domestic production. The effective tariff on our exports is determined by the size of the free US GHG allowance allocation to US refineries. At this time, the big fight in the US is about how high that free allocation will be. I understand that Senator Boxer officially tabled numbers later last Friday night that are more generous to US refiners that the W-M bill, but I have not seen those numbers yet.

But the cap and trade bill taxes our energy exports for 100% of end use emissions, because there is no free US GHG allowance allocation to US importers. Upstream supply chain GHGs are irrelevant. It is the free allocation of allowances to US refineries, and that fact that foreign suppliers are not permitted to participate in the most important of the two US allowance auctions, that determines the (what will prove to be) high tariff on our exports.

Also note that the W-M bill exempts GHGs arising from the production of exported energy products from the US GHG cap (the Senate bill does not do that). If the final bill freely allocates any allowances to US refineries and exempts US GHGs from the US cap, then you will never see another dollar invested in resource value-adding capacity in Canada again. We become price-taking exporters of raw resources and price-taking importers of finished energy products. It is very important that Alberta gets on top of this.

The LCFS is bogus in its bias, but less threatening than the cap and trade bill in that US courts have to compel LCFS states to strike the standard if/when we provide data that is more realistic. US law leaves US courts no choice but to strike down environmental regulations that rely on biased emission estimates if better data/science is presented to the courts. Albertan producers should prepare for court challenges, but the LCFS challenges are winnable.

The combination of the facts that: (1) the US EPA maintains a long-standing position that Canadian facility-level emission reporting regulations are inadequate and, therefore, our national pollutant and GHG emission estimates are unreliable, (2) all cap and trade bills and draft LCFS regulations stipulate that an overly conservative GHG factor will be assigned to any imports from nations whose facility-level emission reporting regime does not compare to the US standard, and (3) all US cap and trade bills stipulate that there will be no cross-border trade in GHG allowances with a developed nation whose facility-level reporting standards are not US-comparable, means that Alberta’s top priority should be to see the feds put new more stringent facility-level emission reporting mandates in place ASAP.

Our pollution and GHG reporting regulations do not have to be identical to the US versions. In fact, the US laws are so intrusive and expensive to administer, we should see this as an opportunity to build a "comparable" (using a WTO definition, not necessarily a US Commerce Department definition of "comparable") source of competitive advantage for investors in Canada. 

But the element that has been part of US emission reporting rules since 1991 and which must be included in Canadian facility-level reporting rules is that the reporters have to declare their energy purchases, but fuel and combustion unit, to the regulator. The US has confidence in private sector emission reports because the private sector has also had to report all energy consumption by combustion technology type and combustion unit operating hours. So it is pretty easy to verify emission estimates given the other submitted data.

Canadian industry is going to HATE this emission reporting recommendation. But our final reporting rule should still be less intrusive and less costly to administer than existing US law for the same classes of operations. It is essential to block massive US trade barriers in development.