Climate Change

Introduction

The complex topic of climate change and associated issues face every actor in the energy sector. Tesoro recognizes the concerns of the public related to climate change. Implicit in these concerns is also an appreciation for the need to foster national economic security through domestic energy development and reliability which are currently driving an American manufacturing renaissance. Policies that seek to address climate change must enhance our nation’s energy security and not undermine continued economic growth in the United States while recognizing the global nature of the issue itself. Tesoro is committed to these policy objectives while aggressively pursuing continued investments in the areas of energy efficiency, energy conservation, and the technological development of alternative sources of fuel consistent with our business model.

Tesoro Actions

Addressing greenhouse gas (GHG) emissions is important to Tesoro. In late 2006, the Company, independent of any government mandate to do so, challenged itself to reduce its GHG emissions to 1990 levels (7.6 million tons inclusive of our Wilmington refinery, acquired in 2007)) by 2020. Since then, Tesoro has invested approximately $600 million in capital projects designed to reduce GHG emissions through enhanced energy conservation and efficiency improvements as well emissions reduction initiatives. At the end of 2012, and excluding our Wilmington facility operations since that refinery was not part of Tesoro when then the 1990 by 2020 goal was established, our GHG emissions were 7.0 million tons. Importantly, our efforts in this regard continue with future plans that include projects with the potential to further reduce existing carbon emissions by approximately 500,000 tons annually. In future reports, we plan to report GHG emissions on a year-over-year comparison basis.

Independent of regulatory fiats, Tesoro will continue to invest in energy efficiency projects that make good business sense. For example, Tesoro participates in the Biennial Solomon Benchmarking Study, which contains data on energy efficiency and carbon intensity. Our active involvement in this study provides useful knowledge on ways to operate more efficiently which not only reduces GHG emissions, but also conserves resources and reduces costs at our refineries. Tesoro does this because what makes good sense to our business also makes good sense to our customers and shareholders.

Public Policy Principles

Tesoro is committed to the constructive engagement in, and the development of, a robust public policy debate at federal and state levels on the issue of climate change. Tesoro strongly believes in considering every proposed statute, regulation, or program on its own merit and is guided in this process by certain core principles:

1. Stewardship of our natural resources and the environment is a shared value throughout Tesoro.

Tesoro is deeply committed to the communities we serve and in which our facilities are located. Inherent in the relationship we endeavor to have with our neighbors and customers is a trust by them that we conduct ourselves as careful stewards of our natural resources and the environment. We strive to earn this trust by seeking to conduct our business operations with a dedication toward conservation, energy efficiency, and safety – for our employees and our neighbors.

2. Transparent cost-benefit analysis of policies designed to address climate change

Any federal or state policy designed to address climate change should have a rigorous cost-benefit analysis that accurately informs citizens about the projected benefits of such policy and the estimated cost of such policy to the U.S. economy, the energy costs borne by U.S. citizens, and the impact on U.S. energy reliability. Only when these costs and benefits are adequately represented to the American public can an informed decision be made on whether they merit pursuit.

3. Market-based options are the best means to address climate change

Tesoro believes that artificial government mandates related to energy use or production, whether at the federal or state level, ultimately produce market distortions. Government mandates are typically premised on political considerations and frequently produce unintended results. As evidenced by the ongoing decline in domestic greenhouse gas emissions and dramatic improvements in the realm of energy efficiency, lasting solutions to the challenge of climate change arise from the forces of capitalism. This is the dynamic that drives technological innovations which will change how we produce and use energy on a scale significant enough to have a real environmental impact.

4. Climate change policies must be multilateral to be effective

It is undeniable that climate change is a global issue in scope — not just a U.S. one. Therefore, any proposed “solution” to deal with climate change focused solely on U.S.-based emissions will only impose great costs on the U.S. economy while doing very little to actually address the issue. Imposing burdensome regulations and costs onto American businesses are likely to encourage companies to move more energy intensive manufacturing to foreign countries; many of whom have fewer emission reduction requirements. This result ensures that American jobs are lost for little ultimate environmental benefit. Unilateral economic disarmament is not a sound public policy response to the international scope of climate change.

Views on Specific Climate Policies

  1. Carbon Taxes

A carbon tax would establish a set fee on sources across the economy for every ton of carbon dioxide emitted—a fee that would then be passed along to consumers. If adopted in a vacuum, Tesoro believes that a carbon tax would constitute another questionable government intervention into the economy. In imposing an ever-increasing rate of tax to incentivize reduced use of fossil fuel energy sources so as to reduce overall GHG emissions, the costs for electricity, gasoline and general goods would also increase significantly. In fact, studies have shown that a carbon tax would impose a larger burden on lower-income households—many of whom spend a higher amount of their earnings on energy costs and goods produced by energy intensive industries (e.g. gas, food, public transportation, etc.). Adding a carbon tax on top of the complex of federal and state regulations on greenhouse gas emissions would cause harm to businesses around the Nation as it would place them at a competitive disadvantage with companies in developing nations or other states who are not subject to the same costs. However, a revenue neutral carbon tax as an alternative to, and in lieu of, less flexible command and control regulation at the Federal and state levels may have merit and warrants discussion. Finally, it is unclear what, if any, climate benefit would be achieved by a carbon tax since only U.S. emissions would be targeted.

  1. Renewable Fuel Standard

Tesoro believes that the Renewable Fuels Standard (RFS) should be repealed. Since its inception, Tesoro has fully complied with the RFS. Despite this, Tesoro believes that the RFS, designed to achieve significant greenhouse gas reductions, is a flawed government intervention into the transportation fuels market. Objective observers seem to coalesce around the conclusions that the current RFS is: (1) premised on incorrect market assumptions with respect to domestic fuel demand and technological breakthroughs relative to alternative fuel production, (2) unlikely to be met; (3) causing unintended consequences in other market segments; and (4) will not result in any discernible reduction of greenhouse gas emissions. In its 2011 study of the RFS, the National Academy of Sciences concluded not only that it was unlikely the U.S. could meet the RFS-mandated levels of renewable fuel by 2022, but that the RFS “may be an ineffective policy for reducing global greenhouse gas emissions.” The US Department of Energy stated on June 26, 2013, that “the RFS is not predicted to come close to achievement of the legislated target that calls for 36 billion gallons of renewable motor fuels use by 2022.” At a minimum, Tesoro believes that Congress and the Administration should undertake a comprehensive review of the RFS, along with the economic assumptions which guided its creation, and must include a clear-eyed, comprehensive and transparent cost-benefit analysis to determine whether the program can or should be continued.

  1. Low Carbon Fuel Standard (LCFS)

The non-partisan Congressional Research Service defines a LCFS as requiring the reduction of GHG emissions associated with transportation through a decrease in the carbon content of transportation fuel. Since its enactment as part of AB32 in California, Tesoro has fully complied with that version of a LCFS while maintaining reservations about the efficacy of the program as well as the associated increased energy costs for consumers in that state. Tesoro believes that any program designed to reduce the carbon content of transportation fuel must take into account both the current availability of alternative fuels as well as the actual climate benefit that the program would achieve. For example, one impact of a federal LCFS is likely to be increased exports of heavier Canadian fuel to Asia and increased imports of lighter fuel with less carbon content from the Middle East. These results would not only negate any reduction in greenhouse gas emissions but also impact America’s energy security. Tesoro believes that using market-based solutions that allow for realistic assessments of available technologies are more likely to lead to the development of alternative fuels as well as to actual carbon emission reductions. Tesoro opposes the enactment or promulgation of a federal, regional, or a patchwork of state LCFS requirements.

  1. Greenhouse Gas Emission Standards for Petroleum Refineries

As part of a 2010 settlement agreement with environmental groups, but, notably, without the involvement of the sector being regulated, the U.S. Environmental Protection Agency (EPA) committed to adopting performance standards for the emission of greenhouse gases from petroleum refineries. Tesoro urges EPA to consider actual data submitted by the refining sector to ensure an accurate analysis of actual greenhouse gas emissions and emission controls from the Nation’s refineries. Tesoro believes that any rule must include a rigorous and transparent cost-benefit analysis to ensure the public is informed of the potential cost of the regulation to U.S. taxpayers and the actual impact of the regulation on climate change.