In a ruling that could have interesting implications going forward, the US Supreme Court has ruled that the Environmental Protection Agency (EPA) has significant latitude in providing exemptions to federal biofuels mandates. The ruling will provide the current Biden administration with the power to compel more American refineries to meet annual biofuel quotas by withholding waivers. But, crucially, it will also provide future administrations with the power to do the opposite- increase waivers to reduce biofuel blending, which sets the country up for a push-pull battle between political affiliations and the oil/farm lobbies.
Why is this important? Under the Renewable Fuel Standard law, the EPA issues an annual biofuel mandate that compels oil refiners to blend a certain amount of renewable fuel into the American fuel mix. For 2020, that amount was 20.09 billion gallons of renewable fuel, including a sub-mandate of 15 billion gallons from conventional biofuels (like ethanol) and the rest including other forms of biofuels. Typically, the mandated amount increases each year, but recent levels were kept steady as the EPA accounted for weaker fuel demand due to the Covid-19 pandemic. Refiners that do not satisfy these annual biofuel quotas will be required to buy compliance credits from refiners that do. Given that US fuels consumption has retreated into slow growth, the evolution of EPA biofuel mandates has had the effect of reducing the amount of pure gasoline and diesel required in the American market. The original intent of the mandates was to reduce US dependence on oil imports while simultaneously boosting demand for American agriculture in the Midwest. For a long while, it was a win-win situation. Refiners got to claim that they were ‘Buying American’ by reducing crude supplies coming from countries like Saudi Arabia, Venezuela and Iran, while US farmers got a major boost in captive demand. Given that both industries were staunch Republican supporters also played a role.
But those dynamics have changed. The advent of the shale revolution flipped the equation, allowing the US to reduce its net import position. From a peak of 12.9 mmb/d in June 2006, the US net crude import position fell precipitously to 40 kb/d in September 2019. Since then, the US has during most months actually been a net exporter of crude, with US shale oil making inroads into markets as varied as Poland, India and Vietnam. For refiners, this means the issue of importing crude is now secondary, since there is plenty of supply both domestic and across the border from Canada. The capitalist impetus is therefore then to increase the profit position. Which flies in the face of the EPA biofuels mandates, since that is an enforced cost on a refiner that actively replaced its own products (gasoline and diesel) that is oftentimes expensive. Because the price of corn and soybeans – the principal sources of American ethanol for biofuels – is also driven by food demand. In China, for example, US soy is a major source of vegetable oil and soymeal for the meat industry. Soybean prices recently hit its all-time high in the Chicago Board of Trade, as recovering demand in China and adverse weather in the Midwest created a perfect storm of speculative trade. For American refiners that were already devastated by Covid-19, that added cost could be the difference between solvency and bankruptcy.
And so the EPA – under the Trump administration – used a tool in the law that allowed it to provide exemptions for refineries that face an ‘economic hardship’ from mandate compliance. These waivers surged under Trump’s tenure, bringing cheer to the oil industry but drawing backlash from biofuel manufacturers and, particularly, US farmers that were facing demand hurdles as a result of Trump’s trade wars with China and other major trading partners. This triggered lawsuits from biofuel advocates, which argued that the waivers were only intended to be short-term relief, not long-term arrangements. Refiners, of course, argued the opposite.
In a 6-3 ruling split across non-partisan lines, the US Supreme Court has now affirmed that the EPA’s power on the matter is broad, not limited. Under the Biden administration, this will like lead to fewer waivers to compel more refineries to meet mandates, but allow some flexibility and option to provide relief for independent refiners that are still struggling from Covid-19. Increased environmental scrutiny under Biden has already caused the Limetree Bay refinery in the US Virgin Islands to shutter. To allow a refinery operating in a swing-state like Monroe Energy’s Trainer site in Pennsylvania or Husky Energy’s Superior plant in Wisconsin to shutter over strict adherence could be politically dire. Especially in a hyper-partisan political climate.
But more crucially, the ruling might be a long-term win for American refiners. Since the EPA, under a different administration, could use its position as affirmed by the Supreme Court to reduce mandates instead. It certainly sets up an interesting dynamic for the biofuels industry that has many shades of political influence. The focus at the moment is to ensure that US refineries in critical condition have their burdens eased, with the American Fuel and Petrochemical Manufacturers Association president stating that he hoped the EPA would ‘move swiftly to provide critical relief to those small refineries that have demonstrated disproportionate economic harm resulting from the Renewable Fuel Standard’. In response to the ruling, the EPA is now also re-analysing its slate of proposals for 2021/2022 mandates.
Why does this matter? Refineries in the US are currently operating at near-maximum levels as economic recovery gathers pace, especially with the summer driving season coming up. With US crude output still far below pre-Covid levels, due to shale discipline and investment shyness in the face of climate change conversations, that has bid WTI prices up to its highest level in nearly 3 years. In fact, the WTI-Bent spread has narrowed so much because American fuels demand is far outstripping its supply. Continued exemptions from biofuels waivers would increase that demand, since corn-based ethanol would be displacing less volumes of gasoline, potentially driving prices even higher. The spillover effects on US grain prices and associated impact on food prices may also see a change. But all that could be reversed by a future administration with a different direction, potentially upending price dynamics again. The US Supreme Court has handed the EPA a potent weapon. May it be used wisely.
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Two very different economic blocs. Two pathways to a carbon-free future, one younger and one more mature. And one more with plenty of ambition but hamstrung by inaction. Between China, the EU and the US, three of the most powerful economies in the world all agree that pursuing a carbon neutral future is necessary if the planet is to limit global warming levels to 1.5 degrees Celsius above preindustrial levels, as committed under the Paris Climate Agreement. But the question of how to get there is the tricky one. In the past two weeks, both China and the EU have unveiled their own sweeping plans meant to limit greenhouse gas emissions, both incredibly ambitious in their own right but both also facing headwinds.
Let’s start with China. In Shanghai, the Shanghai Environment and Energy Exchange launched the country’s national emissions trading system on July 16. Currently focused on its own companies, the Chinese emissions trading system is already the world’s largest carbon market from the first day of operations. Covering an initial 2225 power plants that are estimated to emit more than 4 billion tonnes per annum of carbon dioxide, that amount already exceeds the European Union’s scheme, which covers about 2 billion tpa of emissions according to the International Emissions Trading Association. And there is still plenty of room to grow.
China decided to kick off its carbon trading platform with a focus only on power companies, given that they are among the most polluting of industries contributing to roughly 40% of China’s annual carbon emissions and roughly 14% of global carbon emissions from fossil fuel combustion according to the IEA. This initial phase allows the domestic participating companies to cover their own emissions by purchasing surplus allowance from those that have been able to cut their emissions through the exchange. Within the first week, Chinese energy giant Sinopec already closed a huge bulk deal by buying a 100,000 tonnes of carbon emission quota through its subsidiary Unipec. In the first day alone, a total of 4.1 million tonnes were traded, with the price rising from the opening CNY48 (US$7.41) to CNY51.23 (US$7.89), reflecting strong demand as the Chinese state aims to reach peak carbon emissions by 2030 and carbon neutrality by 2060. While the current price is still well under the €50 ($58.87) per tonnes under the EU emissions trading scheme, it is a bold step forward that can only grow.
In time, China intends to add other sectors such as iron and steel, cement, aluminium, paper, domestic aviation, building materials, and petrochemicals to future phases of the trading scheme. In addition, the first phase of the Chinese ETS is only limited to spot transactions by domestic players, but over-the-counter transactions and foreign/individual investors are expected to be added eventually one the exchange matures. Stricter carbon caps by industry may also be added, although the timing and scope have yet to be determined; China’s scheme is based on carbon intensity, rather than the EU’s absolute cap on emissions, which means that total emissions can still rise as power generation grows. For now, the price paid per on will be passed on to consumers, which promotes efficiency and incentivises emissions-cutting by giving a cost advantage to companies that are able to slash their carbon faster than required.
It’s a good start, even though it is unlikely to result in an acceleration of emissions reduction soon, given that there is not enough surplus renewables capacity to match the emissions of carbon-intensive industries. Which means that China will need to continue on its mammoth rollout of solar, wind and nuclear energy over the next decade to truly make a difference.
If China is just starting out with a framework that will service it for the next half century, then the EU is racing ahead to beat its own previous targets. The EU Commission has unveiled a new – dubbed the European Green Deal – that intends to achieve and exceed its commitments under the Paris Agreement, which bound the bloc to cutting greenhouse gas emissions by 55% in 2030 from 1990 levels and achieve net-zero emissions by 2050. The adoption of this target has already had ramifications across the continent, with almost all major energy companies adopting carbon neutral targets along the same timeline. And in some cases, even further, with the recent court judgement in the Netherlands that Royal Dutch Shell must accelerate its emissions-slashing plans globally from its already ambitious plan.
The new EU proposal aims to cut reliance on fossil even further and promote renewables. Central to this is a requirement that the share of renewable energy sources as part of Europe’s mix must rise to 40% from 20%, while limiting pollution from fossils fuels from key sectors like power, transportation, shipping, agriculture and housing – resulting in a 61% fall from 2005 levels by 2030, compared to the current target of 43%. Controversially, the EU proposal also deals with the idea of ‘imported pollution’ – carbon leakage that is caused by shifting production to countries with loose or no emissions rules by imposing a carbon import tax that will begin in 2023 for full implementation in 2026. This would ensure domestic competitiveness within the EU while incentivising trading partners that do adopt carbon plans by allowing the carbon price (as determined through China’s emissions trading system, for example) to be deducted from the carbon cost bill when entering the EU. It is a plan that has already sent shudders through global supply chains, triggering accusations of bias by developing countries. But there is also dissent for the plan in Europe itself. Emmanuel Macron’s government in France, one of the main pillars of the EU, is reportedly already lobbying to watering down the proposal to create a new carbon market for domestic heating and road transport, and phasing out all combustion engine cars by 2035. Other countries, including the Netherlands and Hungary, are also worried about the social impact, since the plan would drive up costs for average citizens. The EU Commission claims the increase in costs will not be too much, on the assumption that revenues generated from the new carbon market will be channelled to subsidise fuel bills of low- and middle-income households.
Between China and the EU, bold moves have been made to progress on a carbon neutral future. But there is one major player that has plenty of ambition as well, but is unable to proceed with similar bold steps due to politics. Since taken over the White House in January, US President Joe Biden has made renewables a focus of his administration – announcing initiatives to scale back on fossil fuels and move to 100% carbon-free electricity by 2035. But his ability to push further – by, say, creating a national renewable standard or fund renewable infrastructure is hampered by Republican obstruction and state pushback. The likelihood that the Republicans may increase their power in the next mid-term elections also pours water on the idea that Biden’s big ideas can take shape eventually. But where the American government can’t step up, private investors can step in: witness the recent shareholder revolts at Chevron and ExxonMobil. The march towards carbon neutrality will be tortuous and long, but at least there is some progress happening now to ease the difficult path the world must take in the future.
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In 2020, renewable energy sources (including wind, hydroelectric, solar, biomass, and geothermal energy) generated a record 834 billion kilowatthours (kWh) of electricity, or about 21% of all the electricity generated in the United States. Only natural gas (1,617 billion kWh) produced more electricity than renewables in the United States in 2020. Renewables surpassed both nuclear (790 billion kWh) and coal (774 billion kWh) for the first time on record. This outcome in 2020 was due mostly to significantly less coal use in U.S. electricity generation and steadily increased use of wind and solar.
In 2020, U.S. electricity generation from coal in all sectors declined 20% from 2019, while renewables, including small-scale solar, increased 9%. Wind, currently the most prevalent source of renewable electricity in the United States, grew 14% in 2020 from 2019. Utility-scale solar generation (from projects greater than 1 megawatt) increased 26%, and small-scale solar, such as grid-connected rooftop solar panels, increased 19%.
Coal-fired electricity generation in the United States peaked at 2,016 billion kWh in 2007 and much of that capacity has been replaced by or converted to natural gas-fired generation since then. Coal was the largest source of electricity in the United States until 2016, and 2020 was the first year that more electricity was generated by renewables and by nuclear power than by coal (according to our data series that dates back to 1949). Nuclear electric power declined 2% from 2019 to 2020 because several nuclear power plants retired and other nuclear plants experienced slightly more maintenance-related outages.
We expect coal-fired electricity generation to increase in the United States during 2021 as natural gas prices continue to rise and as coal becomes more economically competitive. Based on forecasts in our Short-Term Energy Outlook (STEO), we expect coal-fired electricity generation in all sectors in 2021 to increase 18% from 2020 levels before falling 2% in 2022. We expect U.S. renewable generation across all sectors to increase 7% in 2021 and 10% in 2022. As a result, we forecast coal will be the second-most prevalent electricity source in 2021, and renewables will be the second-most prevalent source in 2022. We expect nuclear electric power to decline 2% in 2021 and 3% in 2022 as operators retire several generators.
Source: U.S. Energy Information Administration, Monthly Energy Review and Short-Term Energy Outlook (STEO)
Note: This graph shows electricity net generation in all sectors (electric power, industrial, commercial, and residential) and includes both utility-scale and small-scale (customer-sited, less than 1 megawatt) solar.
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