Shale oil and gas booms and emission reduction targets: Tradeoffs between gains and costs

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1 Shale oil and gas booms and emission reduction targets: Tradeoffs between gains and costs Farzad Taheripour and Wallace E. Tyner Purdue University 37 th IAEE International Conference, New York, USA June 15-18,

2 Outline Background and literature review Some key figures, Literature review, Objectives of this paper, Modeling framework, Experiments, Simulation results, Conclusions. 2

3 Some key figures (1) Energy reserves and production in 2012 (MTOE) Energy Sources USA World Reserve Production R/P Reserve Production R/P Conv. Crude oil Shale and tight oil Total Crude Conv. Natural Gas Shale and Tight Gas Total Gas Coal Nuclear Energy Hydro Energy Renewable New resources extend US oil and gas reserves by 232% and 527% New resources extend world oil and gas reserves by 21% and 115% New shale resources are mainly located outside the Middle East 3

4 Some key figures (2) World shale oil and gas reserves Resources: ARI, INC and DOE 4

5 Natural gas production by source (trillion cubic feet) 5

6 US domestic crude oil production (million barrels per day) 6

7 Economic gains versus environmental benefits Economic gains due to shale oil and gas booms: More jobs and higher employment rates, higher sectoral and national outputs, welfare improvement, lower rate of dependency, and higher national security [IHS Global Insight Inc (2011), Citi GPS (2012), Arora (2013), and Taheripour, Tyner and Sarica (2013)], With proper environmental policies, expansion in shale gas provides an opportunity to reduce GHG emissions as well, [Brown et al. (2010), Paltsev (2011), Jacoby (2011)], However, reduction in emissions is costly. 7

8 Objectives of this paper Existing studies either examined economic gains due to expansion in shale resources or investigated potentials for achieving lower GHG emissions using shale resources. Our research examines tradeoffs between economic gains and GHG reduction targets, The main question: What would happen to the shale boom gains if we "spend" part of these dividends on reducing greenhouse gas emissions? 8

9 Modeling Framework: A modified version of GTAP-E Endowments: Labor, Land, Capital, and Resources Commodities: including energy GTAP is a well known Computable General Equilibrium model which traces production consumption and trade of good sand services at a global scale 9

10 Modifications in GTAP-E Correction in the GTAP data base version 8 to reflect values of production and consumption of gas at the global scale more accurately, Biofuels are introduced into the model, Modification in firm s demand for energy inputs to accurately model substitution between gas and other energy sources, Introduce two groups of resources: Resources used in oil and gas industries, Resources used in other industries, Modifications in closure to expand endowments. 10

11 11 Experiments developed for this research Experiment 1: Expansion in shale oil and gas according to the DOE projections up to 2035 with no emission reduction policy. Experiment 2: Expansion in shale resources plus a carbon tax that reduces US 2035 GHG emissions by 26.5% compared with Experiment 3: Expansion in shale resources plus the same level of emission reduction but focused only on electricity and transportation: This is close to current US policy, CAFE standard for autos, Electricity standard for power plants, Experiment 4: Expansion in shale resources plus the same level of emission reduction but focused only on electricity.

12 12 Simulation results: Experiment 1 Using shale resources with no environmental policy The shale oil and gas boom is having a major impact on the US economy. During the time period from 2008 through 2035 the US GDP on average would be 2.2% higher than its 2007 level with the expansion in shale resources, The welfare gain from availability of the shale oil and gas technology averages $302 billion per year over this period.

13 13 Simulation Results: Experiment 1 Changes in sectoral outputs, prices, and trade balances Sector Output (% Change) Prices (% Change) Trade Balance (mil$) Sector Output (% Change) Prices (% Change) Trade Balance (mil$) Crops Oil Product Livestock Biodiesel Forestry Ethanol Fishing Electricity Food Chem. Ind Coal E. Int. Ind Oil Other Ind Gas Transport Gas Dist Services

14 14 Simulation Results: Experiment 1 Changes in welfare and GDP at constant price Country Changes in welfare (mil$) Changes in GDP (%) Country Changes in welfare (mil$) Changes in GDP (%) USA Mala_Indo EU R_SE_Asia BRAZIL R_S_Asia CAN Russia JAPAN Oth_CEE_CIS CHIHKG Oth_Europe INDIA MEAS_Nafr C_C_Amer S_S_AFR S_o_Amer Oceania E_Asia Total

15 15 Simulation results: Experiment 2 Using shale resources with overall carbon tax The welfare gain falls from $302 to $178 billion, a drop of 41%. The GDP level increase drops from 2.2% to 1.2%. 41% of the shale gain is lost, but substantial reduction in GHG emissions has been achieved. Another way to interpret these results is that we can at the same time increase fossil energy availability and achieve substantial economic gains, while also reducing GHG emissions 27% from the 2007 base.

16 16 Simulation results: Experiment 2 Other important difference Coal output fell 1.4% with no carbon tax, and falls 35.1% in the carbon tax case. Electricity output increased 2.4% in no carbon tax, but falls 4.6% with the carbon tax. While all the industrial sectors grew in the shale expansion case, they all contract a bit in the carbon tax case. Coal price was relatively flat in the shale expansion case but falls 4.7% with the carbon tax. Electricity price fell 1.3% with no carbon tax, but increases 9% with the carbon tax.

17 Simulation results: Experiment 3 Using shale resources with regulations on electricity and transport emissions This policy targets only emission reduction in the two sectors that together generate 71% of US GHG emissions. The welfare gain falls from $302 billion in Exp. 1 and $178 billion in Exp. 2 to $148 billion. The welfare gain is less than half the original gain from shale expansion. By refusing to go with the more efficient economy-wide carbon tax and instead using regulatory measures to achieve the same objective, the welfare cost to the economy is about $30 billion/year. 17

18 18 Simulation results: Experiment 3 Other important difference Coal output falls even further to -39%. This difference is to be expected since more of the emission reduction is forced on the electricity sector. All the fossil energy prices fall significantly. Electricity price goes up 12.5% compared with 9% in the carbon tax case. All the industrial prices go up more than in the carbon tax case.

19 19 Simulation results: Experiment 4 Using shale resources with regulation on electricity There is only a small difference between experiments 3 and 4. The welfare increase goes up from $148 to $151 billion. The GDP change rounded is the same 1%. Coal output falls further by 42.6% of the base case. Coal price actually falls less at 7.8%. Electricity output falls more as would be expected, down 9.6%, while electricity price jumps by 15.7%.

20 Summary of key results (1) 20

21 Summary of key results (2) 21

22 22 Summary of key results (3) Changes in EV with respect to changes in emissions reduction target Description Emission reduction target for 2035 Emissions reduction target for 2035 (%) Average annual EV in billion $ at 2007 prices Change in EV for 15% increments in emission reduction Clearly, if the shale dividend is viewed as a windfall, it could pay for substantial emissions reduction.

23 23 Conclusions Clearly, the shale gas boom has significant economic implications for our economy. We have the opportunity to use part of the shale dividend to reduce GHG emissions. It is an important decision for the US. We can pay forward to lower GHG emissions using part of the shale oil and gas gain.

24 Thanks very much! Questions and comments Contact information: Farzad Taheripour Wallace E. Tyner