Global Petroleum Industry Approaches for Long-Term Carbon Management

Aimée Christensen

Summary
On October 15 and 16, 2001 in Boston, Massachusetts, the International Petroleum Industry Environmental Conservation Association (IPIECA) held its Symposium on Long Term Carbon and Energy Management: Issues and Approaches. The Symposium brought together scientists, economists, industry representatives, and policy-makers to discuss the challenges and opportunities associated with long-term carbon management as governments and industry face an increasingly carbon constrained world.

The goals of the Symposium were to advance understanding of the actions and policy frameworks that could contribute to solutions. Conference participants said this would require:

• Long term, sustained, global efforts to improve understanding and develop effective solutions while meeting a growing global need for energy;
  
• Development, commercialization, and global use of innovative technologies; and
  
• Effective policy frameworks that recognize and account for national differences, promote international cooperation, and encourage the development and global deployment of innovative technologies.

Conference participants agreed that development of global, regional, and national frameworks and policies is necessary to ensure sufficient investment and technology development to evolve towards a situation of net zero emissions. This may involve the development and deployment of greenhouse gas-free technologies, as well as the use of biological and geological carbon sequestration to offset carbon dioxide emissions (in the case of biological sequestration) or store carbon dioxide emissions in geological formations.

Conference Presentations
Science and Scenarios of Human Induced Climate Change

The conference began with a discussion by Ronald Prinn on how MIT models are designed to predict climate science, economics, technology and social science. He said that uncertainty is inherent in any climate modeling, with many assumptions included therein, and resulting in much controversy associated with nearly all modeling results. One key uncertainty, according to Prinn, is the climate impacts of lower air pollution. Such pollution can lower the radiative forcing of climate due to lowered black carbon aerosols and lowered ozone, but lowered air pollution can also cause a rise in radiative forcing due to lowered sulfate aerosols and a rise in methane induced by lowered OH (the hydroxyl radical). Richard Tol of the Hamburg, Vrije and Carnegie Mellon Universities acknowledged that there remain some missing pieces to the climate research, including the coupling of natural and social science models, and looking at impacts and adaptation.

Peter Stone of MIT highlighted major uncertainties leading to the variability in model predictions: climate sensitivity, the strength of aerosol forcing, natural variability of the climate and the rate of ocean heat absorption. And John F.B. Mitchell of the Hadley Centre for Climate Prediction and Research confirmed the uncertainties in models, especially how the various climate feedback loops, such as the role of clouds and water vapor, will affect the climate response.

Long- Term Energy Needs and Carbon Management

Yet policy-makers are looking to models to help guide their short-term decisions and long term approaches to mitigate and adapt to global warming. Eric Sundquist of the U.S. Geological Survey (USGS) said that long-term carbon dioxide (CO2) scenarios are increasingly important on Capitol Hill, where decision-makers need research to support their policy choices. Presenters generally agreed on the need to improve the diagnostic capability of models, especially to ensure that it is possible to more accurately distinguish between natural variability and anthropogenically-induced climate change.

The International Energy Agency and the Energy Information Administration presented each of their models on future energy use. Unlike the climate models, their energy models do not include probable policy and regulatory changes, but merely project current trends out twenty years. For conference attendees, these models served to show that if governments do not change current policies, they will not be able to meet emissions goals under Kyoto, nor the long-term atmospheric carbon stabilization goals of the UNFCCC. This fact was underscored by Peter McCabe of the USGS and Cutler Cleveland of Boston University, who agreed that there are sufficient cost-effective fossil energy resources available to keep us on our current consumption path well through the middle of this century. According to their information, there will be no dwindling supply-driven price increase to reduce demand and improve the cost-competitiveness of non-fossil sources.

Prospects for Technology to Address Climate Change

Recognizing that current practices will not meet the UNFCCC global concentration goal, conference presenters outlined a multifaceted approach to change course, including the use of market-based mechanisms such as emissions trading, the use of biological sinks, increased energy efficiency, and technology commercialization, such as for geological sequestration. Several Symposium speakers said that biological or geological sinks could offset part or all of fossil fuel CO2 emissions, so that net zero CO2 emissions may not require the phase out of fossil fuels. However, scientists said CO2 emissions from fossil fuel combustion would eventually saturate biological sinks and atmospheric concentrations of CO2 would resume their growth. Nevertheless, biological sinks can provide an interim reduction of atmospheric CO2, allowing time for technology development. Presenters reviewed preliminary evidence that geological sinks (e.g., reinjecting CO2 into used petroleum fields) do have the potential to sequester all of the fossil fuel CO2 emitted over very long periods of time.

Jae Edmonds of the Battelle Memorial Institute laid out a technology strategy government should adopt. In the near term, governments must array technology and energy system options, insure assumed reference technologies are delivered, minimize cumulative emissions with incremental technology improvements, and make progress with non-CO2 gases and aerosols. In the mid-term, we must transition from an emitting to a non-emitting world. Technologies Edmonds said could significantly impact our emissions in the mid-term include carbon capture at any point in the energy system, geologic sequestration, hydrogen systems (production, transportation, distribution, and use), energy storage systems and commercial biomass energy. Improved performance of more common technologies is also important, including efficiency, nuclear, non-biomass renewables, and improved performance of fossil fuel use. Over the long run, Edmonds said governments will need to act, learn and then act again based on the new information.

On transportation technology development, Thomas G. Marx of General Motors' presentation contrasted with that by John Heywood of MIT. While Heywood focused on the promising role for more efficient conventional fossil technologies over the short and medium term, Marx felt that MIT's assessment of transportation technologies was overly pessimistic on hydrogen fuel cell vehicles and overly optimistic on the cost estimates for conventional and advanced fossil fuel technologies. Marx outlined GM's strategy to meet consumer and social needs through a portfolio of advanced technologies, with fuel cell vehicles being the long-term solution. He advocated government investment in research and development, as well as infrastructure development.

The Marrakech accords, by creating rules for the use of carbon emission reductions and removals, help to establish a global value for emission reduction and removal technologies. This value for the carbon emission removals, or emissions avoided, can create a new source of financing for a project, therefore reducing the overall project cost, and/or ensuring the project's profitability. For example, in a project structured by Baker & McKenzie, as a result of the deployment of a new engine technology in China, the sale of the carbon emission reductions generated by the project has the potential based on current estimates of future carbon prices to bring an additional $40 to $80 million to the project. In fact, depending on the cost of an emission reduction activity, carbon financing has the potential to pay for the entire cost of the project.

Policy Frameworks to Address Long-Term Climate Change

Dick Morgenstern of Resources for the Future (RFF) discussed the necessary role of a U.S. economy-wide cap and trade program to meet emission reduction goals. His program would include a fixed cap with cost-containment at $25/ton. By issuing additional permits using RFF's "Safety Valve," the permit costs would be kept at a maximum of $25/ton. Such a system would also include equitable burden sharing by auctioning allowances, with seventy-five percent of the proceeds to go to households (as with Alaska's oil proceeds system), and twenty-five percent to industry. Morgenstern argued this would be generous because in reality industry would be passing on much of its carbon costs to consumers. He noted that while industry voiced its support for such a system behind closed doors, it would not likely do so openly as that could lead to a more rapid introduction of a cap and trade system. Building on this domestic emissions proposal, RFF is advocating the use of the Safety Valve for the Kyoto Protocol compliance system.

Michael Wriglesworth, representing the Union of Industrial and Employers Confederations of Europe (UNICE), discussed concerns regarding the imminent announcement of the European Commission (EC) Directive establishing a European Union-wide greenhouse gas emission trading system [editor's note: see article in this issue regarding this Directive].

Robert Stavins of Harvard's John F. Kennedy School of Government stated that policy is far ahead of the climate research. He advocated the integration of a Safety Valve into the Kyoto and other trading systems. For an international trading system to work, all nations would have to put in place their own national trading systems. He advocated for voluntary accession to Kyoto by developing countries through growth targets and participation in trading, for the negotiation and agreement on long-term instead of short-term emission reduction targets to give the necessary market signals to promote technology innovation and commercialization, and for the flexible mechanisms - the tradable permit system being the best of the alternatives to address global warming.

Conclusion
The closing discussion highlighted the challenges facing long-term carbon management, including the associated uncertainties in climate response to warming, the availability of fossil energy sources, and the relatively high costs of cleaner technologies, at least in the short term. Participants recognized the need for developing country participation to meet long-term stabilization goals, and the potential barrier to such participation created by the expected high costs of participation in the Clean Development Mechanism (CDM) due to its overly complex rules. Symposium participants agreed on the need to encourage the development and deployment of technology to reduce CO2 emissions in the short term and achieve net zero CO2 emissions in the long term, but did not agree on how best to accomplish these goals. In addition to urging more research on the science and economics of climate change, several business participants called for governments to invest in research and development of new technologies, to reduce the complexity of joint implementation (JI) and CDM participation, and to put in place market-based mechanisms, particularly emissions trading, to facilitate technology development and deployment at least cost.

As a result of the U.S. decision to reject the Kyoto Protocol, some are suggesting that the global emissions trading system will become one of regional inter-linkages. Without the U.S. demand for emission reduction credits, the carbon price is lowered, but with the increasing certainty created by the agreement in Marrakech, the market price for carbon reductions and removals has already begun to rise. U.S. companies are perhaps in the most uncertain of situations with the least clear rules before them, thereby making long-term carbon management that much more difficult. Certainly those with operations outside the United States are in a different situation than those with solely U.S. facilities. The global petroleum industry and others similarly situated face not only the implications of Kyoto Protocol ratification, but also face the challenge of identifying the risks and opportunities presented by the rapidly proliferating global, regional and national greenhouse gas regulations and policy measures.

Aimée Christensen is an associate and member of the International Practice Group in the Washington, D.C. office of Baker & McKenzie, where she practices environmental law. She is also technology vice chair for the Section's International Environmental Law Committee. She may be reached at aimee.r.christensen@bakernet.com.