CLIMATE:

As Calif. aims at carbon, Canada sees itself in bull's-eye

Canadian oil exporters fear that a low-carbon fuel standard adopted by California last week threatens to upset a thriving North American trade in petroleum if the regulation spreads throughout the United States.

The California Air Resources Board's (ARB) low-carbon fuel regulation -- the first of its kind in the world -- seeks to grade transportation fuels by carbon intensity and set a threshold beyond which refiners would be penalized for using carbon-heavy fuels.

While it is being hailed by environmentalists, the rule is controversial for its use of a "lifecycle" emissions tool that rates fuels' greenhouse gas emissions from production through combustion.

That tool would likely pinch the ethanol industry by including land-use effects related to corn growing in its overall carbon score. It could also squeeze producers of crude extracted from Canadian oil sands. Exports of oil-sands petroleum to the United States have soared as the United States seeks to avoid imports from the Middle East.

The concern in Canada is not as much about California, which imports little oil-sands crude, as it is about the prospect of other states -- or Congress -- adopting similar rules.

"Our real issue is what California does to influence other regions and more importantly the federal government," said Rick Hyndman, a senior policy adviser at the Canadian Association of Petroleum Producers. "The real issue is oil security."

Hyndman, who is supported by the government of Alberta, the largest oil-sands producer, has problems with the rule on several fronts. Chief among them is the apparent ambition of the ARB's staff, which he says has a ideological ax to grind with oil-sands production.

ARB unfairly singled out oil sands, he said, by setting up a system that creates a different carbon rating method for different types of crude. Why? To discourage investment in tar-sands extraction, he said.

Hyndman argues that most of the United States wants oil from Canada, even if it is extracted from tar sands, because importing petroleum from an ally and a trade partner is better than buying from Venezuela or other OPEC nations. In his view, ARB has intentionally ignored this reality to set the national environmental agenda, because California stands to lose nothing economically by freezing out oil sands.

"It's kind of a gratuitous shot at oil sands," Hyndman said. "Because we had no significant supply going into California, they can make this political statement without much [economic] consequence."

Hyndman pointed to ARB's construction of the rule, which sets a specific carbon-intensity formula for oil that accounts for more than 2 percent of the state's supply. Carbon-heavy sources that do not deliver 2 percent of the state's supply, on the other hand, must abide by a separate, tougher standard.

Carbon-heavy fuel sources used at low levels in California must live by a separate lifecycle calculation, thus creating a disincentive for refiners that will be graded by their overall basket of fuels.

"If you put all the oils in one basket, then we don't have a problem," Hyndman said. He argues that oil sands' lifecycle rating -- which takes into account its effect on climate change, water supply and land use -- is close to that of other forms of crude, even if they are dirtier than cellulosic biofuels or other alternatives.

"We're just concerned about this attitude that says, 'We don't want your oil,' because I don't think that's what we hear from the rest of the United States," Hyndman said.

Energy security

This underlying conflict, which has as much to do with U.S energy security as it does carbon neutralization, emerged during the meeting at which ARB adopted the fuel standard last week.

Prior to the vote on the low-carbon rule, board member Ron Roberts confronted ARB Chairwoman Mary Nichols over the oil-sands issue. Roberts, who ultimately voted for the rule, asked if the board was ignoring "the whole notion of a petroleum-independent economy."

"This is like the 900-pound gorilla moving through all of this," he said. "One of the only countries outside the United States where we seem to maintain reasonably good relationships is with Canada."

Nichols' response: "While it's true Canada is our largest trading partner, they don't hesitate to charge us whatever they can get for a fair product. We're just as dependent if it's coming from Canada than if it's coming from someplace farther away."

Roberts said flatly that he would prefer buying fuel from Canada than from Venezuela.

Another board member, Dan Sperling, a professor at the University of California, Davis, recently delivered an address at the Commonwealth Club in San Francisco in which he all but admitted the low-carbon fuel standard was targeting oil sands. Sperling said a friend in the oil industry admitted his company had stopped making investments in hard-to-reach tar sands because of fears it would soon be subject to a low-carbon rule.

"And perhaps," Sperling said, "the most important value of this low-carbon fuel standard is to discourage those investments."

'We're taking shots at carbon'

ARB officials insist they are not targeting oil-sands producers or Canada's energy economy. And they deny accusations that they are trying to stretch their influence beyond the California line.

Stanley Young, a senior spokesman at ARB, said the low-carbon rule includes a provision that would allow producers of oil-sands and other carbon-heavy fuels to demonstrate their ability to reduce energy required for extraction as well as mitigation of greenhouse gases via carbon sequestration and other technologies. They have until December 2010 to do so, he said, under a provision added to the draft rule last week.

Moreover, regulated parties are not producers or consumers, Young said. The targets are refiners operating within California, he said. They must come up with a portfolio of fuels -- to include biofuels and possibly electric-charging stations for cars -- to meet the mandate, he said.

"The low-carbon fuel standard does something that we've been waiting for for 35 years," Young said. "It sends a price signal that there will always be demand for low-carbon fuel, and that provides the certainty that investors in low-carbon fuels want to see."

So would oil-sands producers be hurt by the standard? No more, Young said, than any other carbon-heavy option.

"We're not taking shots at anybody," Young said. "We're taking shots at carbon."

Many battles

As for the 2 percent threshold, Bob Fletcher, ARB's chief of stationary source regulation, conceded the regulation sets up a different standard for fuels that are already "a significant part of the California baseline."

But he said the regulation applies only to fuels with higher carbon intensity, not to cleaner-burning biofuels derived from cellulosic sources like switchgrass or to future breakthroughs.

"Whoever is importing that crude oil takes a hit," Fletcher said. "The refiners take a hit."

And oil derived from oil sands is not the only import that would be hurt by the 2 percent threshold provision, Fletcher added. Venezuelan crude, for example, does not meet the 2 percent requirement and scores close to oil sands on the air board's carbon intensity and lifecycle scale.

"It doesn't specifically say it applies only to Canadian oil sands," said Fletcher, who added that ARB is working with Canadian oil-sands producers to improve their lifecycle score.

Still, Hyndman took note of the verbal jousting during the ARB meeting last week and pointed out that a climate change bill in Congress advanced by House Democrats would essentially copy California's low-carbon fuel standard. That could mean tricky trade relations with Canada for the Obama administration, on the one hand, and tough lobbying ahead for the Canadians.

"We're obviously very concerned if the U.S. government says, 'We don't want your oil,'" said Hyndman, explaining that his association, backed by government officials, would try to stop that from happening. "The U.S. is our national market."

Sullivan reported from San Francisco. Kahn reported from Sacramento.