Low-carbon rules could be tough to meet

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New rules aimed at lowering the carbon emissions of transportation fuels place so many demands on crude producers - especially those in Canada's oil sands - that they may prove impossible to meet, a new analysis warns.

Low-carbon fuel standards, which have been passed in California and British Columbia, and are under consideration by states responsible for 34 per cent of U.S. fuel consumption, could also provide the basis for an international trade dispute as serious as the softwood lumber wars.

In a report released Tuesday, Cambridge Energy Research Associates (CERA) calculates that a legislated 10-per-cent reduction in the carbon content of fuels - which California has already mandated and other states and provinces are now considering - would require a one-third to one-half drop in the emissions used to extract and refine crude. Without major advances in the adoption of other transportation fuels such as natural gas, that level of reduction will be virtually impossible for industry to achieve, at least in the next decade, CERA concludes.

The impact could be even worse for oil sands exports, which are already 6 per cent more carbon-intensive than average U.S. crude, the group calculated in a report entitled Oil Sands, Greenhouse Gases, and U.S. Oil Supply: Getting the Numbers Right.

"Even when you think about carbon capture and storage or better fuel efficiency in the refinery, it's very difficult to envision a case where you could take a third of your emissions out of that whole process," said Jackie Forrest, IHS CERA's director for global oil, and one of the report's authors.

"You need other types of policies if your end goal is to reduce emissions."

The reason is grounded in the how greenhouse gases are produced from a barrel of oil. Between 70 and 80 per cent of those gases are produced when the oil is burned - and it's impossible to reduce those emissions. Therefore, the only place to cut a barrel's footprint is from emissions in the creation of a barrel - the 20 to 30 per cent that comes from extraction, transportation and refining.

Those emissions will need to be cut dramatically to achieve the 10-per-cent overall reduction. Even new oil-sands-extraction technologies that promise huge gains, for example, are likely to trim only a quarter of production emissions, not emissions over all, Ms. Forrest said.

The CERA finding comes against a backdrop of increasing interest in low-carbon fuel standards as a way to decrease emissions. Last year, for example, 11 Eastern U.S. states agreed to pursue such a policy.

But the difficulties in meeting those targets - and the potential problems they could cause oil sands companies - could set the stage for substantial legal disputes.

Brenda Swick, a McCarthy Tétrault lawyer who has examined the California low-carbon fuel standard, said Canada has grounds to dispute the rule - and others like it, providing they are passed - under the North American Free-Trade Agreement and World Trade Organization rules. The reason: The low-carbon standard can be seen as a protectionist measure that discriminates against Canadian crude.

"To the extent that the U.S. low-carbon fuel measures make oil from one part of the world that they consider dirty more expensive than their own domestic substitutes (e.g. biofuels) that the U.S. considers 'clean' … you've got a discriminatory treatment issue," she wrote in an e-mail.

While the United States could argue that the rules should be exempted from trade treaties on environmental grounds, that may involve proving climate change in a court of law, Ms. Swick said.

"It's very tricky stuff," she said. "I was very involved in the Canada-U.S. softwood lumber dispute. And if this type of dispute actually takes place, it would have the same far-reaching consequences."