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Greenhouse gas legislation and the refining industry: part 1

Hydrocarbon Engineering,

Although still contested by some, scientific evidence that greenhouse gas (GHG) emissions by man are the cause of a global temperature rise seems to have gained general support by policy makers and there is a willingness to take action. According to the most recent UN assessment report, GHG emissions from industrialised countries must be reduced by 25 - 40% by 2020, compared to 1990 levels, in order to avoid CO2 levels exceeding 450 ppm. A consensus on what efforts need to be made and the extent of effort sharing is still far away.

The Kyoto protocol, the main outcome of the third UNFCCC COP (Conference Of Parties) in 1997, was a significant breakthrough. Industrialised countries would reduce their GHG emissions in 2012 by 5.2% compared to 1990. However, it is unlikely that this goal will be achieved. Firstly, the US and Australia did not ratify the protocol (Australia ultimately did in 2007). In addition, some important countries that did ratify (notably Canada and Japan) clearly failed to meet the Kyoto obligations.

USA: Waxman-Markey
In February 2009, the Obama administration drafted a budget that includes substantial revenues from a cap and trade system. Meanwhile, the US House of Representatives voted the ‘American Clean Energy and Security’ or W-M Act, H.R.-2454(8) (‘W-M’). The act consists of four ‘titles,’ the third of which concerns the introduction of a cap-and-trade (ETS) scheme that would start in 2012 and target an emissions reduction of 17% by 2020 compared to 2005 and a further reduction to 17% of the 2005 baseline by 2050. The main difference between the W-M act and the EU ETS is that the American cap would include almost 85% of all USA emissions, while the EU ETS holds less than 45% of EU emissions under its cap.

The cost debate
Like in any market, the cost of carbon allowances will be set by supply and demand. In principle, the amount of emission permits in a cap and trade system is fixed, which sets the supply. Demand then has to match this supply and the cost of carbon will equal the cost to reduce GHG emissions down to that level. As the cap is further reduced with time, more costly investments have to be made to achieve the required GHG emission reduction or ‘abatement.’

Carbon leakage
A cap and trade system will result in a substantial increase of the refinery operating cost if emission rights are not distributed free of charge. In that case, it is necessary that a significant fraction of the carbon cost can be passed on to the end consumers. The resulting increase at the pump will be small (<US$ 0.5/gal.) if the refinery only has to account for its own emissions but will be much more substantial (US$ 0.15 – 0.50/gal.) if the tailpipe emissions are also carbon taxed.

There is a legitimate concern from the refining industry that profitability is under threat in a carbon capped environment. A cap and trade system or carbon tax increases refinery operating costs substantially, even if only refinery emissions have to be accounted for. Emission for conversion of heavy feeds are high and not all due to energy inefficiency. Hence, refineries should either receive part of their allowances for free or else have the possibility to transfer a substantial fraction of the carbon cost to the consumer. This can be achieved by imposing a carbon tax on imports from countries with no carbon cap.

It seems like the authorities both in the EU and the USA are willing to supply the refining industry with free emission allocations covering part of their baseline emissions. Whether this will be sufficient is still subject to study (in the EU) and debate (in the US).

However, all this should not conceal the fact that it is possible to reduce the carbon footprint of a refinery to some extent and often even considerably. Blaming competition from abroad will not always be justified. Being blind to its own inefficiency may make a refinery go down under its heavy carbon load, even if competition only comes from other refineries under a carbon cap.

The next article of this series will explain in more detail the importance of carbon efficiency and outline a GHG reduction strategy for refineries.

Joris Mertens, KBC Process Technology Ltd, the Netherlands

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