WASHINGTON -- Bush administration officials agreed that greenhouse gases could endanger the public and should be regulated under clean- air laws, but later reversed course amid opposition from Vice President Dick Cheney's office and the oil industry, a congressional report said.

The report, by the U.S. House Select Committee on Energy Independence and Global Warming, offers a look at the breadth of Bush administration support for regulations before such plans abruptly stopped. The report draws heavily on an interview with a former Environmental Protection Agency official who had told Congress that Mr. Cheney's office tried to censor federal testimony on the danger of global warming. It is also based on confidential interviews with EPA staff and documents subpoenaed from the EPA.

"This is the dysfunctions and motivations of the Bush administration laid bare," Chairman Ed Markey (D., Mass.) said in a statement.

The White House rejected the committee's findings. "Chairman Markey's report is inaccurate to the point of being laughable," said White House spokesman Tony Fratto.

For months, Congress has been investigating a series of decisions by EPA Administrator Stephen Johnson, including stopping California from regulating motor-vehicle greenhouse-gas emissions. Previous congressional reports showed that Mr. Johnson originally sided, at least in part, with EPA staff on several matters, including the idea that greenhouse-gas emissions pose a danger to the public and should be regulated. But the latest report suggests that Mr. Cheney's office came to play a key role in interagency discussions.

Megan Mitchell, a spokeswoman for Mr. Cheney's office, disputed the report. "I don't accept their premise," she said. The latest report said the oil industry argued against regulatory action and had the support of Mr. Cheney's office. In the end, the report said, the Bush administration backed off regulation. "Frankly, that's ridiculous," Ms. Mitchell said.

Jason Burnett, a former EPA associate deputy administrator who played a key role in coordinating the agency's climate-change activities, told the House committee that people in Mr. Cheney's office and the White House Office of Management and Budget felt regulations would hurt President George W. Bush's legacy. Mr. Burnett didn't return a phone call seeking comment.

The report said F. Chase Hutto III, Mr. Cheney's energy adviser, argued against new regulations, along with unidentified individuals from Exxon Mobil Corp. and the American Petroleum Institute. It also said that Mr. Bush's deputy chief of staff, Joel Kaplan, and Energy Secretary Samuel Bodman, Transportation Secretary Mary Peters and Commerce Secretary Carlos Gutierrez had originally endorsed an EPA finding that greenhouse-gas emissions endanger public welfare and should be regulated under the Clean Air Act.

Earlier this month, those officials signed a letter saying that the Clean Air Act isn't an appropriate vehicle for regulating greenhouse- gas emissions.

Energy Department spokeswoman Angela Hill said that Mr. Bodman "has not reversed course" and that the department considers the Clean Air Act fundamentally ill-suited to effectively regulating greenhouse-gas emissions.

Brian Turmail, a spokesman for Ms. Peters, said that she "was involved in an intellectual process to explore whether the Clean Air Act was an appropriate vehicle for regulating fuel-economy standards. The decision was 'no.' You shouldn't confuse engaging in an intellectual exercise with supporting the idea."

A Commerce Department spokeswoman didn't respond to a request for comment. American Petroleum Institute spokeswoman Karen Matusic said it isn't unusual for the group to meet with federal agencies "on areas of mutual concern," and that it has repeatedly said it doesn't believe the Clean Air Act is appropriate for regulating greenhouse-gas emissions. Exxon spokesman Alan Jeffers said he didn't know who made the company's case, but that "it's not a secret what our views are." He said Exxon believes the Clean Air Act isn't the appropriate way to regulate carbon emissions.

# posted by Hugh Bartling @ 9:40 AM 0 Comments

Households Would Need New Bulbs
To Meet Lighting-Efficiency Rule

WASHINGTON -- Manufacturers and environmentalists are hammering out a nationwide energy-saving lighting standard that, if enacted by Congress, would effectively phase out the common household light bulb in about 10 years. That in turn could produce major cuts in the nation's electricity costs and greenhouse-gas emissions.

The new standard is expected to compel a huge shift by American consumers and businesses away from incandescent bulbs to more efficient -- but also more expensive -- fluorescent models, by requiring more light per energy unit than is yielded by most incandescents in use. The winner, at least in the near term, likely would be the compact fluorescent light bulb, or CFL.

Whatever rule is proposed by the groups would likely be incorporated into energy legislation passed last week by the Senate Energy Committee that the full chamber is set to debate by the end of the month, committee aides say. This bill, the Democrats' first major energy initiative since taking control of Congress in January, calls for new efficiency standards for appliances and motor vehicles and mandates the use of more alternative fuels, such as ethanol, by 2022.

While the move could face resistance from some consumer groups and from low- and fixed-income constituencies, Energy Committee aides say there is bipartisan support in Congress for a new lighting standard.

"Congress should do all it can to encourage industry and consumer groups to work with government in setting standards for energy-efficient products, including light bulbs and new lighting technologies," said Sen. Jeff Bingaman, a New Mexico Democrat who is chairman of the panel.

Fluorescent bulbs have been around for years and are known to be more economical over the long run, but consumers have shown a clear preference for the softer and more easily adjusted glow of incandescent bulbs, which also carry a much cheaper sticker price. Now, there is push toward using regulation to force adoption of the more energy-efficient product.

The Senate panel estimates a shift from the standard tungsten filament incandescent bulb and other relatively inefficient forms of lighting would save $18 billion in electricity costs every year. Because 50% of the nation's electricity comes from coal-fired power plants, this would also reduce demand equivalent to that currently met by 80 coal-fired power plants. Burning coal releases pollutants including carbon dioxide, which scientists think is accelerating climate change, and mercury, which can damage the nervous systems of small children.

The move away from the current incandescent bulb, invented by Thomas Edison in 1879, would create at least an $8 billion market for more-efficient lighting, analysts say. There are four billion electric light sockets in the U.S., most of them in homes, and some would be filled with CFLs, which use 75% less energy and can last more than six times as long, according to industry estimates. Manufacturers expect over the next decade to provide consumers with other choices as well, since CFLs don't work as well in applications such as reading lamps.

"It's the right thing to do," says Randall B. Moorhead, vice president for the North American affiliate of Royal Phillips Electronics NV of the Netherlands. "But we're also hoping we'll make some money. It's not entirely altruistic."

The three biggest light-bulb makers, Philips, General Electric Co. and Osram Sylvania, a unit of Germany's Siemens AG, have more efficient lighting products in development. GE is the biggest seller of compact fluorescent lights in the U.S. In February, the Fairfield, Conn., company announced it would be introducing an incandescent bulb that will be comparably efficient to CFLs and would likely meet standards now being discussed. Manufacturers also are re-engineering light-emitting diodes that are currently too pricey for the consumer market but will likely fall in price over time.

One reason bulb makers are willing to negotiate a new federal standard is that a half-dozen states, led by California and Texas, are weighing bans on incandescent bulbs. Australia, Canada and the European Union are also considering phasing out such lights.

"If there are all these intrastate regulations, it will become tough as a skunk to get these things to work. It becomes very challenging to the retailer," says Richard Upton, president and chief executive of the American Lighting Association, which represents lamp makers and retail-lighting showrooms in the U.S. and Canada.

The talks on establishing a new nationwide standard include the bulb makers, the lighting association, the Alliance to Save Energy, the American Council for an Energy Efficient Economy and the Natural Resources Defense Council, among others. They have been under way since March, after Phillips declared that incandescent bulbs should be phased out within 10 years.

"I think we're half to two-thirds of the way there," says Noah Horowitz, a senior scientist with the Natural Resources Defense Council. He predicts the result will be a two-stage federal standard that will require bulbs that use 30% less electricity within five years and bulbs that are 75% more efficient within 10 years. The talks are also aimed at standards that would remove the least-efficient street lights and fluorescent lights that are used in offices.

The resulting sharp cut in electricity demand would be the quickest and most effective energy curb in this year's energy bills, says Bill Prindle, acting executive director for the American Council for an Energy Efficient Economy. Noting that electricity consumption is scheduled to increase by 20% by 2020, Mr. Prindle says new "clean tech" energy forms such as alternate fuels and advanced wind power won't begin to reduce emissions until energy demand is cut. "We have to do both," he says.

GE's Earl Jones, senior counsel for the company's consumer and industrial business, says the goal is to agree on efficiency standards that reduce greenhouse gases and cut energy consumption, but also "satisfy basic consumer interest in the quality of light in their home and at work."

"The winners will be the manufacturers whose technology can deliver the highest lumens without compromising quality of light," Mr. Jones said. A lumen is a measure of light.

Shifting to compact fluorescent light bulbs will be more expensive for homeowners at the outset. Incandescent bulbs can be bought as cheaply as 25 cents, but compact fluorescent bulbs can cost between $2 and $3. However, because the more-expensive bulbs use much less electricity and last far longer, they can pay for themselves in as little as six months, depending on usage, says Jeff Harris, vice president for the Alliance to Save Energy, a coalition of business, government, environmental and consumer leaders that advocates efficiency policies that minimize costs to society and consumers. In addition, the prices of compact fluorescents are falling. But it isn't known whether CFLs will be more economical or efficient than future technologies.

There are other drawbacks that have limited the more efficient bulb's market penetration. Aside from lighting quality, compact fluorescent bulbs include a tiny amount of mercury that would require their disposal through recycling programs. According to Mr. Moorhead of Philips, CFLs only fill an estimated 6% of American sockets.

GE and Osram, in weighing the details of a new standard, need to ensure that they have enough time to retrofit their incandescent-light factories to make more energy-efficient lights. Philips doesn't have any incandescent factories in the U.S. CFLs, which are much more labor intensive, are mostly manufactured in China.

Source: Wall Street Journal

# posted by Hugh Bartling @ 9:01 AM 0 Comments

Climate Economics

A new United Nations report is the latest sign that the global-warming debate is moving beyond science to hardball economics, dividing nations and industries in a scramble over how the cleanup bill will be divided -- and how big it will be.

Amid mounting political and public pressure to curb global-warming emissions, companies and governments are reaching general consensus on what technologies need to be deployed and how much it could cost. Now a battle is heating up over the details.

The report issued Friday by the United Nations' Intergovernmental Panel on Climate Change, an international panel of scientists, says the world can meaningfully curb global-warming emissions over the next several decades without significantly crimping global economic growth. But that would require sweeping changes to the global energy system -- and the cost would hit some sectors much harder than others.

"There's not a win-win here," says Ray Kopp, a senior fellow at Resources for the Future, a Washington-based think tank studying global-warming policy. "Somebody gets hammered and somebody doesn't."

The U.N. report says reducing greenhouse-gas emissions enough to avoid the worst consequences of global warming could reduce projected global economic output in 2030 by as much as 3% below the level it would otherwise reach that year. Whether that is a significant economic drag is a matter of dispute.

Bush administration officials argue a 3% reduction in the global economy in 2030 would be too severe. It is "something that we probably want to avoid," James Connaughton, chairman of the White House Council on Environmental Quality, said Friday. He said the effects could fall unevenly across the economy, causing some factories to move abroad and particularly hurting lower-income Americans. He said the administration supports emission-reduction measures it believes can be made at lower cost.

Officials who led the U.N. report played down the cost. "It's not an order of magnitude that cripples the economy," said Bert Metz, a Dutch researcher and co-chairman of the report.

Jonathan Pershing, director of the climate and energy program at the World Resources Institute, a Washington-based environmental think tank, said the potential cost to the economy "suggests you want to be pretty careful" in designing the emission-reduction system. "But if you do this right, it's not going to break the bank."

Reducing emissions to the levels studied in the U.N. report would cost between $20 and $100 for every ton of carbon dioxide, the main global-warming gas, that is kept out of the atmosphere, the report says. That is the price companies would have to pay either to curb their own emissions enough to comply with a cap or to buy emission "credits" on a trading market that pay someone else to do the cleanup.

Prices are approaching those levels already in parts of the world where emission caps are in place. In Europe, which in 2005 imposed a carbon cap on itself, a credit allowing the bearer to emit a ton of CO2 next year is trading today at about $25.

The rise in prices envisioned in the U.N. report is broadly in line with what many are predicting by 2030. Consultant McKinsey & Co. estimated in a January study that greenhouse-gas cuts approximately as stringent as those surveyed in the U.N. study would cost as much as $40 a ton of avoided CO2.

Both the U.N. and McKinsey studies assume the world attacks global-warming emissions in the most economically efficient way. For instance, the U.N. study assumes the cuts come from across geographic regions and economic sectors, spreading the costs broadly. If that doesn't happen, the costs would rise. Currently, the world's two biggest global-warming emitters, the U.S. and China, haven't accepted emission caps.

Another question is what sectors of the economy cough up the bulk of the emission cuts. Like most studies, the U.N. report says that improving the energy efficiency of buildings and cars can produce significant emission cuts while actually saving money. That is because the extra initial investment in, say, home insulation or a more fuel-efficient auto engine can more than pay for itself in lower electricity bills or fewer trips to the gas pump.

But that assumes consumers will be willing to wait many years to recoup the extra up-front costs. In reality, many consumers don't keep their houses or cars that long. So the government also would have to dangle incentives to consumers or mandate that car makers lift mileage.

"A carbon price that gets a lot to happen in other sectors of the economy does not make much happen in transport," explains Robert Socolow, a professor at Princeton University focusing on climate change. He says a carbon cap that imposes a $30-a-ton price for CO2 emissions raises the retail price of a gallon of gasoline by about 30 cents -- not enough to prod many people to go out and buy a more-efficient car.

In Europe, the carbon cap has fallen on utilities and manufacturers, largely because targeting a relatively small number of large power plants and factories is easier than targeting millions of cars and trucks. In the U.S., many heavy-emitting companies now say they think a federal emissions cap is all but inevitable. That is why utilities are lobbying particularly hard to shape the details of any cap.

One is Duke Energy Corp., based in Charlotte, N.C. James Rogers, Duke's chief executive, said in an interview earlier this year that the company already has "made a lot of investment decisions in recognition of the fact that we're going to live in a carbon-constrained world." But he said it remains far from clear how high the cost of avoiding each ton of CO2 emissions will climb. For planning purposes, he said, over the life of potential power plants, "I've used $7.50 to $30" a ton.

# posted by Hugh Bartling @ 9:00 AM 0 Comments

SHRINK TO FIT
As Its Population Declines,
Youngstown Thinks Small

YOUNGSTOWN, Ohio -- Hanging next to city planner Bill D'Avignon's desk is a giant map of this city, divided into neighborhoods. One is Oak Hill, a gritty enclave just south of downtown. The neighborhood, once densely populated, has lost 60% of its population in recent decades and is dotted with abandoned buildings and empty lots.

Faced with the devastation of Oak Hill and other depressed pockets of the city, Youngstown is trying an unusual approach: Allow such areas to keep emptying out and, in some cases, become almost rural. Unused streets and alleys eventually could be torn up and planted over, the city says. Abandoned buildings could be razed, leading to the creation of larger home lots with plenty of green space, and new parks.

Youngstown, a former steel-producing hub, has been losing residents for years as a result of the closing of most of its steel mills. But rather than struggle to regain its former glory or population, it has adopted an economic-development plan that boils down to controlled shrinkage. By accepting the inevitable, the city says it can reduce its housing stock, infrastructure and services accordingly.

The plan is still in its early stages. As a first step, Mr. D'Avignon and other city planners have divided Youngstown into 127 neighborhoods, and labeled them as stable, transitional or weak. Now they're working on a customized plan for each one, noting which corners need street signs, which sidewalks need to be repaired and which buildings need to be demolished. The goal is to craft plans for about 30 neighborhoods a year.

Another goal is to wipe away the most obvious blight. The city estimates it will take about four years to bulldoze the biggest eyesores, including about 1,000 abandoned homes and several hundred old stores, schools and other structures.

"The vision is still evolving, but the ultimate result will be to create more open space where there used to be part of the city," says Mr. D'Avignon.

Talk like that would be considered blasphemy in most cities, where officials are taught to promote growth and development and fight against population decline. Accepting that a city is going to shrink goes against conventional wisdom that a bigger city means more jobs, more taxpayers, more revenue, better education, and better services -- in essence, a higher standard of living.

PODCAST

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Youngstown Mayor Jay Williams³ explains the strategy behind the plan to scale down the town.

"It's un-American. It seems like you're doing something wrong if you're not growing," says Hunter Morrison, director of the Center for Urban and Regional Studies at Youngstown State University, who worked with the city to come up with its strategy. But he says the idea is "not really about growth or shrinkage, it's about managing change."

Controversial Approach

The approach is controversial. Encouraging and accepting the hollowing out of neighborhoods will, by default and design, hit Youngstown's poor and minority residents the hardest. About 45% of Youngstown's residents are black, another 5% Hispanic, and the blight is heavily concentrated in minority neighborhoods, which are slated for the biggest makeovers.

"You always have to ask yourself: 'What areas are going to be abandoned?'" says John Russo, who teaches labor and working-class studies at Youngstown State. "And most of those are the African-American parts of the city."

Youngstown has promised not to force anyone to move, which has helped allay some fears in minority neighborhoods.

Others think the idea could be a hard sell. "You have to be skeptical, because it's really hard to do something like this," says Frank Popper, a Rutgers University land-use planner who studies regions with population declines. "The one thing you always run up against is that Americans don't want to be told about decline."

The Oak Hill neighborhood in Youngstown, Ohio

Youngstown, which has lost half its population since the 1950s, says it needs a radically different approach to halt decay. It's pointless to try to revive certain neighborhoods, the city's leaders argue, since the exodus of residents often makes those areas unpleasant and dangerous places to live, leading to further decline.

"The concept of trying to grow out of economic malaise is just not realistic for us," says Mayor Jay Williams, 35 years old. One of his first official acts after being elected in 2005 was to apply surplus money to demolition in the city.

Although Youngstown is one of the first cities to openly embrace this philosophy, the idea of planning to get smaller is gaining consideration around the world. Earlier this year, the University of California, Berkeley, held a symposium called "The Future of Shrinking Cities" that attracted 100 people from five continents.

In parts of eastern Germany, the government has earmarked some $3.4 billion for tearing down communist-era prefabricated apartment blocks and replacing them with green space, partly in response to an exodus of residents to the West.

European cities are more experienced with the phenomenon of shrinking urban centers, having endured centuries of war and famine that caused many of the region's great cities to fluctuate in size over time.

A Berlin-based "Shrinking Cities" project, partly funded by the German government, compiles research about urban-population loss. The group says that during the 1990s more than a quarter of the world's large cities saw population declines, mostly in industrial regions such as eastern Germany and the U.S. heartland, but also in Japan, Russia, and China, where people are moving from remote cities to booming coastal centers.

"The issue is most visible in cities that are concentrated in a single industry, like steel," says Philipp Oswalt, an architect who heads the German project. Indeed, a similar pattern is now being repeated in a host of other Midwestern cities, including smaller ones such as Muncie, Ind., and Flint, Mich., which have seen huge shutdowns of auto-related plants and subsequent population declines.

Population loss can manifest itself in unexpected places and for a variety of reasons, says Mr. Oswalt. Paris, for instance, has a vibrant center, but is surrounded by rings of industrial suburbs where, in some cases, population is falling. New Orleans was radically downsized in a matter of hours by a hurricane and floods.

The German group has put together a traveling art exhibit on the topic, with works from more than 200 artists in 12 countries. One film profiles a suburban family moving the remains of a loved one from a city cemetery to a nearby township. A painting depicts a neighborhood scene where little remains but a utility pole surrounded by children's toys. The exhibit recently opened in Cleveland after a run in Detroit, two cities grappling with population declines.

Few cities have adopted a plan like Youngstown's. The city is a classic "hole in the donut" community -- increasingly empty in the middle, but with growing suburbs.

In 1950, Youngstown's population stood at 168,000. The steel industry was booming and city leaders envisioned Youngstown growing to a quarter of a million people by the end of the century. New neighborhoods were laid out on the fringes of the city in anticipation of growth.

A Tailspin

But by the 1980s, the steel industry had gone into a tailspin as producers faced an influx of lower-priced, foreign-made steel. Today, only a single large steel mill is left and the city's population has wilted to about 80,000. Most of the mills have been torn down.

Like other Midwest cities, Youngstown tried to find other big employers to replace steel. City officials lured both a state "supermax" prison and a for-profit prison. Other efforts, including redeveloping about 450 acres of former steel-mill sites into industrial parks, have been successful, but not the job-creating dynamos that steel was.

A neighborhood on the north side of Youngstown, Ohio

Youngstown is bisected by the Mahoning River, a meandering waterway once lined with the mills. The city has made some headway in recent years, sprucing up downtown buildings, while Youngstown State -- located not far from downtown -- has invested in new buildings and landscaping. But population continued to decline and abandoned buildings blighted entire city blocks. Property- and income-tax revenue fell, and delinquencies rose.

In 1999, city officials decided they had to come up with a new master plan. The task was assigned to Mr. Williams, then a city planner and now mayor.

"We came up with a simple concept," he says. "This will be a smaller city, but that doesn't have to be a bad thing."

He doesn't mean physically smaller. Youngstown will never reduce its overall footprint, he says, because political boundaries are too deeply ingrained. Lopping off neighborhoods would likely prompt litigation from residents who don't want to lose city services. Meanwhile, neighboring suburbs aren't that interested in annexing Youngstown's problems.

'Clean and Green'

But within the city, which sprawls out over 35 square miles, there are sizable areas that can be shifted to other uses, Mr. Williams says. He envisions large blocks of green space throughout the city. The theme of the master plan is to make Youngstown "clean and green," he says.

The mayor has sharply increased the city's annual budget for demolition -- to $1.5 million this year from $320,000 in 2005. Youngstown is filled with properties that have been essentially abandoned by owners who failed to keep up tax payments. The city places liens on the properties it clears, to cover the cost of demolition, and recently shifted to a policy of trying to negotiate with owners to gain control over such parcels. These blurred ownership lines are one of the reasons the city expects it will take years to reshape many neighborhoods. "At this stage, we're focused on clearing decades of blight that had built up," says the mayor.

Tearing things down is relatively easy and is done by many cities. Much tougher is figuring out creative ways to use vacant land and getting residents to accept a new vision for what it means for their city to prosper.

With this in mind, Youngstown in late 2005 asked a group of urban planners to come up with design ideas, focusing on the Oak Hill neighborhood. Planners canvassed the neighborhood, asking residents what they would like to see. The answers surprised them.

Many city planners, for instance, favor creating dense developments. But many Oak Hill residents told them something very different.

"They said that the one thing they liked was that their area was becoming less dense -- that there was more space between them and their neighbors," says Terry Schwartz, an urban planner from Kent State. They weren't eager to see new housing built either, since many long-time residents fear new units are almost certain to be low-income housing.

Joseph Jennings, a 74-year-old retired steelworker, has lived in Oak Hill since he came to Youngstown in the 1950s from West Virginia to work in the mills. He says he likes the idea of reshaping his neighborhood so it's less crowded. "It'd help hold up the value of the property and make people more willing to invest," he says. "It's a good thing to spread things out -- that's the way people like to live nowadays anyway."

He built his house nearly 30 years ago, buying a double lot so he would have room for a two-car garage. He notes there are a number of empty lots on his street today.

Norma Stefanik, an urban designer who lives in one of Youngstown's most desirable neighborhoods, on the city's north side, says more attention should be paid to basics -- such as using existing building codes to pressure landowners to do a better job of maintaining their properties. "A lot could be done just by going after the people who are letting their properties decline," she says.

Rufus Hudson, an African-American councilman who represents Youngstown's largely minority east side, knows the areas slated for emptying out are mostly occupied by minorities. But he says the city can't continue to serve an infrastructure built for a much more densely populated city. "Our population has fallen steadily," he says, "but we still have 535 miles of roads that have to be kept paved and plowed."

The forces of demographics are doing much of the clearing for the city. Mr. Hudson estimates that within a decade, about 10% of the residential streets in his district will be empty enough to allow them to be closed.

The city has told residents that it will stop investing resources to redevelop certain areas. City officials say there are many places where streets could ultimately be dug up, street lights taken down, and sidewalks removed in order to create green spaces where there were once densely settled blocks.

While it doesn't have specifics yet, the city says it expects certain vacant land to be turned into parks or community gardens. Another idea, already taking place to a limited extent, is to take empty parcels on blighted streets and sell them for small amounts to remaining residents -- so homeowners who have decided to stay would be allowed to expand their yards or even rebuild their houses to spread out over more than one lot.

The day-to-day task of planning for a smaller Youngstown is handled by Mr. D'Avignon, director of the city's Community Development Agency, who works out of an office in a converted post-office building downtown. "We have to break the downward cycle," he says, noting that many people in Youngstown's stable neighborhoods are hesitant to invest in their homes, because they worry that the blight will eventually engulf them. "There's a mindset in Youngstown that says, 'It's coming my way, the blight is moving this way.' We have to put a stop to that."

Write to Timothy Aeppel at timothy.aeppel@wsj.com

# posted by Hugh Bartling @ 7:26 AM 0 Comments

ALTERNATIVE ENERGY
Ethanol Tariff Loophole
Sparks a Boom in Caribbean

PORT OF SPAIN, Trinidad -- Surrounded by ramshackle watermelon stands and burning sugar-cane fields, Texas oil man Ron White shows off the site for his next big investment: a planned $20 million ethanol processing plant. His company, EthylChem Ltd., is just one of a rush of new Caribbean enterprises trying to serve the suddenly booming U.S. ethanol market.

These biofuel entrepreneurs won't actually make ethanol from Caribbean sugar cane, even though sugar makes the best base for the fuel. Instead they'll just import it from ethanol powerhouse Brazil, and process it here. Then they'll try to cash in on the islands' sweet tariff status: an exemption from a 54-cents-a-gallon U.S. tariff on ethanol processed anywhere else. "Avoiding the tariff -- that's the economics of our business," says Mr. White.

As President Bush meets Brazil's president, Luiz Inácio Lula da Silva, today in São Paulo to promote a loose alliance to encourage more production of ethanol and other biofuels, the Caribbean ethanol industry illustrates how U.S. energy policy and trade policy can stand at odds.

A top energy priority of Mr. Bush is to end a U.S. "addiction" to foreign oil partly by encouraging alternative sources such as ethanol, which can be made from sugar, corn or other agricultural products. (See related article on page C5). But the U.S. tariff, which Mr. da Silva has been lobbying unsuccessfully for Washington to remove, damps the supply in order to protect prices for U.S. corn growers in Farm Belt states.

A tortured route around the tariff goes through the Caribbean Basin. There, two dozen small countries are exempted as part of a 24-year-old trade agreement from near the end of the Cold War, designed to combat communism by feeding the U.S. dollar into their poor economies. Even that tariff exception -- which requires entrepreneurs like Mr. White to jump through legal hoops while risking losses from volatility of supply and demand in Brazil and the U.S. -- is under attack.

Jamaica is home to more and more ethanol installations. Above, storage tanks and, inset, cooling towers at an ethanol plant in Kingston harbor run by ED&F Man of London.

U.S. farm-state lawmakers want to close the loophole. Sen. Charles Grassley of Iowa, the ranking Republican on the Senate Finance Committee, last year accused a Trinidad ethanol business of unfairly harming U.S. farmers. Last week he asked the president in a letter to refrain from using taxpayer dollars to encourage foreign ethanol production, as intended by the planned agreement with Brazil, the second-largest ethanol producer after the U.S.

Caribbean ethanol businesses also are in some danger from the opposite camp, which wants to drop ethanol tariffs generally. That would wipe out the Caribbean advantage. Mr. Bush's brother, former Florida governor Jeb Bush, has forged a coalition of American and Brazilian ethanol interests called the Inter-American Ethanol Commission to lobby to drop the tariff. At times Mr. Bush and his cabinet members have indicated interest, though given the farm-state objections it's unlikely to be removed any time soon.

In a world without trade barriers -- and trade politics -- Brazil would be ethanol king, and the U.S. would be importing Brazilian fuel far more heavily, stoking production further in turn. With efficient sugar-cane production and chemical processing, Brazil can produce ethanol for as little as 80 cents a gallon, less than half the price of U.S. ethanol producers, who mainly convert corn to make the fuel. Sugar cane is a better raw material for ethanol because it ferments more quickly into alcohol. But the 54-cent tariff, on top of the cost of shipping to the U.S., wipes out much of the price advantage. There are exceptions: In the summer of 2006, the U.S. price spiked enough that Brazilian producers that reacted quickly made money exporting large quantities to the U.S., despite the tariff.

Encouraging more imports of foreign ethanol would drive down prices and likely boost the American market further. While the 54-cent tariff early on encouraged the U.S. domestic industry, now it has become counterproductive, contends Robert Howse, a trade expert at the International Food & Agriculture Trade Policy Council, an advocacy group sponsored largely by agricultural companies. "If we wanted to achieve the energy goals in the U.S. we would disassemble a lot of the protectionist policies," he says.

The Caribbean sugar industry is so antiquated that it can't produce the fuel competitively from its own cane fields. Instead, Caribbean companies take on a middle step in the production process: They dehydrate the ethanol from its original state, then ship it to U.S. refiners, which add gasoline to make the fuel useable in American cars.

The dehydrating meets the U.S. requirement that products be "substantially transformed" in Caribbean Basin countries, if they don't originate there, to escape tariffs. Such techniques to satisfy trade rules often are controversial: In the 1980s and 1990s, Caribbean Basin countries ran afoul of U.S. apparel makers when they started finishing low-cost apparel from Asia and sending it on to the U.S., skirting trade barriers aimed at the Asian products.

U.S. farm-state lawmakers like Sen. Grassley say that merely siphoning water from ethanol shouldn't qualify Caribbean firms for tariff breaks. "It's subterfuge," he says.

The Caribbean tariff exception originates in a Reagan Administration agreement called the Caribbean Basin Initiative in 1983, between the U.S. and most countries with Caribbean coastline, plus El Salvador, not geographically in the Caribbean Basin but seen then as vulnerable to communism.

Nations in the group were awarded incentives to increase local production of ethanol and given duty-free access to the U.S. equal to 7% of the U.S. ethanol market. That trade preference is currently worth $600 million. A U.S. International Trade Commission study says that ethanol was Jamaica's leading export to the U.S. under the initiative in 2004, the most recent year for which those data are available.

As the U.S. appetite for ethanol grows, and total consumption swells, so will the volume of Caribbean exports that can enter the U.S. duty-free. This year, the 7% rule means the nations in the agreement can export about 350 million gallons of dehydrated ethanol duty-free. Next year that's estimated to grow to 420 million gallons. If the U.S. manages to meet President Bush's goal of using 35 billion gallons of alternative fuels, up from six billion gallons last year, the Caribbean Basin nations' 7% slice would probably top two billion gallons.

So investors are lining up at Caribbean Basin ports. In Trinidad, Angostura Ltd., better known for its bitters and rum products, started processing ethanol in 2005. In El Salvador, U.S. agricultural giant Cargill Inc. is producing the fuel as part of a joint venture. In Jamaica, two ethanol processors are up and running, with two more ready to start production this year. Another is trying to line up backing from U.S. venture capitalists. In Haiti, an idled ethanol dehydration plant has attracted renewed attention. Projects also are in the works in Guyana, the Dominican Republic and Aruba.

So many players are entering the Caribbean market that the ethanol exporters may produce more than the duty-free allotment -- meaning some shipments would have to pay tariffs after all. "The Caribbean is heading to 397 million gallons" capacity this year, or almost 50 million gallons above the estimated cap for 2007, warns Jeffrey Tuite, managing director of London-based ED&F Man Holdings Ltd., which operates an ethanol dehydrator outside Kingston, Jamaica. "We're looking at a quota race. Then it will be first come, first served." In 2006 about three-quarters of the fast-rising quota was produced, up from less than half in recent years.

Smart operators can do extremely well, especially if they time market swings properly. But that's no simple task. Despite the bravura of the dehydration crowd, fat profits are hardly guaranteed, given price fluctuations in energy markets. "We've always referred to [Caribbean] plants as 'fireflies,' for the way they turn on and off whenever the price window fails to open in their favor," says Manfred Wefers of Coimex Trading Co., one of Brazil's largest ethanol traders. Demand for ethanol is so strong in Brazil that no more than 20% of the fuel production is exported, and sometimes at prices that are too high for Caribbean dehydrators to make any profit. On the other end, sometimes the U.S. price rises so high Brazilian producers can make a profit bypassing the Caribbean step.

Along a seafront highway east of Kingston, a relic known as Jamaica Ethanol Processing Ltd., which is ED&F Man's subsidiary on the island, has made money despite relying on ancient equipment. Some of the storage tanks, originally built to hold petroleum for Royal Dutch Shell, are still clad in brick masonry, a defense rushed into place against Axis submarine missions in the 1940s. The boilers were built in the 1980s, but look a lot older as they sputter and squirt steamed ethanol through creaking pipes. The little plant employs 30 people to run round-the-clock shifts dehydrating "wet" ethanol, mostly from Brazil.

The business works, managing director Erwin Jones says, because the company has learned to lock in prices for "wet" ethanol when it's cheap, and pounce on opportunities to ship far from Jamaica when the price of dehydrated ethanol spikes.

On the southern tip of Trinidad, Angostura's ethanol subsidiary, Trinidad Bulk Traders Ltd., wasn't profitable last year -- because its 50-million-gallon-a-year dehydration plant couldn't get enough fuel from Brazil. But Curtis Mohammed, an Angostura general manager, says he's confident of profits this year, and is doubling annual capacity. He says the revenue generated from the ethanol business will be funneled back into Angostura's rum business, which has taken a hit in recent years from increased prices for raw materials like molasses.

EthylChem's Mr. White says the years he spent calculating risk as a sales representative for Exxon Mobil and other refiners should help in the ethanol business -- although sometimes his calculations worked out poorly. In 1999, he became president of Global Octanes Corp., a small Texas company that manufactured methyl tertiary-butyl ether, called MTBE, which oil refiners were using at the time to reduce air pollution and comply with environmental regulations. It looked like a growing business -- until MTBE was discovered to contaminate ground water. Global Octanes folded in 2003, after California banned MTBE, and in 2005 Congress failed to give liability protection to its refiners, effectively ending the business. Mr. White took a course to become an insurance salesman.

Before he started going door-to-door, however, the 62-year-old entrepreneur met Patrick Johnson, a Texas businessman familiar with the Caribbean ethanol business, which was getting a boost from the failure of MTBE. He joined Mr. Johnson's EthylChem on Trinidad, whose economy is built on petroleum, natural gas and petrochemicals. Trained labor was abundant, as was the energy to run an ethanol dehydration plant.

The pair cobbled together a small number of investors from Trinidad and the U.S. and hired a Houston investment banker to scour for more funds. They found a Trinidad bank willing to kick in construction financing and are working on a deal with a second bank overseas. Mr. White is telling investors they can expect returns on investment of between 30% and 50% when the initial debt is paid down. He figures he can reduce the risk of not getting enough Brazilian supply, if necessary, by reversing the business model and charging Brazilian producers to dehydrate their ethanol and avoid the tariffs, without EthylChem buying the fuel.

In 2004, Petrojam Ltd., Jamaica's state-owned oil company, put together a joint venture with Brazil's Coimex Trading to process ethanol for the U.S. market. At the time, Petrojam executive Winston Watson recalls, ethanol was selling for about $1 a gallon in Brazil and U.S. buyers were paying between $2 and $2.20 a gallon for dehydrated fuel. "Our break-even number was about $1.50 or $1.60," says Mr. Watson.

But last year, Brazilian ethanol export prices soared to $1.60 a gallon as Brazilian ethanol makers fed their growing domestic market for flex-fuel cars, which can run on either gasoline or ethanol. At the same time, the U.S. purchase price for dehydrated ethanol dropped below $2 a gallon, as American ethanol makers improved productivity. "We didn't lose money," Mr. Watson insists, but acknowledges that the plant still isn't running at full capacity.

Ultimately, says Karl James, chairman of Jamaica's Petrojam Ethanol Ltd., and leader of that country's Sugar Industries Association, Caribbean producers must learn to produce ethanol from the abundant sugar cane on the islands, either for the U.S. or other energy-thirsty markets. But few Caribbean players are in any position to convert sugar production to capitalize on ethanol.

In many parts of the Caribbean, the sugar-cane industry is rotting. The governments of Trinidad, St. Kitts and Barbados have already decided the sugar sectors of their islands are not worth further investment. They'd rather use their islands' limited land for tourism and retirement real estate, figuring that even with the booming ethanol demand, there isn't enough growing space to make modernizing worthwhile. Rum distillers like Trinidad's Angostura and Jamaica's Appleton Ltd. now reach all the way to Fiji for molasses to import for their spirits.

But Angostura's Mr. Mohammed wants to encourage sugar-cane production in the Caribbean Basin in Guyana. And Jamaica hopes the sale this year of five government-owned sugar-cane estates will lead to a renewal of the sugar business there for ethanol production. Authorities are encouraged that among the prospective bidders at this summer's auction are Brazil's Coimex Trading and India's Dhampur Sugar Mills Ltd., both big ethanol traders.

Write to Lauren Etter at lauren.etter@wsj.com¹ and Joel Millman at joel.millman@wsj.com²

# posted by Hugh Bartling @ 1:33 PM 1 Comments

Wal-Mart Wants Suppliers,
Workers to Join Green Effort

Wal-Mart Stores Inc. Chief Executive Lee Scott called on the retailing giant's suppliers and employees to aid its green campaign, including a request that suppliers eventually eliminate nonrenewable energy from their processes and products.

For the past year the company has been expanding its environmental push even as its sales growth has waned and it has faced persistent criticism over its wages and health benefits. But Mr. Scott's remarks yesterday in London marked Wal-Mart's first formal call for suppliers to decrease their use of nonrenewable energy such as that generated by burning coal or gas. Wal-Mart pledges to eventually power its operations entirely with renewable energy sources such as wind and solar energy.

Mr. Scott issued the call while introducing a campaign he christened "Sustainability 360." In another aspect of the campaign, Wal-Mart will ask its 1.35 million U.S. employees this year to make commitments of their own, such as biking to work or encouraging friends to buy energy-efficient light bulbs.

Among the initiatives Mr. Scott outlined, prodding suppliers off nonrenewable energy could have the largest commercial ramifications. Wal-Mart, with an estimated $350 billion in sales last year, buys goods from more than 60,000 suppliers globally.

"Just think about this: What if we worked with our suppliers to take nonrenewable energy off our shelves and out of the lives of our customers?" Mr. Scott said, according to a transcript of the speech, at an executive seminar hosted by the University of Cambridge and Prince Charles.

Some suppliers, such as General Electric Co., already are working with Wal-Mart to promote products such as energy-efficient light bulbs. Osram Sylvania, a unit of Siemens AG, produces 30 types of energy-efficient, compact fluorescent light bulbs.

In another facet of the campaign, Wal-Mart will encourage its employees to adopt what it calls Personal Sustainability Projects this year. The program encourages Wal-Mart employees to embrace a cause in areas such as environmental sustainability or personal health, like starting an in-store recycling program or organizing weight-loss or smoking-cessation support groups.

Some Wal-Mart employees have yet to hear about the program. Ada McBride, a greeter at a Wal-Mart in Apopka, Fla., said she would like to see the retailer "focus on wages," but she anticipates the new initiative will be well-received by employees. It could be viewed favorably by conservation groups, too, especially if it gains widespread participation.

"While we are not familiar with the details of this effort, any program that can engage over a million people in working for a healthy and sustainable environment is good news," said Bob Perciasepe, chief operating officer of the National Audubon Society.

As it expands its green initiatives, Wal-Mart is struggling on another front: perpetuating its sales growth. The retailer in recent years has increasingly pushed into denser urban and suburban markets in the U.S. Subsequently, its same-store sales -- sales at stores open at least a year -- have steadily diminished. Those measures reached rare lows with a 0.5% gain in October and a 0.1% decline in November. Wal-Mart anticipates reporting a gain of 1% to 2% for January.

Write to Kris Hudson at kris.hudson@wsj.com¹

# posted by Hugh Bartling @ 4:21 PM 0 Comments