On January 26, President Barack Obama outlined the first steps his administration will take to change American energy and transportation policy. Along with other initiatives, the President directed the Department of Transportation to establish rules and regulations which will raise the automotive fuel efficiency standard to an average of 35 miles per gallon by 2020.  The increased fuel efficiency is expected to be accomplished in part by continued development of electric vehicles (EVs) and plug-in hybrid electric vehicles (PHEVs).  Many major automakers have announced a roll-out of EVs or PHEVs within the next few years, including GM, Toyota, Honda, Volkswagen, BMW, and others.

Auto manufacturers have expressed concerns about the increased costs associated with higher fuel efficiency standards for some time.  One such cost increase may result from an escalating global demand for rechargeable lithium-ion batteries. These batteries have already been tested and adopted by a number of auto manufacturers for their electric fleets, and increasing demand for the batteries will put increasing strain on international lithium markets.

Lithium-ion batteries currently charge (and re-charge) various electronic consumer products, such as cellular phones and laptop computers.  In 2007, batteries became the leading end-use product for lithium, comprising 20% of the global lithium market, and the world market for lithium batteries grew to $5.2 billion. Because EVs and PHEVs will likely play a crucial role in allowing auto manufacturers to achieve elevated fuel efficiency standards, the demand for the batteries that power those vehicles should increase. This will lead to a substantial increase in the size of the lithium market.

According to the U.S. Geological Survey, the U.S. already consumes more lithium than any other country, despite possessing less than five percent of the world’s estimated supply of lithium resources. Because of the disparity between domestic supply and demand, the U.S. imports effectively all of its lithium from South America, specifically Chile—the world’s leading lithium producer—and Argentina. Some auto companies have already become concerned about a global shortage of lithium, which could constitute a potential roadblock to the success of lithium-ion batteries, and which some are projecting could happen as early as 2015.

Another problem affecting the global lithium market is the infrastructure issues of countries with large reserves of the mineral. For example, while the salt flats of southwestern Bolivia are estimated to possess more than half of the world’s total lithium deposits, Bolivia does not have the necessary infrastructure to extract lithium in amounts sufficient to affect the market.

These types of supply and demand issues are not uncommon in the energy industry.  In 2004, the solar industry began to feel the effect of a supply crunch for high-quality silicon, which is used to manufacture solar panels as well as computer chips.  This silicon shortage contributed to increased emphasis by the solar industry on thin-film solar cell technology, which uses a smaller amount of material than traditional photovoltaic solar technology.

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In the run-up to the fourth session of the Ad Hoc Working Group on Long-Term Cooperative Action (AWG-LCA), China, India and Brazil have sharply reiterated their views that the burden of reducing greenhouse gas (GHG) emissions lies, in the first instance, with developed countries.  The AWG-LCA, convened as part of the U.N. Framework Convention on Climate Change (UNFCCC) Bali Action Plan of December 2007, is charged with facilitating agreement on principles for long-term action to reduce GHG emissions, extending beyond the current Kyoto Protocol obligations, which are set to expire in 2012.  This agreement on principles is, under the Bali Action Plan, expected to be reached in time for the December 2009 UNFCCC Copenhagen summit.  In preparation for the fourth session of the AWG-LCA, scheduled to occur in Poznan, Poland during the first two weeks of December 2008, governmental parties to the UNFCCC are currently staking out their negotiating positions in formal submissions to the AWG-LCA.

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For clean coal advocates, the energy bill passed in the House Wednesday reflects the tough reality of getting a comprehensive bill passed by the end of the current session.  Speaker Pelosi indicated last week that the House Bill would incorporate the $10 billion funding mechanism for accelerating investment in carbon capture and sequestration (CCS).  On Tuesday when Democrats introduced the bill, the CCS funding provision was gone.  Instead it included modest changes to existing tax credits targeting integrated gasification combined cycle (IGCC) systems, carbon sequestration and other clean coal technologies.  Such changes include:

• Providing an additional $950 million in additional tax credits (based on a credit of 30 percent of the investment) for certain qualified advanced coal projects, and requiring that companies seeking such tax credits provide for capture and storage of at least 65 percent of its carbon emissions (Sec. 811);
• Providing an additional $150 million in additional tax credits (based on a credit of 30 percent of the investment) for qualifying coal gasification projects that include equipment to separate and sequester at least 75 percent of the project’s total carbon emissions (Sec. 812);

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Ahead of the United States in adopting a national scheme to cap and reduce greenhouse gas (GHG) emissions, Canada recently announced the final regulatory framework for its Turning the Corner plan to reduce GHG emissions by 20% from 2006 levels by 2020. Promulgated pursuant to the Canadian Environmental Protection Act of 1999, draft regulations to implement the Turning the Corner plan are expected in the Fall of 2008. In announcing the plan, Canada noted that its performance in reducing emissions “has lagged behind most OECD countries for well over a decade.”

While Canada’s Turning the Corner plan is analogous in many respects to the leading U.S. legislative proposal to cap and reduce GHG emissions – S.2191, the America’s Climate Security Act of 2008 (ACSA), introduced by Senators Lieberman and Warner – one major difference is the lack in Canada’s plan of a mechanism to address the competitive impact to Canadian manufacturing firms of imports produced under less stringent GHG emissions standards. According to the Turning the Corner plan, the final regulations will cover 16 industrial sectors, including refineries, chemical and fertilizer plants, and the cement, steel, and pulp and paper industries. Many of the products produced by these industries compete in Canada’s domestic market (and abroad) with products produced in China, India, and other countries that currently are not planning similar curbs on domestic GHG emissions.

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The ongoing World Trade Organization (WTO) Doha Round process includes negotiations toward an agreement that would reduce or eliminate tariff and non-tariff barriers to international trade in “environmental” good and services. While the mandate for these negotiations is the 2001 WTO Doha Declaration, the United States now views these negotiations as “complementing and supporting the objectives of and the process under” the UN Framework Convention on Climate Change process. The fundamental goal of a WTO agreement on trade in environmental goods and services is to harness trade liberalization to encourage the global distribution and deployment of environmentally friendly technologies that, among other things, help mitigate climate change.

As in other areas of the ongoing WTO Doha Round negotiations, substantial differences have emerged between developed and developing countries – and in particular, between the United States and the European Communities (EC), on the one hand, and Brazil, on the other.

Currently, one of the principal areas of contention is whether to include biofuels in the definition of “environmental” goods. Brazil argues that the inclusion of biofuels is critical in order to increase exports of environmental goods from developing countries. The United States and the EC have rejected Brazil’s proposal, contending that trade liberalization in biofuels should be negotiated as part of the separate WTO market access negotiations for agricultural goods. Further, in a recent joint proposal, the United States and the EC argue that the environmental goods and services negotiations should be divided into two phases – the first and more urgent phase addressing trade in goods and services directly linked to addressing climate change, and the second phase covering the remaining substantial body of environmental goods and services.

Negotiations are currently scheduled to resume in February 2008. It is widely accepted that Brazil and other developing countries will object strenuously to the recent joint US/EC proposal because it excludes biofuels, and it seems unlikely that it will be easy to bridge this divergence of views. Unlike other areas of the WTO Doha Round negotiations, it does not seem that these negotiations will soon advance to the stage of discussions based on a draft text for an agreement.

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