Apr-2012

Assessing the impact of carbon pricing on refinery profitability

The carbon cost to the European refining industry arising from EU policy will depend on the carbon price and on the refinery’s carbon footprint

JORIS MERTENS, KBC Process Technology

Article Summary

The current global economic slowdown has shifted the focus of public, media and policy makers away from climate change and climate action. However, local as well as inter-governmental authorities are still further developing climate legislation, the speed, result and effectiveness of which, however, are subject to discussion.

Although UN-led negotiations to reach a global agreement on greenhouse gas (GHG) emissions reduction seem like a continuing series of failures, the signature of the Durban Platform in which the parties agree to come to a binding treaty by 2015 justifies some moderate optimism. But then again, one day after the conference, Canada announced that it would quit the Kyoto protocol in order to avoid the fine it would be subjected to for not meeting its commitment.¹

There are more local initiatives to put a price on carbon:
• 2011 was not the best year for Europe’s Emission Trading Scheme (EU ETS), with security breaches, cases of fraud and carbon prices at record lows due to the economic slowdown, resulting in an oversupply of free emission permits. Nevertheless, the EU authorities adhere to the plans for the third phase of the EU ETS starting in 2013 and consider measures to support the carbon price.
Switzerland has its own ETS, with voluntary participation, and plans to link its system to the EU ETS
• After failing three times to successfully vote an Emissions Trading Scheme, the Australian government passed a national carbon pricing scheme in November 2011. The law establishes a carbon tax of AUD$23 per ton of emissions on 500 sites beginning in July 2013. The tax will rise by 2.5% until 2015, at which point the scheme will change into a trading scheme with the price set by the market. Under the Jobs and Competitiveness provisions of the new scheme of the act, refineries will initially receive 94.5% of the emission permits for free
• An emission trading scheme started in New Zealand in 2008. Emitters must surrender New Zealand Units (NZUs) to cover emissions. From 2013 onwards, one permit will be required for each tonne of CO2 emitted. The NZU follows the trend of the EU ETS emission permits. Early 2011 spot prices for NZUs have ranged from NZ$19-21,2,3 but NZUs dropped below NZ$7 in January 20121
• Canada has abandoned its GHG reduction ambitions through carbon pricing to avoid jeopardising development of the tar sand industry. However, British Columbia and Quebec schedule to run carbon tax or cap-and-trade schemes.¹
Ontario, British Columbia, Quebec and California (USA) participate in the Western Climate Initiative (WCI). A cap-and-trade programme is advised within the WCI, but not all Canadian provinces have committed to implementing it, while all but one US states had pulled out of the programme in November 2011 as a result of the political shift after the 2010 US elections
• In the US, federal cap-and-trade legislation has been pushed off the table after the Waxman-Markey bill failed to obtain the required support in the federal Senate. Subsequently,  cap-and-trade was declared dead. Support for GHG legislation through carbon costing further vapourised in many states after the 2010 elections. California, however, still intends to put in place the US’s first economy-wide emissions trading system in 2013, targeting covered entities in the electricity, industry and transportation sectors, including oil refineries.

The Regional Greenhouse Gas Initiative (RGGI) of the eastern states and Canadian provinces is another cap-and-trade system, which, however, is limited to power generation only
• Since 2008, South Korea has been working on policies aimed to establish a GHG Emissions Trading Scheme. For the first phase, over 95% of allowances will be freely allocated to the industries.2 However, a bill to launch emissions trading in 2015 is currently stalled in parliament1
• Industrial sectors and some regions in China are encouraged to take on carbon trade. Shenzhen has been selected to host the country’s seventh regional pilot carbon trading scheme from 2013 onwards. The others are Guangdong, Beijing, Shanghai, Tianjin, Chongqing and Hubei. State Council approved a proposal under which there is a plan to set up a national carbon accounting system during the 2011-2015 five-year plan period.²

These local initiatives show, on the one hand, that carbon pricing and cap-and-trade are not dead everywhere, but, at the same time, that the road to carbon pricing is long and slow. Only Europe is currently pricing carbon emissions, and only partly. And only a limited number of other countries (Australia, New Zealand and California) have concrete plans to limit GHG emissions through emission pricing in the future. For an outsider, this will seem surprising, since cap-and-trade is generally considered to have been (cost) efficient in reducing acid rain in the US. The stakes in the case of GHG emission pricing, however, are much higher, as carbon-intensive industries could potentially be seriously affected by carbon pricing. 

Carbon cost and refineryprofitability: the full cost case
Figure 1 shows what the impact is of carbon pricing on refinery profitability if all emissions have to be paid for. It should be noted that all carbon pricing schemes that have been proposed or voted include at least a partial compensation for the polluters, normally by supplying free emission permits.

Carbon cost is a function of carbon price, on the one hand, and of the carbon intensity of the refinery on the other, the latter being defined as tonnes of carbon emitted per tonne of crude processed. Carbon intensity not only depends on crude and fuel type, refinery complexity and energy efficiency, but also on the import/export policy of steam, power and hydrogen.

If the EU oil demand figures of 680-690 million tonnes of crude processed annually, as reported by Europia, are used as a basis, then, using verified emission data published by the European Commission,4 the average carbon footprint of the EU ETS refineries is around 0.21 tCO2/tcrude. 

KBC estimated the carbon footprint for different refinery configurations and crude types using KBC’s Petro-Sim software to calculate unit rates, hydrogen consumption and FCC coke make, and KBC’s Best Technology Energy Benchmarking methodology to calculate the carbon footprint of different refinery configurations. It is assumed that hydrogen, steam and power are produced on-site. Carbon footprint varies widely from 0.08 tCO2/tcrude for some hydroskimming refineries to 0.35 tCO2/tcrude for high-conversion complexes.⁵