NEW YORK - The U.S. climate bill would cost Valero, the country's largest oil refiner, more annually than it has ever made in a year, forcing it to warn consumers at filling stations that fuel prices will rise, the company's top government affairs official said.

How would we be able to operate? Jim Greenwood, a vice president for governmental affairs at San Antonio based-Valero Energy Corp, said about the legislation the House of Representatives narrowly passed in June. I don't know.

He said the bill, which would require refiners to hold or purchase permits for the amount of carbon dioxide their plants and fuels produce, would cost Valero some $6 billion to $7 billion per year.

That is more than the net income it made during 2006, its best year of net income for refining so far.

Many oil refiners have complained they would be burdened by extra costs from the bill, which would set up a cap-and-trade market on emissions around 2012. It would give refiners only 2 percent of the permits to emit greenhouse gases in the early years of program, while utilities would get 30 percent of the permits to pollute.

Democratic leaders in the U.S. Senate are expected to introduce their version of the bill next month. It is uncertain whether there would be enough votes to pass it this year.

Greenwood also took issue with the number of refiner permits in the legislation.

But he said Valero preferred a radical reworking of the bill to include far more research-and-development money for technologies such as advanced biofuels and carbon capture and storage underground, rather than a reworking of the bill to include more permits for refiners.

Critics of carbon capture and storage have said burying enough carbon dioxide underground to help slow global warming would require building a pipeline system equal to the size of the current U.S. liquid fuel pipes system.

But Greenwood said Valero sees it as a top priority. If they can make some breakthroughs ... especially with carbon capture and sequestration, you can halve carbon emissions, Greenwood said. It seems to me (the government) ought to be spending money on figuring out how to do that.

Valero is letting customers know it believes the bill will boost gasoline prices and is encouraging them to write to lawmakers. The company has printed 100,000 signs with that message and is encouraging franchise owners of its gasoline stations to place them at the top of fuel pumps.

It hopes such opposition could help persuade moderate Senators to vote against the bill, especially in industrial states. Valero has already installed 1,000 of the signs at stations the company owns, mostly in the U.S. Southwest.

We have to calculate whether we can pass the climate bill costs through to consumers and what the impact is going to be on the demand for gasoline and operationally how we are going to adjust, said Greenwood.

He said a carbon tax would be more transparent than a cap-and-trade market. Even adding an additional gasoline tax of 10 or 20 cents a gallon would be preferable to cap and trade in which the prices for emitting a ton of carbon could be hard to predict, he said.

This year Valero bought seven distilleries to make traditional ethanol from corn and has made other investments in companies that plan to make advanced cellulosic ethanol from nonfood crops and fuel from algae.

But even Valero's proposed solutions would be no quick fix. Greenwood said advanced fuels and carbon capture and storage are both at least 10 years or more from becoming commercially viable.
(Editing by David Gregorio)