A Minute With...

Don Fullerton, expert on energy policy

6/4/2013  8:00 am

The Obama administration has yet to decide whether to approve the Keystone XL pipeline, which would transport oil from Canadian tar sands in Alberta to refineries along the U.S. Gulf Coast.

Because of persistently higher oil prices and improved extraction and refinery technologies, proponents argue that the Canadian tar sands are now an economically viable way to produce gasoline that could potentially reduce U.S. dependence on oil from less stable parts of the world. But the plan also has run into fierce opposition, especially along its proposed route through Nebraska and other High Plains states.

Don Fullerton is a finance professor and energy policy expert at Illinois. Fullerton, also a researcher in the U. of I. Institute of Government and Public Affairs and in the Center for Business and Public Policy in the College of Business, spoke with News Bureau business and law editor Phil Ciciora about the economic and environmental impact of the Keystone XL pipeline.

Since implementing a carbon tax is pretty much a nonstarter in Washington, D.C., right now, would blocking the Keystone XL pipeline effectively function as a stealth carbon tax?

image of professor don fullertonActually, yes, that analogy is a good one. If oil companies had to pay the true social costs of producing gasoline, then they would have to charge a price high enough to cover not just production costs but also environmental costs. Then if consumers still demand it, they’re welcome to it. Each ton of carbon dioxide emissions is estimated to impose about $10 to $20 of costs on the rest of society, and a carbon tax or permit price of that size would raise the cost of conventional gasoline by about 10 to 20 cents per gallon.

But the tar sands have three additional problems. First, transportation via pipeline requires converting the tar into liquid, which requires additional energy and about 12 percent more carbon-dioxide emissions than conventional gasoline. Second, that process generates huge amounts of semi-solid waste. Third, spills from the pipeline might damage ecosystems along its route. In Nebraska, landowners are concerned about spills into the Ogallala Aquifer, a major water source.

Without paying those costs of pollution, oil companies can make profits producing this type of gasoline. But if they did have to pay all those costs, it may or may not be worthwhile. I’d prefer to let them pay for all that pollution and then let them choose whether to produce and sell it. But absent those payments to cover the environmental costs, then we might be better off without the use of tar sands. Sorry, Canada.

Assuming the tar sands will be used somehow, rather than left in the ground, and assuming the pipeline through the U.S. is the cheapest way to get it to refineries, then doesn’t stopping the pipeline just raise the cost of transportation and induce the Canadians to ship it to China? 

In other words, “Approve the pipeline or we’ll sell this stuff to China.” I’m not sure of the official distinction between blackmail and extortion, but that claim sure sounds like one or the other. Besides, getting the oil to China would mean building a different new pipeline through the mountains of British Columbia, a plan that has its own environmental problems and opponents. If they can’t build that new pipeline, oil companies have suggested they could transport the oil by railroad cars to the Pacific Ocean. But railroad transport may have even worse environmental problems.

In addition, they’d have to convert some pristine coastline into a supertanker terminal, with the potential for more spills. None of that would be easy to do in British Columbia.

Should the president get creative and tie his approval of the pipeline to something “green” in return, such as new regulation of coal-fired power plants? 

That’s a possibility. I’m just sorry so much politics is involved. If polluters had to pay for the cost of pollution, through a tax or price on greenhouse gases and other emissions, then we could let them do whatever they want. The Keystone XL pipeline would get built, if it were still the cheapest way to sell valuable gasoline. Or not. And coal-fired power plants could operate, or shut down, whichever is in the best interest of shareholders. Without a price per ton of emissions, it’s hard to know whether the pipeline is really worthwhile, or even if coal-fired power plants are really worthwhile.

Some groups back the Keystone plan, arguing it would create jobs and a steady, secure supply of oil. Others have argued that it could have steep environmental costs, and would only serve to strengthen our dependence on fossil fuels. What’s your take?

The “jobs” argument is highly overrated. Those who make the case for creating jobs are usually not the unemployed, but the companies who want to increase their profits. Construction of the pipeline would certainly require those companies to hire more workers. If those workers were hired from the unemployment lines, then it would create new jobs. But oil companies won’t get the skilled workers they need from the unemployment line. Those workers would likely be hired away from other companies, which could bid up wages but not necessarily change unemployment. And the case for a secure supply of oil also is usually an argument made primarily by the oil companies.

Tar sands represent a particularly dirty source of fuel. For policymakers, the mix of strategies to reduce global warming usually involves not just a carbon tax, but also efforts to “sequester” that carbon by growing trees and reducing deforestation. Technologists also discuss the feasibility of injecting carbon dioxide emissions deep underground, to keep it out of the atmosphere. Well, one way to sequester carbon deep underground is to leave it there in the first place.


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