Energy Probe

On the global environmental front, a major problem is that the Kyoto Protocol rules say that we get carbon credits if we invest in/build a wind farm in China even if China continues to build a new coal-fired generation unit every week.  But when we build the same wind generation capacity in Canada, there is no reportable GHG reduction unless/until we also shut-down and equivalent amount of fossil-fired power generation capacity. 

Canadians do not understand this bias in the Kyoto Protocol yet, but when they do they will not be supportive.

Similarly, under CDM rules, a Chilean or Brazilian hog producer earns CDM credits (CERs) if they flare the methane from their effluent ponds, even when they (1) dump unsustainable volumes of effluent into rivers to free up space in those ponds (with major resulting increases in NO2 emissions to the atmosphere, relative to the pre-project case), or if they (2) spend the revenues from CER sales increasing production levels, realizing a net increase in GHGs even if GHGs per hog produced go down. 

But there is no reportable reduction in Canada’s GHG inventory if our Canadian hog producers cut GHGs per hog but increase hog production rates.  We don’t earn domestic credit for the same investment unless we hold hog production at historical levels.

Numerous studies demonstrate that when we invest to preserve one forest stand in most developing nations, deforestation just increases in other protected stands. The developing nations get CERs even if the national forest inventory is being depleted. But Canada gets not credit for reforestation under the CDM rules. Period. 

Over 40% of CERs circulating in the global market are credits that the UN has issued to producers of HCFC-22 who have paid less than $0.50/TCO2e to cut GHG discharges in the HCFC22 production processes. The problem is that HCFC22 is a potent ozone-depleting substance and GHG that is illegal to manufacture in Canada at this time and illegal to import as of the end of next year.

Canadians do not understand the Kyoto Protocol double standard yet. But I can assure you that if Canadian capital starts flying out of Canada under these or similar rules, Canadians will quickly understand and likely withdraw any and all support for the Kyoto Protocol and maybe even the UN. 

Are you really going to propose that Canadians invest up $60 to $150 billion in Canadian resources to build green energy supply offshore instead of investing at home? Yes, an offshore investment will buy more UN-certified "credits", but likely way less global GHG reductions. And not all GHG reductions are equal. 

A GHG reduction achieved at home can (but might not) generate jobs to at least partially replace the ones our GHG reduction mandates are going to destroy.  Also, 80% of the domestic investments we might make to cut GHGs will also cut local NOx, SO2, VOC, PM10 and mercury discharges.

I do not advocate for Canadian GHG rules that preclude the import of developing nation GHG credits.

Canadian regulators could agree that Canadian companies shall not invest in any of the above-described projects to secure compliance units applicable to Canadian regulations.  But this does not work.

The four activities described above account for almost 70% of the forecast CER supply through 2012.  It is not possible to stop the brokers from swapping "good" CERs" for "bad" CERs, so a discrete Canadian standard for CERs would have little global effect when bad CERs so dominate the market.

But I do recommend that Canada’s final rules only recognize GHG credits when:

The offshore credit-generating project could operate legally if it was to be built in Canada. The theory is that the Kyoto Protocol is resulting in the transfer of western standards to the developing world.

The reality is different.

The CDM/JI Board issues credits to developing nation projects as long as they exceed local permitting standards. There are two things wrong with that.

First, the existing KP policies discourage developing nation governments from introducing stringent national pollution standards. That is stupid. Our rules should reward developing nations for introducing more stringent standards.

Second, the existing CDM/JI approvals reward multi-national corporations for taking the old equipment they are removing from North American plants and installing it in developing nation plants as "new" or "better" technology.  This practice pins the parts of the developing world that depend on our investments into a permanent environmental lagging trend. Our standard for CDM/JI projects has to be that they comply with all Canadian permit conditions.  Given the new offshore projects meet this test, then I have no problem with a generous CER calculation method.

The offshore credit-generating project registers in Canada as a Canadian offset project and reports in Canada as if it was located in Canada. Who cares if it is UN-approved? Why don’t we say "yes" and issue Canadian credits to any offshore project that meets our tests? Then project developers can make their own decisions about whether they want to register with the CDM Board or Canada’s offset project registry.

The offshore credit-genrerating project has to publish and annually update a complete GHG inventory. When an offshore (or domestic, for that matter) offset project transfers GHG "credits" to a Canadian regulated entiy’s GHG inventory, the offshore project must book balancing GHG "debits" to its publicly-reported project inventory. 

Any nation that approves CER orcredit exports to Canada has to back up that export approval by booking balancing debits to their national GHG inventory.  This stops the double-counting of developing nation GHG reductions that characterizes the entire CDM CER portfolio, even when projects are otherwise "good". 

As long as we continue to import credits for which no balancing debits are booked to any GHG inventory, the CDM market is just another Credit Default Market Crash in the making. You can’t sustain a market that is all credits with no balancing debits, even if the reductions are otherwise real.

The offshore credit-generating project incorporates Canadian technology. This has to be a real test. Technically, this test is already embedded in Canadian policy.  But one Canadian broker succeeded in getting a few Canadian officials to agree that a CDM hog farm-based credit project has Canadian content because one of the sows in the breeding operations is the progeny of a sow that was born in Canada! 

Other projects have been deemed, by Environment Canada, to have Canadian content if the project auditor is a firm with operations in Canada, even if no one on the audit team has ever set foot in Canada. Maybe it is just me, but these are bogus "Canadian content" tests.

It is also important to note that, to date, the government of Canada and provinces have elected to report GHG performance relative to national/provincial GHG inventories that exclude land use change, land use change and forestry (LUCLUCF). 

Under the Kyoto Protocol, that means the in respect to domestic action, Canadian are not permitted to include improvements in the Canadian LUCLUCF GHG accounts as progress towards our international GHG targets. We can only count domestic LUCLUCF credits if we first incorporate the LUCLUCF accounts in our baseline and progress reporting inventory. 

So, at this time, offshore project developers are essentially proposing that Canada bind to a treaty in which we can get credit for forest protection offshore, but cannot get credit for rebuilding any domestic forest area that has been harvested or destroyed by pests or fire since 1990.

Again, once Canadians get that under the existing agreements Canadian reforestation does not count, the Canadian public will abandon any commitment to support the Kyoto Protocol. This is a major block that would have to be addressed in the LUCLUCF-related negotiations at Copenhagen to make the deal acceptable to Canadians.

Oilsands operations have very different GHG profiles. The over-simple analysis that Berkeley’s Energy Group has done, to date, does not tell the whole story.  The analysis suggests (more or less accurately) that if we use oilsands feedstocks to make gasoline, the full fuel cycle GHGs are high relative to conventional sweet crude. 

The problem is that oilsands output is usually used as a "diesel" feedstock.  If we substitute oilsands-based diesel for gasoline in the single passenger vehicle fleet, GHGs are lower than if we continue to burn gasoline that is made most efficiently from conventional sweet crude. There are numerous technical options to enable us to further cut GHGs in oilsands production, while GHG/unit of conventional sweet crude production are going up worldwide and we have hit an efficiency plateau in that production stream. 

According to their own Carbon Disclosure Report, BPs European GHGs increased over 23% from 2005 through 2008, while their crude oil and gas production and refinery output fell. This is happening everywhere companies are drilling deeper and deeper for more and more sulphur-contaminated oil.

The oilsands upgraders with the highest GHG profiles are typically (but not always) upgraders at which 100% of the sulphur is stripped from the crude. It is more efficient to strip sulphur in the upgrading stage than in the refinery, which is your only option for conventional crude. 

Refineries designed to max out the diesel—as opposed to gasoline–production from oilsands sulphur-free feedstock discharge about 15% less GHGs than refineries that are designed to max out gasoline production from low sulphur crude. The Berkeley analysis takes the upstream GHGs for the sulphur-removed synthetic or upgraded crude and then models that crude being fed into a refinery that is designed to convert at least 35% of the barrel of crude feedstock into gasoline—which rarely happens in real life (you can’t really convert more than 10% of a barrel of heavy crude into gasoline without a whole bunch of additional processing that is energy intensive). 

And the Berkeley analysis also assumes that all of the oilsands feedstock going into these gasoline refineries still contains sulphur, double charging the oilsands fuel cycle for sulphur removal.

Then, at the tailpipe, diesel cars discharge 15% to 25% less GHGs per litre or mile than gasoline. The Berkeley researchers actually explicitly acknowledge, in the Technical Report posted at the LCFS website, that the least cost way for US fuel distributors to comply with the California LCFS is to start a shift in the single passenger vehicle fleet from gasoline to diesel. 

The LCFS has two separate standards, one for gasoline and one for diesel, with the express purpose of blocking the single passenger fleet fuel switch from gasoline to diesel shift. The sole objective of this strategy is to protect California refineries whose plants are more gasoline-oriented than others and US ethanol producers. 

The decision to create two separate standards instead of one single transportation fuel GHG standard in the LCFS is a trade and commercial policy decision, not an environmental policy decision.

Note that 100% of the transport sector GHG reductions realized in Europe since 1990 derive directly from the passenger vehicle fleet switch from gasoline to diesel. 50% of EU passenger vehicles are diesel-powered and 60% of new car sales are diesel. The Opel Astra diesel-electric hybrid model is quite wonderful.  But I think (I might be wrong) one condition of GM’s sale of Opel to Stronach is that he had to agree not to develop the Opel Astra in North America.

Also, I have little faith in ethanol and a lot more interest in the potential for algae-based biodiesel as a biofuel.  I like cellulosic ethanol, but can’t figure out how to get the costs of trucking wood waste large distances to feed big plants under control.

Even traditional canola and soya-based diesel is much more clearly sustainable than US ethanol. Biodiesel is easier because biodiesel economies of scale kick in at a much smaller plant size than ethanol economies of scale, so the feedstock transport costs are easier to manage. 

Also, there is the basic question of oils versus alcohols…and as far as I can see oils win.  The key thing with oils is that they are almost totally recyclable, while alcohols cannot be blended with recyclable content.  We know how to grow beans sustainably (without mining the carbon from the topsoil), but we do not yet know how to grow starches (feedstock for alcohol fuels) sustainably.

If I blend biodiesel into the diesel fuel I get another big tailpipe GHG reduction hit, before even talking about hybrids. Also, biodiesel can be blended into diesel at any point in the fuel distribution chain. We need way less new distribution infrastructure at ports, terminals, etc., for biodiesel than ethanol.

I am also much more enthusiastic about the long-term efficiency improvement potential of plug-in diesel electric hybrids than gasoline electric hybrid vehicles or 100% electric vehicles when considering the global (as opposed to Canadian) electricity supply options.

So when I think about continuing to import sweet crude and gasoline from Nigeria and Europe (burning fuel to run the ships) to blend with ethanol trucked in from the US, it all looks crazy to me.  I tend to think we want to regulate the heck out of the oilsands and at least consider what Canada looks like as a "clean diesel-electric nation"—or at least "not a gasoline nation.”

Nuclear

I am not ready to go pro-nuclear, but my brain tells my heart I should be more open to nuclear than I am at the moment. Waste management is a huge issue. But Canada already has the 4th largest stockpile of nuclear waste in the world, so we have to come up with a solution for that problem anyway. 

But when I look at nuclear technology options, I just do not see CANDU technology competing—even with better management at AECL. And the big global trend in nuclear at this time is very large reactors. I actually imagine a future in which small reactors—land-based systems that are much improved versions of the reactors that have been used for decades to run nuclear submarines, or newer/different technologies altogether. 

I have been watching the Toshiba project for Galena, Alaska for many years, however, and its progress appears snail pace slow.  And I don’t know how real the Hyperion technology is.

…and then there is the question of what we could achieve if we could apply small nuclear (not large nukes) to eliminate natural gas consumption in oilsands upgrading…

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.