(August 24, 2011) Californian stars and Canadian environmentalists protest Alberta heavy oil while making no effort to stop the California regulators from going out of their way to over-allocate excess free GHG quota to subsidize more GHG-intensive California heavy oil.

On July 25 the California state government published the final California state GHG regulations.  The regulations stipulate that all suppliers of oil, gas and electricity — both domestic producers and out-of-state suppliers — must acquire and then surrender CA GHG quota (“allowances”) equal to: (1) the out-of-state GHG associated with the production of any electricity sold in California and (2) all GHG arising from the consumption of the oil products or natural gas supplied to California customers.  In other words, the CA cap and trade bill imposes a new indirect tax on all energy suppliers, not necessarily / only in-state producers of those energy products.  The suppliers are on the hook for their CA customers’ GHGs, so over 85% of all California GHGs are covered by the cap and trade rule.

The CA regulations then stipulate that California in-state oil producers will receive free CA GHG quota (“allowances”) equal to 100% of their forecast GHG emissions, through 2020 (even if those emissions increase relative to current levels).  In other words, neither the CA oil producers nor the in-state refineries they supply are expected to cut GHGs to contribute to the state’s 2020 emission “reduction” goal.

The oil producers are not the only in-state emitters who will receive free CA GHG quota suppliers.  Each of a number of key sectors of the state economy will receive free GHGs equal, in aggregate, to at least 100% of their sector-wide GHG emissions.  But not every participant in the sector will receive free allowances exactly equal to their reported emissions.  First the state regulator will set aside a pool of California GHG allowances, equal to 100% of the forecast aggregate GHGs for the sector in 2013 and then declining on a straight-line basis to 85.1% of the sector’s forecast GHGs by 2020.  For California crude oil producers, at the end of each year, each producer will get his share of the pool of free California GHG allowances based on the following general formula:

The producer’s actual production for the reporting year / all in-state production by all producers in the same class

Multiplied By

The GHG “benchmark” for producer’s class, which is denominated in GHGs / barrel of crude oil output

The document here, released by the California Air Resource Board on July 25, 2011, outlines the meaning of the state’s “benchmarks”.  A table starting on page 5 of the document shows the proposed “benchmark” for a number of industrial activities.

The benchmark for California heavy crude oil is 0.0654 allowances per barrel of oil output.  (Most Alberta oil sands producers discharge less than 0.0654 TCO2e/barrel of heavy oil extracted.)  The benchmark for California conventional sweet crude is 0.0100 allowances per barrel of crude oil extracted.  (One allowance equals tradable, bankable government authorization to discharge 1 TCO2e of GHGs.)

A California heavy oil producer will only experience a significant free GHG quota shortfall if the operator’s GHGs / unit of output exceed the benchmark rate AND their production falls as a percentage of total statewide production within their activity class.   In other words, the California GHG cap and trade regulation perversely acts as an incentive for California heavy oil producers to cut emissions to 0.654 tCO2e / barrel (if they are not already below that rate) and then increase heavy oil output — and total GHGs — thereafter. CA oil producers can realize no financial gain by reducing heavy oil output and replacing it with more conventional sweet crude supplied from either in-state or foreign sources.

Given this set of benchmarks and current industry-wide GHG intensity rates, the California regulators are forecasting that at least 90% of all in-state  crude oil and gas producers and “benchmarked” industrial GHG emitters in CA will receive free GHG quota allocations equal to at least 100% of their actual reported GHGs from 2013 through 2020.  Most of California’s forecast GHG “reductions” will occur through reduced residential and commercial building energy demand, and will largely be paid for by out-of-state suppliers of electricity, natural gas and petroleum products to California.  These out-of-state suppliers have to buy CA GHG quota from in-state recipients of free quota to cover 100% of their GHG liability.  Under the regulation, foreign suppliers of these energy products have to buy California GHG allowances covering 100% of their California customers’ end-use GHG emissions plus 100% of the foreign / out-of-state electricity generation emissions, even if / when the foreign suppliers are more efficient (have lower supply chain GHG footprints) than the in-state emitters who receive generous free GHG quota allocations.

Under the formula, California heavy oil producers can conceivably receive free GHG allowances in excess of their actual emissions, even if / when their total GHG discharges increase year over year.  This can happen if their GHG intensities are below the benchmark rates per unit of output, especially if they increase their share of statewide production of heavy oil.  To put some upper limit on the potential windfall this cap and trade rule represents for some in-state oil producers, the regulation limits the number of free allowances any one producer can collect in any one year to 110% of their actual reported GHG emissions for that year.

In other words, any California heavy oil producer will be allowed to collect a free California GHG quota subsidy, even if their total GHGs increase year-over-year, as long as their GHGs per barrel of heavy oil produced are at or under 0.654 tCO2e per barrel of crude oil extracted, and particularly if they increase their heavy oil production levels.  This “benchmark” GHG rate for heavy oil extractors (which does not include upgrading or refinery emissions, which are covered by another free quota allocation) exceeds the comparable GHG intensity for many Alberta oil sands producers at this time.

But every MWh of electricity that is exported from BC to California will wear a GHG change of at least 0.315 TCO2e / MWh, and to maintain — let alone grow — the BC clean power share of the California energy market, starting in 2013 BC Hydro / Powerex will have to start buying CA GHG quota from the CA heavy oil and similar high-GHG CA energy producers.   Under the law, power exported from BC to California is deemed to be power from “unspecified sources”.  One single GHG charge is attached to all power imported from unspecified sources through the Bonneville Power Administration transmission lines connecting BC to California.  The law does not permit BC Hydro/Power to segregate any of our power exports to attach a 0-emission rating to them.  At this time, both the CA state regulators and WCI carbon market administrators set this charge on all power supplied from BC into California at 0.315 TCO2e / MWh (as compared to BC Hydro / Powerex’s advertised but irrelevant, in this carbon market context, GHG intensity of 0.020 TCO2e/MWh).

(Same story for BC natural gas exports to California.  BC’s natural gas exports will be hit with a big CA carbon tax, even though the BC natural gas supplies displace demand for higher-emitting oil products and coal-fired electricity imports.  The BC shippers do not get any credit for this GHG displacement, but will have to buy GHG quota from the supply that will be freely allocated to CA oil and gas producers, processors and refiners.)

How California’s GHG Quota Will be Allocated to Electricity Suppliers: the California Regulators’ Own Words

The regulators will set aside a supply of quota for California electricity distributors equal to 100% of their aggregate supply chain (in- and out-of-state suppliers’) emissions in 2012, which free quota supply will decline to roughly 85% of supply chain 2012 emissions in 2020.  85% of total supply chain GHGs is still more than 140% of the GHGs that will originate at California in-state power generation units.

From the CARB Cap and Trade Orders:

“In order to receive [free] allowances as part of the electricity sector allocation, entities must serve end-use customer load and [directly] receive payment for that load from [the CA] end-use customers…Generators, marketers, and other providers of electricity that do not have a transactional relationship to end-use customers are not eligible for [free] allowance allocation…Any allowance allocated to electrical distribution utilities must be used exclusively for the benefit of retail ratepayers of each such electrical distribution utility”

Once a California electricity distribution company receives its free CA GHG quota, it can do only one of two things with that quota:

• Allocate some or all of that quota to an in-state power generator, only if that generators is (1) publicly-owned and (2) is obliged to deliver power to the distribution company under a long-term power purchase agreement; and
• hand over the rest of its free quota allocation, for that quota to be auctioned by the state government.

The electricity distribution companies will then receiver a portion (not 100%) of the auctioned value of the quota that was originally freely allocated to them.  (In other words, they don’t really get to keep any of the quota that they do not elect to hand over to the in-state generators they rely on for supply.  All the extra quota is auctioned by the state, with a commitment from the state that a share of the auction revenues will be handed over to the distribution companies.)

The CA electricity distribution companies are NOT permitted to transfer any free quota to any out-of-state electricity supplier, even if they have a long-term power purchase agreement with that supplier.  They are NOT permitted to use any of the revenues they get back from the state’s quota auction to reduce their out-of-state suppliers’ cost of acquiring CA GHG quota/allowances to cover 100% of the out-of-state power generation emissions (which have to be covered by CA allowances under the CA regulation):

“…Prohibited Use of Allocated Allowance Value. Use of the value of any allowance [freely] allocated to an electrical distribution utility, other than for the benefit of retail ratepayers…is prohibited, including use of such allowances to meet compliance obligations for electricity sold into the California…markets.”

In other words, the California cap and trade regime also provides unfair protection to higher-emitting in-state power generators — as long as they are publicly-owned (because they get access to the GHG quota that is freely distributed to the distribution companies to whom they supply electricity) — while they penalize all power imports or in-state generation units that the private utilities do not sell to municipal governments, even if / when those power imports and / or in-state plants are much lower-emitting than the protected in-state, publicly-owned generation units.

The CA cap and trade rule also repeats this strategy to protect in-state natural gas producers and suppliers at the expense of out-of-state suppliers.

Then The CA GHG Allowance Auction Rules Limits Out-of-State Energy Suppliers’ Access to the Auction

…The net result being that to maintain or grow our shares of the California energy markets, we have to buy quota on the secondary markets from California’s highest GHG emitters, who — for the most part — will get their quota for free.

“(c) Auction Purchase Limit. For auctions conducted from January 1, 2012, through December 31, 2014, the share of allowances of any vintage year offered at any quarterly auction which may be purchased by one entity or a group of entities with a corporate association pursuant to 95914 shall be limited to less than:(1) For covered entities and opt-in covered entities: ten percent of the allowances offered for auction.
[All covered entities are entities that make or receive energy imported into the state and have operations in the state.  This does not include any out-of-state entities.]
(2) For investor owned electrical utilities receiving a direct allocation of allowances [because they both operator power generation units in the state and electricity distribution networks…where they qualify for the free allocation only because they operate the distribution networks] the auction purchase limit in (A) does not apply…; and
(3) For all other auction participants [including, for example BC companies that export petroleum products, natural gas and power to California]: four percent of the allowances offered for auction…”

There are very complex rules in the regulation that preclude out-of-state companies from setting up offices in California for the sole purpose of getting more generous access to the GHG quota auction.

But apparently neither California’s most environmental concerned movie stars nor Canada’s most vocal and well-financed environmental activists can be bothered to protest California’s new proposed cap and trade rule-based subsidies for California’s heavy oil producers, natural gas producers and suppliers and in-state GHG-emitting municipally-owned power plants, while they introduce high new indirect taxes on all imports of those commodities–even when the imports are demonstrably less GHG-intensive.  They are too busy flying to Washington to protest the import of less GHG-intensive Alberta crude to protest the unfair protection of more-GHG intensive California crude.

The state has published a set of “benchmarks” to determine how many free GHG quota units any one producer or refinery can receive.  In principal, they can receive free bankable, marketable GHG quota units up to 110% of their actual GHG emissions, as long as their emissions are below the benchmarked rates.

To make things as easy as possible for California heavy oil producers (who account for roughly 2/3 of California crude oil output), the benchmark for those producers is 0.654 free allowances per barrel of crude oil production–every year through 2020–where one allowance equals government authorization to emit 1 TCO2e of GHGs.  There is a separate quota allocation for producers of conventional sweet crude, which is 0.0100 free allowances per barrel of crude production.

Yes, the California law freely allocates more than 6 times more GHG rights to California heavy oil producers — which is more than most Alberta heavy oil and bitumen producers would need to cover their emissions — every year through 2020, to ensure that California heavy oil producers keep pumping crude to supply California refineries.

Meanwhile, some of California’s richest residents fly to Washington to protest US imports of somewhat less GHG-intensive heavy oil from Alberta.  The height of hypocrisy.  It seems to me that if the US government fails to approve the Keystone pipeline based on GHG emission concerns but allows, at the same time, the California cap and trade rule to proceed, someone should be able to sue the US federal government for actions that impede interstate commerce while protecting all US heavy oil production from competition.

Look up the official California free GHG quota allocation plan here.  Refer to page 5 of the 17 page document to view the table showing the benchmarks (establishing the free quota supply) for California heavy and conventional oil producers.

Aldyen Donnelly, August 21, 2011