Friday, August 21, 2009

Standard Stumble

Last year the Department of Environmental Protection (EPA) published new standards for renewable fuels in October 2008. Public outcry over those standards sent the EPA led to a withdrawal the next month and a new rule published in June 2009. At the heart of the controversy is the EPA’s so-called “lifecycle greenhouse gas analysis,” which seeks to quantify the carbon content of fuel - renewable and not-so-renewable - by looking at all elements of the fuel’s production. This includes land use and other indirect inputs. (You can follow the Renewable Fuel Standard saga on the EPA’s web site.)

The “all-in” approach of the EPA got some folks up in arms, especially the ethanol camp. For example, corn growers would rather not think about the implications of energy required to run the distillation process or to transport the fuel to blenders, not to mention the negative environmental impact in the Midwest of cutting down trees and filling in ditches to extend field acreage for corn.

Earlier this month the EPA released peer review findings on the standards. Investors should find the thread familiar as the arguments pro or con for one fuel over another are all in the assumptions. We note the following from a white paper from one peer review:

“Evidence suggests that biofuel-induced land use changes produces significant near-term GHG (greenhouse gas emissions), with displacement of petroleum by biofuels over subsequent years in effect ‘paying back’ earlier land-conversion impacts. Therefore, it is critical to select an appropriate time horizon over which to analyst emissions and apply a proper discount rate to value near-term versus longer-term emissions. EPA highlights two options. Option one assumes a 30-year time period for assessing future GHG emission impacts and equally values all emission impacts regardless of time emitted (a 0% discount rate). Option two assesses emission impacts over a 100-year time period and discounts future emissions at 2% annually.” (Italics added for emphasis.)

These assumptions were then the focus of this particular peer review document. Apparently, most peer reviewers agreed that the approach taken by the EPA was scientifically objective, but they held widely divergent views on the appropriate time frames. The recommendations ran the gamut from abandoning the impact time frame altogether in favor of a project approach. Others suggested using time frame from a low of 13 years to a high of 100 years and suggested discount rates ranged from 0% to 7.9%.

While it appears the EPA stumbled in setting new standards for renewable fuels, we note that five years ago the lifecycle assessment approach was not much more than a concept among the most forward-thinking on the global warming/energy production frontier. To have reached the public policy level is a giant step for mankind even if on shaky legs. It is also a huge plus for investors, who can begin to apply lifecycle assessment concepts as a part of the investment decision making process.

No comments: