Cap-and-trade, U.S. refiners and carbon leakage

Good post and comments discussion over at Energy Outlook on the effect of cap-and-trade on U.S. oil refiners, of which I'll attempt a brief synopsis:

- Geoff judges as reasonable the scenario described by the new API-funded study on Waxman-Markey, which says that U.S. refiners will suffer under the Waxman-Markey bill because they will bear more costs than foreign refineries, becoming less competitive and losing volumes to imports.

- Commenter bartman points out that this loophole could be closed by requiring import terminals to also buy permits, and that the real danger to refineries is falling domestic consumption due to higher CAFE standards, higher gas prices and electric vehicles.

- Geoff responds that yes, but importers probably wouldn't be required to have permits for upstream and refining emissions, just combustion emissions, and that the 2% permit allocation in W-M will not cover all of U.S. refiners' direct emissions.

- bartman agrees that refiners in non-carbon-pricing jurisdictions would have a slight advantage, but most U.S. refined product imports come from Canada or Europe, which have or will soon have carbon pricing. (he also opines that climate legislation won't pass this year)

- PelinoC then adds that Canada energy firms will be worse-off (e.g. oil sands have more upstream emissions) and predicts that carbon tariffs will quickly be imposed.

I don't mind that Waxman-Markey is a back-handed gasoline tax, because I think a higher U.S. gas tax is probably a good thing and there's no way one would pass through the front door. The more I think about it, though, the more I fret about the unappealing choice between protectionism on one hand and carbon leakage on the other. A global trade war would be disastrous, but examples like this in refining show increasingly plainly that most of the benefits of cap-and-trade (not to mention many industrial jobs) could leak away if the system has holes and other countries don't follow. There's been encouraging news from China and India lately, but we are still a long way from anything that looks like a globally consistent and enforceable price on GHG emissions.

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