Global fuel standards are pushing the dirtiest oil out of the market

Source: By Michael J. Coren, Quartz • Posted: Tuesday, October 13, 2020

Not all oil is equal. We think of petroleum as equivalent whether it comes from the ground in Saudi Arabia or Texas. But that’s not quite right. There are hundreds of grades of fuels out there, each with different carbon footprints—and different impacts on the climate.

The dirtiest oil, like the viscous stuff from Canada’s tar sands, has to be steamed out of the ground and heavily refined before being shipped off to the coast. That makes it responsible for three times more carbon emissions than a barrel of “light crude,” which gushes out of the ground in Saudi Arabia. Saudi’s oil also contains less water, and tends to come out of the ground with less methane, all of which means less emissions per gallon by the time it’s burned in your engine.

That variation in carbon intensity promises to shake up the global oil market, writes energy economist Philip Verleger in a report to investors. Governments concerned about climate change generally aren’t banning fossil fuels outright; they’re creating low carbon performance standards, which allow for taxing of fuels based on their carbon content. A steadily rising price for carbon means the dirtiest fuels—from places as disparate as Canada, Venezuela, and Alaska—will eventually be pushed out of those systems.

Who will be the winners and losers? To help find out, we can turn to California.

California prices it

California’s approach to carbon fuel standards is perhaps the world’s most aggressive. By 2030, the state’s market-based program aims to lower the carbon intensity of California’s transportation fuels by 20% below 2010 levels.

Any fuels used in California that fall below its carbon intensity target—ethanol, biodiesel, renewable diesel, compressed natural gas and biogas, hydrogen, and electricity for electric vehicles (EVs)—can generate credits. Those above, such as conventional diesel or gasoline, generate a deficit, requiring credits to comply with the standard. Drivers never see the tax, except as slightly higher prices for conventional gasoline. Instead, petroleum importers, refiners, and wholesalers who fall under the program must pay the difference, or find different fuels.

The state’s air regulatory body, the California Air Resources Board (CARB), measures the life cycle emissions for every major fuel—allowing it to award credits, or impose credit deficits, on fuel suppliers. The variation is dramatic: The carbon arriving in fuels shipped to California is vastly different not just between countries (which can vary by a factor of five), but even among individual oilfields.

Alaska’s oil is some of the most energy-intensive out there, with a carbon intensity of 16 g CO2e/MJ (grams of carbon dioxide equivalent emissions per megajoule, a unit of energy). Thailand, although a small supplier, ranks among the lowest: just 4 g CO2e/MJ.

That wide range reveals how carbon intensity could change competitive dynamics between fuel suppliers around the world. Oil is a global commodity. Even a small change in relative prices could create big winners and losers for oil-exporting nations. One clear winner is Saudi Arabia. “The higher carbon dioxide content of many crudes relative to the Saudi crudes warns that enactment of a carbon tax will confer a competitive advantage to Saudi oil relative, say, to crude oil from Russia or many other countries,” Verleger writes. “This advantage will add to the Saudis’ production cost advantage.”

In other words, carbon intensity standards like California’s could raise demand for Saudi Arabian crude in the short term, even as it steadily increases the prices of all fossil fuels.

Beyond fossil fuels

Another clear winner created by carbon intensity standards: alternative fuels. As oil importers, refiners, and wholesalers seek to minimize the cost of carbon emissions, they’re turning to an unlikely cast of fuel suppliers in California’s low-carbon competition.

More than 840 unconventional fuel sources have been certified by CARB for use in its trading scheme. Dairy cows in Indiana, pigs in Missouri, methane-rich landfills in Illinois, molasses ethanol producers in Brazil, and even waste wine from California vintners are all sources of transportation fuels such as ethanol (derived from plants), biogas (via animal manure), and hydrogen manufactured by splitting water using solar electricity. Several, such as biogas generation on dairy and pig farms, result in negative emissions due to their displacement of methane emissions, a potent greenhouse gas. At the moment, ethanol and biodiesel are the two largest alternative contributors to California’s transportation system, accounting for well over half its alternative transportation fuel generating credits, estimated at about $1 billion in 2018, according to Stillwater Associates, an energy consultancy.

So far, the effort in the state has seen emissions fall ahead of schedule. Researchers in the journal PLOS One estimate emissions in California’s transportation sector declined by about 10% due as a result of the program, while saving hundreds of millions of dollars in improved workers’ productivity due to better air quality.

California is planning to tighten carbon limits each year. In 2020, CARB imposed new penalties for dirtier fuel as the state’s fuel carbon intensity rose above its initial targets, raising compliance costs by about 24 cents per gallon of gasoline.

While most of the world lacks stringent carbon intensity standards, the program is now inspiring followers (pdf). Canada, the European Union, Oregon, and others are now adopting low-carbon standards of their own. Nearly a dozen US states are considering them. As global carbon standards tighten, the most carbon-intensive fuel sources will likely see their markets shrink first and prices fall below historical benchmarks.

Then, it will be time for a new class of energy suppliers to supply low—and even negative—transportation fuels.