How US greenhouse gas regulations will hurt Canadian exports to the US

(March 22, 2011) Aldyen Donnelly explains how a US cap and trade system would unfairly punish Canadian exporters, including the electricity industry, and fail to reward GHG reductions by Canadian exporters.

US greenhouse gas (GHG) permits for New Sources establish multiple GHG limits (intensity-based and absolute), not just one or the other.  As in the Acid Rain Program, no facility can exceed any of the permit-based emission limits, under any circumstances.  The primary design goal of both the US EPA’s and state of California’s cap and trade regime is to establish a new quota allocation and trading rule that unfairly discriminates against less GHG-intensive Canadian commodity exports and delivers a new economic windfall to US producers of more GHG-intensive made-in-USA carbon intensive goods and services

So, if the EPA later introduces a GHG allowance allocation, banking and trading rule (which the EPA can do without any new Congressional approval, as long as the EPA has an operating budget):

  • regulated US carbon-intensive goods and service providers will be liable for upstream supply chain and US consumer end use emissions, not just emissions from the facilities they directly operate in the US
  • regulated US entities–which include both US producers and importers of the regulated products–will be required to surrender GHG allowances equal to their most recent reporting year emissions,
  • in addition, all US large stationary GHG emitting facilities will operate under GHG permits, and
  • no permitted US GHG-emitting facility will be allowed to exceed the permitted GHG limits, no matter how many GHG allowances or offset credits the facility owner might have in the bank.

In other words, the US GHG permits for New Sources (rule became in effect in January 2011) and Existing Sources (draft rule scheduled for publication in 2012 and to be in full effect in 2013) define multiple inviolate GHG emission limits for every covered facility, and facility limits do not expand with the subsequent introduction of any GHG allowance allocation and trading rule.  Facility operators’ rights to discharge GHGs may decline, in aggregate, if the total supply of GHG allowances is smaller than the sum of the permit limits for all covered sources.  But there are no circumstances under which permitted facilities’ GHG discharge entitlements expand.

Note that the EPA issued the first ever GHG permit for a natural gas-fired power generation facility in February 2010.

Calpine applied for this permit one year ahead of the federal mandatory application starting date because the company felt securing the permit was the only way to remove GHG regulation uncertainty from the project’s planning and financing plans.  In slides 3 and 4, I include a listing of the full range of GHG limits that are specified in that first US EPA GHG permit, which limits include:

  • Absolute limits to heat input for gas turbines: (1) 2,238.6 MM BTU (HHV) per turbine per hour; (2) 53,726 MM BTU (HHV) per turbine per day; (3) 35,708,85 MM BTU (HHV) summed over all of the turbines operating at the plant per year.
  • Plant-wide Intensity Limits: (1) 7,730 BTU per hour; (2) 242 TCO2e per hour for each gas turbine; (3) 5,802 TCO2e summed over all operating turbines per day; (4) 1,928,182 TCO2e summed over all operating turbines per year.

The existing US GHG reporting rules oblige US entities that import natural gas, petroleum products and electricity to report foreign upstream supply chain GHGs for all commodity imports that originate at foreign facilities that discharge 25,000 TCO2e or more per year.

How the US EPA Will Penalize Canadian Natural Gas and Electricity Exports After the Final EPA GHG Reporting Rules Are in Full Effect

Every time the US EPA has promulgated new fuel quality or emission standards in the past, the US government has used the fact that Canadian reporting rules are “not satisfactory” as the rationale for discriminating against regulated commodity imports from Canada.  The most egregious recent examples of such regulations are the US Renewable Fuel Standard and the US Reformulated Gasoline Standard. ((Have written, in detail, about how US regulators discriminate against renewable fuel and reformulated gasoline imports in the past.  If you would like me to pass those messages on to you, just ask.)

Whenever the US EPA has found that Canadian facility-level emission and operating data reporting standards and/or permit requirements are not as stringent as US standards in selected base years, the US EPA rules that, for reporting and permit compliance purposes, the importers must assign the most conservative (highest) possible GHG factor to those imports.  Even before any introduction of any US GHG allowance allocation and trading rule, the US ruling that Canadian emission and operating data reporting requirements are deficient puts our exports at a competitive disadvantage relative to made-in-US competing energy supplies.

How Discrimination Against Canadian Carbon-Intensive Goods Exports Increases With the Introduction of Any US GHG Cap and Trade Regulation

When the US EPA finally implements a GHG allowance allocation and trading rule, the agency will:

  • Rule that all “suppliers” (US producers and importers) of electricity, natural gas and petroleum products in the US will be required to surrender to the EPA US GHG allowances or US offset credits equal to the wellhead to US consumer end-use GHGs associated with their US sales (not just their US production).
  • Freely allocate surplus US GHG allowances to US resource producers, power generators, refineries and gas processing plants.
  • Make no free allocation of US GHG allowances to US importers of the regulated commodities, and thereby
  • Ensure that Canadian exporters will have to buy US GHG allowances from US oil and gas producers, refinery and/or gas processing plant operators to maintain Canada’s share of the US electricity, natural gas and petroleum product markets.

In this cap and trade market strategy, there is no credit for Canadian exporters of cleaner energy products to the US.  A US natural gas distribution company, coal-fired power plant or aluminium smelter may be freely allocated 90% of the allowances that system/plant operator will be required to surrender to cover the share of their US natural gas, electricity and aluminium sales that involve the combustion of US-originating coal, petroleum products or natural gas.  But the US importer of cleaner Canadian natural gas, electricity or aluminium will not receive any free US GHG allowance allocation.  So the Canadian exporter of the cleaner largely hydro and gas-based commodity will have to go to the market to acquire US GHG allowances to cover 100% of their global supply chain and US end use emissions, while the US-based competitor that continues to burn US coal will only have to buy allowances covering 10% or less of their global supply chain and US end-use emissions.

Canadian governments have let the US get away with this unfair discrimination against Canadian imports multiple times in the past, over multiple product streams.  The US Treasury Department has estimated that when US regulators so discriminate against Canadian imports:

  • Canadians have continued to export the unfairly taxed products to the US;
  • Less than 30% of the Canadian producers’ costs of securing US GHG allowances/quota has been passed through to the US customers as price increases, and
  • At least 70% of the Canadian producers’ costs of securing US GHG allowances/quota has been born as a reduction in Canadian export sales margins.

At this time, all US officials involved in the GHG/climate change file assume that Canadians will eat most of the cost of complying with new GHG regulations in the same way that Canadian fuel and refrigerant exporters did in the past.  For this reason, US officials see the development of a North American cap and trade regime as a mechanism that will affect a long term shift of economic rents to US consumers from the foreign producers of the commodity imports on which they currently rely.


Aldyen Donnelly
WDA Consulting Inc. and
Greenhouse Emissions Services Inc. (“GEMServe”)
Vancouver and Victoria, BC

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