As a weekly allowance can teach a child the value of money, so emissions allowances are the highly prized training wheels to help the energy industry adapt to a new price on carbon. (image: timeinc.net)

Under the cap on carbon emissions provided for by Sen. Kerry and Sen. Lieberman’s American Power Act, nearly a quarter of emissions permits would initially be auctioned and the rest would be distributed as free emissions allowances. Electricity providers would receive the bulk of emissions allowances but some allowances would also be allocated to petroleum refiners and home heating oil consumers to help them weather the transition to putting a price on carbon emissions, reported ClimateWire (via the New York Times) on Monday.

The Senate bill, unlike the Waxman-Markey bill passed by the House, does not envision an economy-wide cap and trade system. Instead, it proposes different programs for different sectors of the economy. The bill targets the coal and natural gas industries that provide electricity through a cap on carbon emissions, while a fee on transportation fuels affects the petroleum industry. However, the Kerry-Lieberman bill allocates emissions allowances to a number of other carbon-heavy industries, and allowances will be distributed to cover emissions from refineries and from home heating oil and propane.

Industries lobbied hard to receive greater proportions of the allowances, since free allowances delay or mitigate the costs of reducing carbon emissions. Electricity providers came out as the big winners with 51 percent of the allowances given in 2013, the first year the emissions cap would take effect. Refiners would receive 4.3 percent of allowances, and 1.9 percent will be allocated to home heating oil and propane. Those seem like relatively paltry sums, but since refiners only have to account for their direct emissions—not the emissions of the finished oil products they turn out—and the amount of emissions produced by home heating oil and propane is paltry when compared to the emissions of coal-fired power plants, those allowances could go a long way to keep home heating fuels affordable while the industry works to reduce emissions.

Exactly how the allowances will be administered remains unclear. The allowances for home heating oil and propane will be distributed to the states, and though ClimateWire says the allowances go to “energy consumers using home heating oil and propane,” the impracticality of measuring emissions from individual households means that producers or distributors of heating fuels will be held accountable for reducing emissions. The bill (the full 987-page pdf is available at Sen. Kerry’s website) does refer to “home heating oil and propane consumers,” but it also refers to “natural gas consumers” who heat their homes with natural gas and specifies that allowances will go to local distribution companies. Similarly, allowances for heating oil emissions will probably end up in the hands of wholesale or retail heating oil suppliers.

Because heating oil suppliers are not personally responsible for large-scale emissions as are coal-fired power plants, for example, the bill specifies that allowances for home heating oil be used in a different manner. A coal plant could reduce emissions, and thereby reduce the cost of paying for carbon emissions, by improving how coal is processed and converted into electricity. A heating oil supplier, on the other hand, could only cut emissions by improving the energy-efficiency of heating oil users. To encourage this, the bill calls for all allowances to be used to help consumers through a combination of energy-efficiency and heating assistance programs. Greater efficiency will help cut emissions and lower heating bills, and to the extent that the price on carbon emissions gets passed on to consumers, a well-funded heating assistance program will help keep consumer costs down.

How much money the allowances will be worth is also unclear, but analysis of earlier climate bills estimated that 1 percent of allowances was worth $600 million to $1 billion. If that holds true, the 1.9 percent of allowances granted to home heating oil and propane would amount to roughly $1.2–2 billion. Since states are supposed to administer the program and ensure that the money saved by allowances is used to fund energy-efficiency and heating assistance programs, this $1.2–2 billion would help consumers, not industry.

Will that be enough to keep heating oil users from spending more as a result of the climate bill? Perhaps, if everything works as Kerry and Lieberman plan, but the best-case scenario is likely that rising prices will be mitigated by refunds aimed at helping consumers, keeping price hikes from being painful even if they are noticeable. With individual states in charge of heating oil and propane allowances, there could also be a wide divergence in heating oil prices as states take different approaches to administering the allowances.

Of course, this assumes that the climate bill passes the Senate at all, which is far from guaranteed. Even the absence of a climate bill, though, does not ensure affordable home heating oil.

Exxon CEO Rex Tillerson is concerned that high oil prices could hurt the economy and lead to demand destruction. (image: arabianoilandgas.com)

While the rising price of crude oil has spawned a vigorous debate over the impact of speculation on oil prices, seasoned observers of oil markets appear to have reached consensus on another question: high oil prices threaten economic recovery. Representatives of the IEA, OPEC, and other economists and oil consultants have all worried that rising oil prices will curb consumer spending on other goods and impede the global economy’s tentative recovery.

Now the Houston Chronicle has reported that Rex Tillerson, the CEO of Exxon Mobil, has joined the club:

As oil prices move upward, they begin to become adverse for the national economy and adverse for some big pieces of the state economy for sure.

For Tillerson, the danger comes when gasoline prices hit $3.00–$3.50 a gallon. At that point consumers begin to change their behavior in order to reduce their energy demand. While changes in consumption can have “a detrimental effect” on the entire economy, Tillerson also worried that high prices pose a long-term threat to the oil industry through demand destruction, the permanent reduction of demand.

The other analysts cited above have cautioned that crude oil prices above $100 a barrel could halt the recovery, and that prices above $80—which happened in the fall, and has been the case for nearly all of March and April—are slowing the burgeoning recovery.

While many consider high prices the result of speculation, and the Senate gets set to debate financial reform that would curb speculation, Tillerson believes the solution to higher prices is to encourage investment and not to “over-regulate” the oil and gas industry.

Secretary of Energy Steven Chu speaking about the future of oil and gas at CERAWeek 2010. (image: chron.com)

Tuesday was “oil day” at the CERAWeek 2010 energy conference, sponsored by the energy research firm IHS CERA, and leading figures from the energy industry and from the Obama administration gathered to speak about the future of oil and gas. The dominant tone was one of confidence, as most speakers insisted that fossil fuels would remain the key energy sources far into the future, reported the Houston Chronicle.

While a positive assessment of the future of oil and gas might be expected from energy insiders, some of the oil and gas industry’s central claims about the continuing potential and relevance of fossil fuels were confirmed by Secretary of Energy Steven Chu. He talked about the promise of natural gas, which can be used for power generation and burns cleaner than coal, as a “bridge” fuel that can play a role in the “transition to other fuels” in the future. Oil, too, will retain its place in the energy mix, according to Chu: “Oil is an ideal transportation fuel, so it will be with us for decades.”

Chu’s guarded endorsement of oil and gas relieved some conference attendees in the oil and gas industry, who were worried that US energy policy might find no room for the continued use of fossil fuels, but other speakers took a more skeptical note on the possibility of an energy transition that would replace fossil fuels with alternative energy sources, whether in a few decades or longer. Saudi Aramco’s chief executive, Khalid Al-Falih, warned of the tendency for renewable energy technology to “overpromise but then underdeliver,” reported the Wall Street Journal. A cycle of overenthusiastic investment could spawn “green bubbles,” he said, though Aramco is planning to invest in solar power technology.

James Mulva, CEO of ConocoPhillips, may have gotten the most applause when he criticized Chu’s characterization of natural gas as a “bridge” fuel. Contrary to claims of what he called “hydrocarbon deniers” who think alternative energy can support the world’s energy needs, he stated: “natural gas is more than a bridge fuel. It is part of the long-term energy solution.”

Disagreement persists on the exact role that oil and gas may play in supplying energy demand in the future, but some consensus emerged on “oil day.” Mulva echoed Chu’s sentiment that “oil. . . will be with us for decades” during an interview after his presentation, when he said, “we know that oil and gas and coal, there’s not going to be an alternative to them for decades to come.” Just as the oil and gas industry doesn’t deny that renewable energy has its place, nor does Chu, the leading figure in US energy policy, deny that oil and gas will continue to be necessary. The question is how much renewable energy can and should be used, and how quickly it can begin to replace some (but not all) consumption of fossil fuels.

Interior Secretary Salazar is unapologetic about tightening regulations on drilling in public land. (image: csbj.com)

Interior Secretary Ken Salazar had some disparaging words for the Bush administration and its coziness with the oil industry this week. As the New York Times reported, Salazar, in an address given on Wednesday, said his department will be taking a harder look at the leasing of oil and gas on public lands; Salazar said he and his colleagues would not be doing business as the last administration had, serving as a “candy store” for big oil.

Salazar, who said Bush administration policies “carved up the landscape and fueled costly conflicts that created uncertainty for investors and industry,” is looking to cut down on what he sees as pricey legal disputes that arose from protests over land use. He pointed to the statistic that nearly 40 percent of rulings on permit drilling rights were challenged in 2008, as compared to 1 percent in 1998.

A strong proponent of wind energy, especially offshore projects, Salazar has been critical of the oil and gas industry in the past, in particular the industry’s approach to land leases. In late November he claimed the industry had a sense of entitlement to public land and failed to develop properties already under lease.

Looking to do away with what he says costs taxpayers millions in legal costs, Salazar is having the Bureau of Land Management issue new guidelines on the review process of land for development by oil and gas companies. (The bureau oversees oil and gas rights.) Citing the bureau’s director, Bob Abbey, the paper said that, under the new guidelines, teams from various agencies will now be able to consult and officials will “physically inspect the sites rather than making decisions from behind their desks.”

While Salazar’s proposed changes are being championed by some, opposition is already brewing. The oil and gas industry isn’t happy, and some Republicans in Congress are also gearing up to challenge the new guidelines. Kathleen Sgamma, Director of Governmental Affairs for the Independent Petroleum Association of the Mountain States, told the Times that the changes will result in “a bureaucratic command-and-control system.” And Jack Gerard, at the American Petroleum Institute, said what Salazar is looking to do will ultimately be bad for the economy and “further delay and limit American energy resources for all Americans.”

Salazar has not been swayed by industry criticism. He told the Times that he thinks the oil and gas industry is simply “wrong” and is reacting to a sudden loss of power after being, during the Bush administration, “the kings of the world.”

A Senate vote in January could determine whether or not the EPA will regulate carbon emissions. (image: msnbcmedia.msn.com)

With Copenhagen’s lackluster result and the Senate climate bill in limbo, EPA regulations seem more likely than ever to be the tool used to regulate emissions of greenhouse gases. However, Senate opponents of EPA regulation, led by Sen. Lisa Murkowski (R-Alaska), have a chance to block the EPA from working further on any new regulations, says The Hill.

On December 7, the EPA announced its finding that greenhouse gases were a threat to public health and that the Clean Air Act authorized the agency to regulate greenhouse emissions. An amendment proposed by Murkowski—which she initially tried to attach to an EPA spending bill—would prevent the EPA from regulating emissions for one year. The amendment will now be voted on during debates over a measure on increasing the US debt ceiling. While the White House and Congressional Democrats would prefer that carbon emissions be regulated by new legislation, not by the EPA, it’s uncertain that Murkowski’s amendment will garner the 60 votes necessary to pass.

The oil and gas industry has criticized the EPA’s plan to regulate emissions, saying it would increase their costs—costs that would have to be passed on to consumers. Some business leaders prefer congressional regulation as, if nothing else, the least bad option for regulation emissions. Legislation would offer more clarity and certainty than EPA rules, they say, and that would help minimize the additional costs of reducing emissions.

Ozone protects Earth from dangerous solar radiation, but it’s also a dangerous air pollutant in high quantities at low altitudes. (image: unitedcats.wordpress.com)

As reported by the Associated Press on Tuesday, the EPA will review air pollution standards for the oil and gas industry, to see if they need to be revised. The EPA’s announcement is in response to a complaint brought by environmental groups claiming that energy production in the West was leading to heightened levels of ozone. In reviewing air pollution standards, the EPA is following in the footsteps of state regulators who have taken a new look at pollution rules. For example, Colorado set stricter limits on gas production in the state, after Denver-area ozone levels exceeded federal standards. It was believed that vapor escaping from gas storage tanks, as well as emissions from engines, drove the increase.

It is worth noting, however, that the population in many western states has been growing rapidly—at the time of the last census, the population of three Colorado counties had doubled in 10 years with no sign of slowing. Population growth—especially with large increases in the number of motor vehicles—increases air pollution. Given that, industry representatives are probably right in saying that “we’re certainly not the entire problem” causing ozone increases.

While the latest EPA action is merely a plan to review air pollution standards, it can be seen as part of a pattern of the Obama administration’s actions showing hostility to fossil fuels. For example, the EPA’s declaration that greenhouse gases are a threat to the environment and health opens the door to regulations affecting oil and gas production. The administration excluded representatives from the oil and gas industry from its recent jobs summit, despite the fact that the industry employs over 9 million Americans and created 2 million jobs from 2004 to 2007. The Interior Department withdrew a number of oil and gas leases granted by the previous administration. And in the draft cap and trade bill crafted by Congressional allies of the administration, petroleum producers would only receive 2.5 percent of carbon allowances being granted for free by the government, while utilities would receive 40 percent.

Given that the petroleum industry and utilities currently contribute equally to carbon emissions, the fact that utilities will receive around 18 times as many of the valuable allowances is a stunning disparity.