The battle over U.S. approval of the Keystone oil pipeline shows the difficulty in regulating carbon emissions through the supply of crude oil, barring an unlikely global agreement to curb demand.

If approved by Washington later this year, the pipeline would transport land-locked, high carbon Canadian tar sand crude to Gulf Coast refineries and from there to world oil markets.

A U.S. Department of State report last Friday concluded that denying the pipeline would have a negligible impact in reducing climate change, because railways or alternative pipelines would still find the crude a global outlet.

By implication, the U.S. Environmental Impact Statement saw no way to stem the flow of tar sands crude in the absence of some kind of global regulation reining in oil demand, although the report did not examine options for regulation.

Options might include an upstream carbon tax or a carbon labelling standard.

Such regulation is all but unthinkable at present, leaving policy focused on national fuel economy standards for cars which are less controversial, as they would save U.S. consumers money, but which green groups may find too slow and incremental.

CARBON LABELLING

Crude oil carbon labelling has so far struggled because global standards for measuring greenhouse gas emissions are at an early stage.

The European Union's executive Commission has tried to regulate transport fuel through a low carbon fuel standard which would label the upstream carbon emissions of different crudes and biofuels.

The EU already sets refiners carbon intensity targets, under its Fuel Quality Directive, which coupled with carbon labelling could in theory rein in demand for high-carbon Canadian tar sands, although these presently have no European market.

Opposition among oil producers and from Canada is based on perceived unfair discrimination against tar sands, given that other heavy crudes are similarly carbon intensive but have less well developed greenhouse gas emissions data.

"The proposed directive unfairly singles out and penalizes the oil sands," Ron Liepert, Minister of Alberta Energy, said in a speech to the European Parliament two years ago.

"Alberta is fully prepared to have our crude oils assessed and competing on a fair and level playing field with all other crudes. The current path of the directive provides a commercial advantage to other heavy crude imports. All crude oils should be treated equally based on scientifically verifiable data."

The European Commission has delayed any ruling on tar sand labelling until later this year.

GLOBAL CARBON PRICE

The EU has also introduced regional carbon prices through a cap and trade scheme.

Some economists argue that the most efficient carbon pricing solution would be a global carbon tax on upstream fossil fuel production, whose extra cost would pass to consuming countries and the tax revenue retained by exporting governments.

Such a tax would dampen demand and foster alternatives, however, making agreement by major oil producers problematic.

Some oil firms have voiced support for a carbon tax on the condition that it is applied globally, which would make it unlikely any time soon.

Exxon Chief Executive Rex Tillerson expressed that view in his support for a carbon tax four years ago.

"A carbon tax may be better suited (than cap and trade) for setting a uniform standard to hold all nations accountable. This last point is important. Given the global nature of the challenge, and the fact that the economic growth in developing economies will account for a significant portion of future greenhouse-gas emission increases, policy options must encourage and support global engagement."

CARBON INTENSITY

Environmental opposition to tar sands is based both on the higher emissions associated with a barrel of tar sands crude compared with the U.S. average, and cumulative emissions given the size of the resource.

The greenhouse gas emissions from burning transport fuel in cars, trucks and planes can be measured on a well to wheels (WTW) basis which accounts for extraction, refining and the burning of the final product in an engine.

Most emissions, at 70-80 percent, are at the final stage of gasoline combustion where the origin of the crude oil is irrelevant.

But tar sands have significantly higher upstream emissions.

There are two approaches to Canadian oil sands extraction: surface mining of bitumen which is then processed remotely to make a synthetic crude oil (SCO); or steam extraction from underground and in situ mixing with a diluent such as natural gas condensate to make dilbit (diluted bitumen).

The process produces higher carbon emissions because heat is needed to make the raw bitumen flow, and because of greater electricity demand and the need for hydrogen in the case of synthetic crude manufacture.

Last Friday's report estimated that Canadian tar sands emitted 17 percent more greenhouse gases than the average barrel of crude oil refined in the United States in 2005.

That used a conservative National Energy Technology Laboratory estimate from 2009 which is higher than many measures.

CUMULATIVE EMISSIONS

If developed entirely, Canadian tar sands would probably account for a sizeable fraction of the carbon that humankind can still burn and stay within safer climate limits, as Columbia University climate scientist James Hansen argued in a blog two weeks ago.

"We stand at a fork in the road. Conventional oil and gas supplies are limited. We can move down the path of dirtier more carbon-intensive unconventional fossil-fuels, digging up the dirtiest tar sands and tar shales, hydrofracking for gas, continued mountain-top removal and mechanized destructive long-wall coal mining. Or we can choose the alternative path of clean energies and energy efficiency."

The State Department concluded that additional, cumulative emissions would be rather negligible from allowing Keystone because alternative infrastructure would otherwise take its place.

By implication, the report leaves U.S. action to curb transport sector carbon emissions resting on fuel economy standards which are unlikely to drive a serious shift to hybrid and electric cars before 2030.