DATE: April 13, 2008
TO: Interested Parties.
FROM: William Koetzle, Ph.D. Senior Vice President of Public Policy
RE: House Committee on Energy and Commerce, majority staff paper on: Climate Change Legislation Design, Appropriate Roles for Different Levels of Government.
The most recent Climate Change Design White Paper aims to: “[Sort] out the appropriate roles of each level of government [federal, state, tribal, and local] in addressing climate change….” For purposes of discussion, this White Paper assumes a “national, economy-wide cap-and-trade program that reduces greenhouse gas emissions by 60 to 80 percent by 2050.” The purpose of this memorandum is to address some of the issues raised by the White Paper with regard to allowing sub-national governments to regulate greenhouse gas (GHG) emissions. This approach is directly responsive to the issues raised by the White Paper of the roles of state, local and tribal governments with regard to GHG reduction programs because the appropriate role of each level of government is a function of the nature of the phenomenon and effectiveness of the response. This memorandum takes as its basic assumption that these efforts are undertaken in order to have some actual effect (i.e. are not actions for actions sake). It is argued below that, to the extent GHG reduction programs are necessary or appropriate, they are unlikely to be effective without agreement among all significant GHG emitters. And actions taken at the federal, state, tribal, or local level, in absence of such agreement, are likely to yield little, if any positive benefit. In fact, they could produce perverse outcomes such as increasing net GHG emissions and increasing the United State’s dependence on un-secure foreign sources of energy.
Carbon Dioxide: A Global Issue
“For example, if you tag a carbon dioxide molecule that’s coming out of your car, you know, you tag it as a red color – a few months later you can find that molecule all the way in the South Pole. So, if a molecule has a long lifetime in the atmosphere, then it gets globally distributed.” 
Critical to understanding the appropriate role of various levels of government in the design of a GHG reduction program is an understanding of the substance which the regulation seeks to control. Carbon dioxide (CO2) is the most prevalent anthropogenic greenhouse gas (GHG). It is a “trace gas” in that it makes up less than .04% (about 380 parts-per-million) of the Earth’s atmosphere. CO2 is released into the atmosphere both naturally and as a result of human activity. Examples of natural processes that release CO2 include animal and plant respiration and volcanic eruptions. The burning of fossil fuels such as coal, petroleum and natural gas are the single largest source of human activities that release CO2 into the atmosphere.
Significant amounts of carbon are stored in the atmosphere, in the Earth’s soil and oceans. Large quantities of carbon are exchanged between the atmosphere and oceans and between the atmosphere and the land surface in a process called the “carbon cycle.” Human activities contribute a relatively small amount to this process, mainly in the form of CO2 from the burning of fossil fuels.
CO2 released into the atmosphere from human activities mixes readily into the atmosphere: “Thus, where fossil fuels are burned makes relatively little difference to the concentration of CO2 in the atmosphere; emissions in any one region affect the concentration of CO2 everywhere else in the atmosphere.”
Anthropogenic CO2 Emissions: Current Status and Future Projections
Because CO2 is well mixed in the atmosphere, any attempt to regulate such emissions must account for the fact that it is atmospheric concentrations of CO2, not CO2 emissions per se, that is of concern. The fact that it doesn’t matter where in the globe CO2 is emitted should inform decisions about where (in terms of what level of government) effective regulation of GHG’s like CO2 should occur.
Take for example the following chart from the Energy Information Agency (EIA). This chart presents a detailed view of current and projected world energy-related CO2 emissions (1990 to 2030). This chart shows that in 2004, the United States accounted for approximately 22% of world CO2 emissions. By 2030, the EIA estimates that the United States’ share of these emissions will fall to about 18.5%. It also shows where the increases in CO2 emissions will occur over the next two decades: in the developing (i.e. non-OECD) countries. Currently energy-related CO2 emissions are roughly equivalent between OECD (developed) and non-OECD countries; by 2030 this ratio will change: Developed countries will be responsible for less than 40% of emissions. Notice specifically that China’s and India’s CO2 emissions are estimated to increase by 139% and 94% respectively.
As the Committee White Paper notes, several states and regions have acted in the absence of federal legislation to enact GHG reduction programs. California, for example, passed AB 32 which establishes a goal of reducing emissions to 25% below 1990 levels by 2020.
California currently accounts for about 6.7% of total United States emissions; and about 1.5% of world-wide energy-related CO2 emissions. If California were successful in achieving this very significant reduction in emissions, how would this impact net global CO2 emissions? The answer is not much. California’s reduction by 2030 would reduce the growth in United States emissions by about 13%; and the reduction would only offset about 4% of China’s increase in emissions over the same period.
This table also helps to illustrate what happens to global net CO2 emissions, given reduction scenarios undertaken by an individual nation or a group of nations. For example, if the United States were to unilaterally reduced emissions by 30% or 40% below 2004 levels by 2030; net global CO2 emissions would still increase by more than 40%. The reason is straightforward: either of these reduction levels is offset by the increases in CO2 emissions in developing countries. For example, a 30% cut below 2004 levels by 2030 by the United States offsets less than 60% of China’s increase in emissions during the same period. In fact, even if the United States were to eliminate all CO2 emissions by 2030, without any corresponding actions by other countries, world-wide emissions would still increase by 30%.
If the United States were joined by the other OECD countries in a CO2 reduction effort, net emissions would still significantly increase. In the event of an OCED-wide reduction of 30%, global emissions increase by 33%; a reduction of 40% still leads to a net increase of just under 30%. Simply put, in order to hold CO2 emissions at 2004 levels, absent any reductions by developing nations like China and India, all OECD emissions would have to cease.
The lack of participation by all significant sources of GHGs not only means it is unlikely that net reductions will occur; it also means that the cost of meaningful reductions is increased dramatically. Nordhous (2007) for example, argues that for the “importance of near-universal participation to reduce greenhouse gases.” His analysis shows that GHG emission reduction plans that include, for example, 50% of world-wide emissions impose additional costs of 250 percent. Thus, he find’s GHG abatement plans like Kyoto (which does not include significant emitters like the United States, China, and India) to be “seriously flawed” and “likely to be ineffective.”  Even if the United States had participated, he argues that Kyoto would make “but a small contribution to slowing global warming, and it would continue to be highly inefficient.”
The data on emissions and economic analysis of reduction programs make it clear that GHG emissions are a global issue. Actions by localities, sectors, states, regions or even nations are unlikely to effectively reduce net global emissions unless these reductions are to a large extent mirrored by all significant emitting nations.
Unintended Consequences: Emissions Leakage
Of course, the above discussion of GHG reduction efforts by a state, a nation, or a group of nations assumes that such reductions actually occur – i.e. that the “reductions” do not simply shift economic activity, and the accompanying emissions to other localities which do not have such programs in place. This concern, known as “emission leakage” is specifically acknowledged in the White Paper: “a more stringent State of regional cap might shift emissions from the more stringent state to other states, without reducing national greenhouse gas emissions.” Multi-State GHG emission programs, such as the Regional Greenhouse Gas Initiative (RGGI) also are concerned about emission leakage offsetting any potential reductions their program might accomplish.
Emissions leakage occurs when GHG emissions shift or “leak” from one locality, state, region or nation to another locality because of the presence of a GHG emissions reduction program (i.e. a cap or a tax) in the one area without a corresponding program in the other. Emission leaks can occur when either a GHG reduction program in one locality raises the cost of production (especially in the case of energy-intensive industries) vis-a-vis production in other localities; or when a reduction program in one area increases the price of carbon-intensive fuels (i.e. coal, oil) thus reducing the demand in that locality. This, however, has the net effect of lowering world prices thereby increasing demand for these products in areas without a reduction effort. The effect of leakage then can be either no net reduction in GHG emissions or, possibly, an increase in net emissions if the economic activity moves to an area with a more carbon-intensive fuel mix or uses energy in a less efficient manner.
The problem of emission leakage is a critical factor that must be considered when attempting to judge the appropriate roles of various levels of government in a GHG reduction program. Local, State, regional, or even national efforts to reduce GHG could be offset, or even surmounted if these efforts are undermined by leakage.
Emissions leakage from the United States to China, for example, is already occurring – even in the absence of a national GHG reduction program because of cost of production differentials. Research from the National Center for Atmospheric Research “suggests that American emissions of carbon dioxide in 2003 would have been 6% higher if the United States had manufactured the products that it imported from China. Meanwhile, China’s 2003 emissions would have been 14% lower had it not produced goods for the United States.” Thus, because of the fuel mix of China (more heavily reliant upon coal) products produced in China for export to the United States resulted in greater GHG emissions than had these same products been produced in the United States. The authors of the study argue: “These results show the importance of world trade in accounting for the emissions that drive climate change.”
Research from the Tyndall Center for Climate Change Research reinforces the importance of international trade and GHG emissions. Researchers found that net exports from China accounted for 23% of their total CO2 emissions because of their export-import imbalance and due to the relative carbon intensity of the Chinese economy (23% of China’s CO2 emissions is about 3 times the total CO2 emissions from the United Kingdom). This finding highlights the problem of “exported carbon” – where CO2 emissions from economic activity are simply moved to another country and the finished goods are then imported. The authors of this study conclude: “It suggests that a focus on emissions within national borders may miss the point. Whilst the nation state is at the heart of most international negotiations and treaties, global trade means that a country’s carbon footprint is international.”
The problem of emission leakage highlights a key concern to programs or initiatives to reduce GHG emissions efforts that do not include all significant emitters. Firstly, it reinforces the fact the GHG emissions are a global not local, regional or even national phenomenon. Secondly, it suggests that any efforts to reduced GHG emissions that do not account for the global movement of goods and services are not likely to result in significant net global emission reductions. Finally, research into the nature of GHG emissions and global trade suggest that such efforts might actually serve to increase global emissions.
Unintended Consequences: Energy Security
Actions taken by localities, states or even nations, without corresponding programs by others, to reduce GHG emissions, also face potential negative ramifications beyond those dealing directly with GHG emissions. Attempts to reduce the lifecycle emission in transportation fuels are a case in point.
California via executive order has announced a goal of reducing the “carbon intensity” of its transportation fuels by 10% by 2020. This will require fuel producers to track the global warming intensity of their fuels, accounting for the emissions that occur in the production, transportation, refining, and storage phases, and reduce this over time.
In a similar vein, on December 19, 2007, the President signed into law H.R. 6, the Energy Independence and Security Act of 2007 (P.L. 110-140). Section 526 of this bill contains the following language:
“No Federal agency shall enter into a contract for procurement of an alternative or synthetic fuel, including a fuel produced from nonconventional petroleum sources, for any mobility-related use, other than for research or testing, unless the contract specifies that the lifecycle greenhouse gas emissions associated with the production and combustion of the fuel supplied under the contract must, on an ongoing basis, be less than or equal to such emissions from the equivalent conventional fuel produced from conventional petroleum sources.”
Both of these proposals are efforts by different levels of government to reduce or limit the growth of GHG emissions from transportation fuels in the absence of corresponding measures from either other states or other nations. However, it is important to keep in mind, because over 80% of anthropogenic CO2 emissions come from the burning of fossil fuels, GHG emission programs are also de facto energy policies. Not surprisingly then, proposals like the ones highlighted above have the potential to negatively impact the energy security policy of the United States.
The United States annually imports about 60% of the crude oil it consumes. The largest single exporter of crude oil to the United States is Canada. In 2006, Canada exported about 2.3 million barrels of oil per day to the United States accounting for about 11% of our total supply. 99% of all Canadian exported oil comes to the United States and the vast majority of this supply ends up in Midwestern refineries. Canadian oil production is expected to continue to increase significantly and play and ever-more important role in filling the gap between United States oil production and consumption over the next several decades.
Canadian oil reserves, at about 179 billion barrels of proven oil reserves, are second only to that of Saudi Arabia. About 95% of these reserves, however, are in the form of oil sands. Currently about half of all Canadian oil exports are from oil sands; as their “conventional” sources of petroleum diminish at the rate of about half a million barrels per day, this decrease is more than offset by a doubling of production from oil sands.
The question of “conventional” versus “unconventional”  petroleum is complicated. There is no such thing a “conventional” type of crude oil. There are, for example, 161 different types of internationally traded crude oils, all which vary in terms of the quality and molecular characteristics.  The term “conventional” then refers to the method by which the crude is recovered. For example, the EIA considers conventional crude oil (and natural gas) to be that which is “produced by a well drilled into a geologic formation in which the reservoir and fluid characteristics permit the oil to readily flow to the wellbore.”  “Unconventional” oil then is simply crude oil produced by means other than simple drilling. It may involve additional extraction effort; the use of advanced technologies; or additional processes which render the crude more useable. Thus, “unconventional” petroleum is an evolving concept that is a function of the characteristics of the type of crude being produced, the technologies available, and the economics of oil prices.
The huge Canadian oil sands reserves may be considered unconventional then, in the sense that they are not produced using traditional oil well methods where wells are sunk and oil is extracted in liquid form. Oil sands are mixtures of organic matter, quartz sand, bitumen, and water. Bitumen is “heavy” crude that does not flow naturally because of its low API gravity (less than 10 degrees) and high sulfur content. The extraction methods used for oil sands differ from conventional well methods: it is generally either mined or produced in-situ. This bitumen product is then upgraded to be moved, often converted into a synthetic crude product before being refined into a finished product. According to the United States Geological Service, over 80% of the world’s recoverable oil sands lie in North America.
Obviously the production of oil sands is more difficult than that of traditional petroleum. The production, extraction, separation, and upgrading the bitumen of oil sands requires significantly more energy than that of conventional oil. Because of the greater energy used to produce these resources, the lifecycle GHG emissions from oil sands is greater than that of conventional oil. Estimates of the increase in lifecycle emissions range from 14-70%.
State low carbon fuel standards and/or prohibitions against using transportation fuels produced from “non-conventional” sources, therefore, have the potential to negatively impact Canadian oil imports and the United States’ energy security. For example, in the case of a low carbon fuel standard, fuel producers could achieve significant global warming intensity reductions by fuel switching from sources like Canadian oil sands to conventional petroleum products. This generates the perverse outcome whereby the United States ends up importing more petroleum from unsecure foreign sources such as western Africa and the Middle East; while, at the same time, doing nothing to reduce GHG emissions on a net basis, since the Canadian oil will simply flow to other markets such as China. Obviously such an outcome is a negative viewed either through the prism of a GHG emission reduction program or for our energy security.
Language like that contained in Section 526 of P.L. 110-140 is similarly suspect from a GHG emission reduction and/or energy security perspective. A plain reading of the language – “No Federal agency shall enter into a contract for procurement of an alternative or synthetic fuel, including a fuel produced from nonconventional petroleum sources, for any mobility-related use” – could be read in such a way that an agency of the federal government, the Department of Defense for example, may not be able enter into a contract to purchase oil from a refinery that uses Canadian oil sands. Again, this makes little sense from a GHG perspective – this oil will be consumed by the world market – and makes no sense for America’s long term energy security since most of the world’s conventional reserves of oil are located in unsecure regions.
In fact, this language has generated significant concern within the Canadian government. Recently, Canada’s ambassador to the United States, Michael Wilson, wrote to Secretary of Defence Robert Gates about Section 526 arguing that “there is little fuel on the U.S. market that is 100% petroleum extracted only by conventional methodology” and that interpreting Section 526 to apply to all commercially-available fuel made in part from non-conventional petroleum could exclude all fuel commercially available in the United States from being eligible for purchase by the United States government.” This would result in the United States being seen as “preferring off-shore crude from other countries over fuel made in part from United States and Canadian sources.” 
Beyond just an impact on Canadian oil, however, such initiatives imperil technological innovations designed to increase the productivity of existing oil wells in the United States as well. Enhanced Oil Recovery (EOR) are methods by which the additional reserves from existing fields can be produced; with the potential to increase the recovery of oil from these reservoirs to a rate as high as 60%. These methods fall into the “unconventional” category in that they involve the use of additional steps (such as the introduction of heat in thermal recovery) and extraction efforts. One such method, CO2 injection, which uses the pressure of gas to push more oil to the well bore, is supported by DOE research as both a way to increase the productivity of existing American oil fields and as a way to capture and sequester CO2. Employing EOR technology, such as CO2 injection, could increase the recoverable reserves of the United State by as much as 20 billion barrels.
Like oil sands, however, EOR is both unconventional and may have a slightly higher lifecycle emissions profile then conventional oil (some estimate that EOR emissions are between 2 and 19% higher). This could produce the perverse outcome whereby the United States Government, following the prohibition found in Sec. 526 of P.L. 110-140, would be prevented from entering into a contract to purchase American-produced oil that was the product of American government funded research. Such an outcome makes little sense from an environmental or energy policy perspective.
These examples underscore the more general point that actions which attempt to reduce GHG emissions that do not include the participation by all significant emitters, or that is blind to other considerations such as energy security, are likely to result in outcomes that do not serve the stated aim to stabilize global concentrations of greenhouse gases. In the examples here, the “best” result of such programs merely shifts emissions to other parts of the globe; the “worst: result is that it makes the United States more dependent on un-secure sources of foreign energy.
We begun with questions about of the appropriate roles of local, tribal, state governments in addressing climate change that was posed by the February 2008 White Paper prepared by the House Energy and Commerce majority staff. Design issues associated with GHG “cap-and-trade” programs are quite complex and the Committee White Paper rightly considers the role that sub-national governments should play, if any.
However, it quickly becomes clear when the nature of the phenomenon of GHG emissions is probed, that local, tribal, state or even national action is unlikely to have the desired outcome of stabilizing atmospheric levels of GHG’s unless all significant emitting countries undertake similar actions. Furthermore, certain actions taken by localities or even nations may have the perverse outcome of exacerbating GHG emissions and threatening other policy objectives such as energy security.
GHG’s, as we know, mix well in the atmosphere – it does not matter where they are emitted, the effect is the same. This means that reductions programs undertaken by sub-national or even national governments can be thwarted via leakage. We live in a global economy, economic activity can, and does, move to different parts of the globe in response to economic conditions. Where production moves can significantly affect GHG emissions: Less energy efficient economies or economies with different fuel mixes could actually lead to higher in GHG emissions.
Similarly, programs that are initiated to limit or reduce GHG emissions that do not take into account the global nature of the phenomenon could actually have deleterious effect beyond climate policy. Ill-thought through initiatives to favor certain types of petroleum over others could actually threaten the energy security of the United States by incentivizing the use of fuel from unsecure regions such as Africa and the Middle East – while at the same time, providing no positive effect with regard to GHG emissions.
What this means is that GHG emissions are a global issue and that global responses will be required if goals like GHG stabilization are to be effectively pursued.
 Dr. Azadeh Tabazadeh, NASA Ames Research Center, Moffett Field, California. Recorded 3-25-03.
 Greenhouse gases are gases that trap heat in the atmosphere. Other GHG’s include: water vapor, nitrous oxide (N2O); methane (CH4); and fluorinated gases (i.e. hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride).
 Fossil fuel combustion makes up about 84% of the total human contribution to CO2. See http://www.epa.gov/climatechange/emissions/co2_human.html.
 See: CRS The Carbon Cycle: Implications for Climate Change and Congress. CRS estimates that burning fossil fuels adds less than 5% to the total amount of CO2 released from the oceans and land surface to the atmosphere each year.
 Ibid. p.2.
 These are both very significant reductions: a 30 percent cut below 2004 levels by 2030, for example, is an actual cut of nearly 50% when measured against emission projections.
 In fact, even this might not be enough to hold constant at 2004 levels. Recent research has shown that Chinese CO2 emissions are growing at a significantly faster rate than previously estimated. CO2 emissions in China could be growing by as much as 11% per year. See: http://www.berkeley.edu/news/media/releases/2008/03/10_chinaco2.shtml
 Nordhous, William: The Challenge of Global Warming: Economic Models and Environmental Policy. 2007.
 Ibid, page 19.
 Ibid, page 19.
 Page 19.
 See for example: http://www.rggi.org/docs/rggi_proposal_8_24_05.pdf
 See for example: IPCC Technical Paper I: Economic Instruments. http://www.gcrio.org/ipcc/techrepI/economic.html
 Tyndall Briefing Note No. 23 October 2007 http://tyndall.webapp1.uea.ac.uk/publications/briefing_notes/bn23.pdf
 S-01-07, issued 1-18-2007.
 Carbon Intensity is a measure of all the mechanisms that effect climate including not only GHG’s but also other processes (i.e. land changes) measured using life cycle analysis which measures all the activities included in the production, transportation, storage and use of a fuel. See A low Carbon Fuel Standard for California, Part I: Technical Analysis. August, 2007. http://www.energy.ca.gov/low_carbon_fuel_standard/UC-1000-2007-002-PT1.PDF
 Energy Information Administration / Annual Energy Outlook 2007
 See: http://www.eia.doe.gov/emeu/cabs/Canada/Background.html
 CRS: North American Oil Sands: History of Development, Prospects for the Future. 2008.
 The bulk of Canadian exports to the U.S. have traditionally gone to PAD District II, because this area is well connected to Alberta by oil pipelines. http://www.eia.doe.gov/emeu/cabs/Canada/Oil.html
 Energy Information Agency.
 CRS: North American Oil Sands: History of Development, Prospects for the Future. 2008.
 I use the term “unconventional” instead of “non conventional” since this is the terminology employed by EIA and other reporting agencies.
 International Crude Oil Market Handbook, 2004.
 See: http://www.house.gov/jec/publications/109/06-26-06_oil_sands.pdf.; Also http://www.eia.doe.gov/oiaf/archive/ieo02/pdf/world_oil.pdf; and Brandt, Adam R. and Farrell, Alexander E. Scraping the Bottom of the Barrel, Forthcoming in Climate Change.
 API gravity is a scale expressing the density of liquid petroleum products. The higher the API gravity, the lighter the compound. Light crudes generally exceed 38 degrees API and heavy crudes are commonly labeled as all crudes with an API gravity of 22 degrees or below. Intermediate crudes fall in the range of 22 degrees to 38 degrees API gravity. See: http://tonto.eia.doe.gov/dnav/pet/TblDefs/pet_pri_imc3_tbldef2.asp.
 Where minerals are extracted from ore that is left in place.
 See: Brandt, Adam R. and Farrell, Alexander E. Scraping the Bottom of the Barrel, Forthcoming in Climate Change.
 See for example: A low Carbon Fuel Standard for California, Part I: Technical Analysis. August, 2007. http://www.energy.ca.gov/low_carbon_fuel_standard/UC-1000-2007-002-PT1.PDF. (page 54).
 “Enbridge Inc has rekindled plans for a C$4 billion ($3.96 billion) pipeline to Canada’s West Coast in response to demand from producers and refiners wanting oil sands-derived crude shipped to Asia.” http://www.reuters.com/article/rbssEnergyNews/idUSN2148130320080221
 Correspondence from Ambassador Michael Wilson to Secretary Robert Gates, February 22, 2008.
 Primary and Secondary recovery of a reservoir is approximately 10 % (primary) to as high as 40 % (secondary). See http://www.fossil.energy.gov/programs/oilgas/eor/index.html.
 For example, DOE is funding research on CO2 injection at the Hall-Gurney field in Kansas.
 See: Brandt, Adam R. and Farrell, Alexander E. Scraping the Bottom of the Barrel, Forthcoming in Climate Change.