Keywords: Energy Independence, Security Act 2007, EISA, Section 526, synthetic fuel, US Air Force, Henry Waxman, Tom Davis, Department of Defense, WTO, greenhouse gas emissions
Originally published March 4, 2008
A little known provision of the Energy Independence and Security Act of 2007 (EISA) is increasingly being seen as making sales of fuel to the federal government far more complex, creating potential trade conflicts, and boosting certain technologies at the expense of others.
EISA Section 526 states that: "No Federal agency shall enter into a contract for procurement of an alternative or synthetic fuel, including a fuel produced from nonconventional petroleum sources, for any mobility-related use, other than for research or testing, unless the contract specifies that the lifecycle greenhouse gas emissions associated with the production and combustion of the fuel supplied under the contract must, on an ongoing basis, be less than or equal to such emissions from the equivalent conventional fuel produced from conventional petroleum sources."
Section 526 apparently was included in EISA because the US Air Force has been considering various coal-to-liquid proposals. House Oversight Committee Chairman Henry Waxman and Ranking Member Tom Davis already have asked the Department of Defense how it intends to comply with respect to coal-to-liquid fuel, fuels from tar sands, and other alternative or synthetic fuels. The effects on federal procurement are clear, and government contractors will have to watch closely as regulations are established in this area. In order to implement Section 526, the government will have to develop uniform standards and contract language through a public rulemaking process. Any such requirements could end up being quite demanding because, as noted in the Waxman/Davis letter, the government will be buying from many refiners of petroleum products that use inputs from a variety of sources. The rulemaking will be critical for industry in both expressing its views regarding implementation and understanding any final standards or contract language adopted by the government.
While Section 526 is neutral on its face as to the country of origin of synthetic fuels, the provisions would have a direct, and arguably disproportionate, effect on producers of fuel from tar sands and nonconventional crude oil reserves, such as Canada and Venezuela. Thus, there may be an issue as to whether Section 526 violates the WTO Government Procurement Agreement or other WTO rules. The Canadian government has already publicly warned top-ranking US officials to avoid an "expansive interpretation" of the provision that could block government purchases of fuels derived from Canada's tar sands reserves.
At the same time, the federal government has an extensive program of loan guarantees, grants, tax credits and other inducements for investments in non-traditional energy sources. Section 526 raises the awkward possibility that the US may provide loan guarantees or direct funding to projects whose output its agencies cannot purchase.
In addition, Congress directed EPA to perform a similar analysis of life cycle greenhouse gas emissions from biofuels—including all stages of fuel and feedstock production and distribution, from feedstock generation or extraction (taking into account significant emissions from land use changes) through the distribution and delivery and use of the finished fuel to the ultimate consumer. This too may be a tough exercise, particularly if international land use is considered, and may influence implementation of Section 526 as well as the selection of technologies and feedstocks in the marketplace.
Section 526 raises many difficult issues for federal procurement, energy producers, energy suppliers, international trade relations, and the financing of major new projects. Its implications should concern all participants in US energy markets.
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