Refiners Lose Out in Cap & Trade System

By Sheraz Mian

The House Energy and Commerce committee passed the American Clean Energy Security Act (H.R.2454), also known as the Waxman-Markey bill, on May 21. The bill is expected to be considered by other House committees in the coming days and is reportedly on a fast track for a vote in the full House before the July 4 recess.

While there are many important changes that this 946-page tome is aiming to bring about, we are focusing here on one central part of the proposed legislation -- the Cap & Trade regime. The bill creates winners and losers among different energy producing and consuming sectors through its initial free awards of emission permits.

Approximately 85% of the permits are doled out for free, with the rest auctioned off. According to a preliminary estimate by the EPA, a permit to emit one ton of carbon dioxide or equivalent will be worth $11-$15 in 2012, with the value of all permits at around $60 billion in 2012. By the 2025, the value would be higher, according to EPA estimates, rising to $22-$28, with the total value at around $113 billion.

Oil producers and refiners, such as Valero (VLO), Tesoro (TSO) and ConocoPhillips (COP) are clearly on the losing side, having been allocated a very small portion of the permits (2%). This forces them to purchase permits on their own account. Electric utilities and other consuming industries such as steel, cement and paper manufacturers benefiting from the giveaways.

Here are the salient features of the Cap & Trade system as proposed in the bill:

• Starting in 2012, industries would be required to reduce their emissions to specific targets through the middle of the century. The cap-and-trade system comes completely into force by 2016.
• The bill aims to cut emissions by 17% below the 2005 level by 2020 and 42% by 2030. By 2050, emissions are expected to drop by 80% below the 2005 level.
• The bill requires companies to buy permits to be allowed to emit carbon dioxide and other polluting gases. If a company cuts its emissions by more than the statutory limit, then it can sell the extra permits. Conversely, a company needing extra permits can purchase those.
• If a company’s emissions exceed its permits, it would be fined two times the value of the permits it should have purchased.

Comments

[lazyj:]

The Waxman-Markey Act does NOT "give away" 85% of emission allowances. It gives away 22%, and reserves the other 78% for the public interest.

Specified trade-sensitive industries (steel, aluminum, cement) get 15%, so they can compete with overseas competitors. They cannot grow, and their allowances decline every year, so they must become more efficient, or shrink.

Merchant power plant owners get about 5%, about half of what they need to operate. Oil refineries get 2%, enough to cover nearly all of their emissions (so they can compete with Caribbean refineries), but not their product (which will be subject to purchasing emission allowances regardless of where the crude is refined).

The rest is reserved for electric consumers, natural gas consumers, heating oil consumers, energy efficiency, low-income assistance, environmental adaptation, tropical forest preservation, and other public interest purposes. Many, or most of these will be auctioned, with the proceeds used for the specified purposes. Only the utilities which actually own their own power plants will directly use the allowances that are targeted for the benefit of their consumers.

Jun 16 10:18 AM

[epeon:]

The refiners do not really loose out. They will simply have to include the cost of the permits in the cost of their product. In the end, the consumer will loose out.

The only way that refiners may loose out is that the higher prices will reduce demand or the higher prices will cause the US to import refined products because they are cheaper. If the latter happens, then the US will loose jobs.

Jun 16 04:30 PM

[A Barrel Full:]

Anyone producing clean alternatives will benefit.

Relatively speaking, a refiner that is more efficient, will lose out less than its competitors so it will gain a competitive advantage.

I am sure that refining companies who are better on this scale, advartise the fact, by announcing their solomon index position.

Jun 17 02:42 AM

[one eye:]

A Barrel full: is it just a matter of "Cleaner" than someone else or is there some regulation requiring Minimum standards be met before being able use this new trading method.

How would they be able to verify their claims, in either direction, hell, who would be making these decisions?

This program looks like it will be harder to decipher than Financial Derivatives.

Jun 17 03:03 AM

[A Barrel Full:]

No what I mean is that it will benefit wind, solar or other non fossil fuels.

Refiners use a huge amount of energy. A large, modern facility will be much more efficient than a small old one. Therefore the impact of emissions costs will be less, per gallon of fuel produced.

In the medium term, extra costs like this will lead to shut downs of small inefficient individual refineries. In effect, it will punish the poor performers even more.

Jun 17 04:05 AM

[john s. gordon:]

barrelful -
a large integrated refinery typically operates @ thermal efficiency of 94%, i.e., the product stream to be sold contains 94% of the input energy content and 6% is used in providing the energy to operate the factory (the inefficient 'topping' [mom and pop] refineries that we had in 1973 have mostly or all disappeared). can your car do that?
> jack

Jun 17 09:14 AM

[oldmanlake:]

anyone ever notice the striking physical resemblance between henry waxman and heinrich himmler? now his actions are similiar.....

Jun 17 09:51 AM

[The Greates...:]

Oh, my! The poor refineries will have to raise the price of gas again. What will they do?
Really? The oil industry has generated around $476 Billion in net profit over the last 6 years, I think they can afford to take a hit for cleaning up their over priced product.

Jun 17 11:57 AM

[one eye:]

Dear Mister Idiot, the refining industry isn't part of the Oil producing industry, they pay on the open market for the oil they refine.

"Oh My"

The Oil Industry has paid more in Taxes than The cost of the Oil they have produced in the USA, their profits have been external to the US of A.

Ever work for a living? Try it.

Jun 17 01:30 PM

[one eye:]

Since refining capacity is running around 85%, Those that are marginal should be shut down Permanently.

With no overcapacity in the System, the True price of distillates will be revealed and the Next roar you hear will be build, baby build. State of the Art Refineries which could process the sludgelike oil from the Oil Sands would quickly eliminate the need for Alt. E cars.

The world has plenty of oil in the form of Heavy/Sour grades. Canada's oil sands have more reserves than the Entire ME combined. But most of the world's refineries, especially ours, are incapable of refining it.

Our nation has had this capability for years.

The Arab ministers have repeatedly said there is plenty of oil.

So instead of spending Trillions on an Intermediate patchwork system like CNG cars. Lets spend a couple of Hundred Billion on Upgrading all current refineries and Building more than a couple of the Newest types. If India can do it so can we.

Unfortunately, this will never occur in our country. Environmentalists, Lawyers, or Ecco-warriors and their lawyers will block it wherever possible.

Jun 17 11:56 PM