Energy Market Consequences of an Emerging U.S. Carbon Management Policy

Project Descriptions

Project One: Energy Market Consequences of Emerging Renewable Energy and Carbon Dioxide Abatement Policies in the United States 

Policy response to climate change and energy security in the United States has so far been highly complicated, with individual states and municipalities forging independent pathways, sometimes at odds with federal policies or initiatives. Several options for reducing carbon emissions have been proposed, including adoption of a national renewable portfolio standard and the creation of a cap-and-trade pollution credit market for CO2. 

This project will research possible scenarios for U.S. energy and climate policy, as well as how these options might impact the competition of fuels in the North American market, with implications for global energy markets. This investigation will be conducted using geopolitical and economic modeling and scenario analysis to study various possible outcomes for U.S. climate policy. 

Scenarios to be studied include: 

1) The adoption of a national renewable portfolio standard 
2) The adoption of a U.S. national cap-and-trade system or other carbon-pricing schemes, and their impact on the promotion of the use of alternative energy 
3) The adoption of a U.S. national cap-and-trade system or other carbon-pricing schemes, and their impact on the competition of fuels and pricing in the United States 
4) The promotion of electric or hybrid plug-in electric cars in the United States 

Baker Institute researchers will conduct analysis of the impact of these various policy scenarios on the competition of fuels in North America, including natural gas, nuclear energy, renewable energy and coal, by utilizing its World Gas Trade Model and new models to assess the importance of emerging U.S. carbon management policy to international energy markets in the coming decades. 

Utilizing its world gas trade model, the Baker Institute will also develop scenarios analysis projecting how different potential U.S. carbon management schemes will influence natural gas demand, supply and pricing in the United States, as well as overall trends in the global liquefied natural gas (LNG) market. 

Kenneth Medlock
James A. Baker, III, and Susan G. Baker Fellow in Energy and Resource Economics
Baker Institute for Public Policy, Rice University

Peter Hartley
Baker Institute Rice Scholar
George and Cynthia Mitchell Chair and Professor of Economics
Rice University

 

Project Two: The History of U.S. Relations with OPEC: Lessons to Policymakers 

The history of relations between the United States and the Organization of the Petroleum Exporting Countries (OPEC) has been a volatile one, ranging from intense conflict in the 1970s to marked cooperation in the early 1990s to bring about stable oil prices in the face of Iraq’s invasion of Kuwait. In recent years, U.S. rhetoric against OPEC and “foreign oil” has intensified as oil prices have experienced giant swings and the American economy has suffered as a result. This paper will look at the history and current geopolitics of the United State’s policy toward OPEC and major oil producers such as Saudi Arabia, Russia and Iran. It also will investigate how emerging U.S. climate and energy policy, including setting corporate average automobile efficiency standards, might alter oil geopolitics and supply and pricing trends in global oil markets. In analyzing how U.S. policies toward energy security and climate might impact policy choices of OPEC and important oil-producing countries, the authors will shed light on the new geopolitical power politics of oil. 

Jareer Elass
Baker Institute for Public Policy, Rice University

Amy Myers Jaffe
Wallace S. Wilson Fellow in Energy Studies, 
Baker Institute for Public Policy, Rice University 

 

Project Three: Emerging U.S. Climate Policy and Its Impact on U.S. Trade and Foreign Policy

Climate change is one of the greatest challenges facing humankind today. Its global scope and multigenerational scale make it uniquely daunting. The United States is the world’s largest consumer of hydrocarbons and one of the largest emitters of greenhouse gases (GHGs). Thus, the United States must play a key role in any global effort to reduce GHGs. In recent years, U.S. policymakers and politicians have been struggling to fashion a concrete response to climate change. 

This paper will examine the domestic political forces that drive and constrain development of a concrete U.S. strategy toward climate change and discuss the impact of an emerging U.S. climate approach on U.S. trade and foreign policy. The paper will address initiatives being undertaken by the Obama administration and their impact on U.S. foreign relations and global climate agreements. 

Joe Barnes
Bonner Means Baker Fellow
Baker Institute for Public Policy, Rice University

James Coan
Energy Forum Research Associate
Baker Institute for Public Policy, Rice University


Project Four: (Un?)Happiness and Gasoline Prices in the United States

This paper estimates the volatility premium associated with fluctuating gasoline prices in the United States utilizing a novel technique based on measures of “subjective well-being” — self-reported measures of life satisfaction and affective measures of well-being. Most current approaches for assessing the value of fuel-saving automotive technology use a narrow cost-benefit method in which the additional up-front cost of new technology is compared with lifetime fuel savings. Yet this narrow comparison should tend to undervalue the benefits of using less fuel if gasoline prices are volatile. A well-developed body of literature on oil shocks argues that oil price volatility has negative macroeconomic consequences, as the large deleterious consequences of oil price increases outweigh the small benefits of oil price declines. Various concepts in psychology such as loss aversion, aversion to uncertainty and desire to feel in control suggest additional negative consequences of gasoline price volatility. 

This paper captures both the macroeconomic and psychological impacts of gasoline volatility with its use of Gallup-Healthways Well-Being Index survey data. Since January 2008, Gallup, Inc., has interviewed 1,000 U.S. residents per day about their life satisfaction and the prevalence of various positive and negative emotions in their lives, allowing for a detailed look at the impact of the 2008 oil shock compared with periods of relative oil price stability. Previous analyses have shown that macroeconomic changes have expected impacts on these measures of well-being, and a commission led by Nobel laureates Joseph Stiglitz and Amartya Sen recently advocated the increased use of these psychological measures in public policy.

Carol Graham 
Senior Fellow and Charles Robinson Chair 
The Brookings Institution

Soumya Chattopadhyay
Adjunct Professor, School of Public Policy, The University of Maryland; Senior Research Analyst,
Foreign Policy Program and Global Economy and Development Program, The Brookings Institution

James Coan
Energy Forum Research Associate
Baker Institute for Public Policy, Rice University

Kenneth Medlock
James A. Baker, III, and Susan G. Baker Fellow in Energy and Resource Economics
Baker Institute for Public Policy, Rice University

Amy Myers Jaffe
Wallace S. Wilson Fellow in Energy Studies, 
Baker Institute for Public Policy, Rice University 

 

Project Five: Wind Power in the United States: Prospects and Consequences

Cumulative installed wind-power-generating capacity in the United States has grown at an average annual rate of around 30 percent since 2000. Generally speaking, wind has been the most cost-competitive technology available to meet the growing number of state renewable portfolio standards, which generally require a percentage of electricity generated within the state to come from new renewable sources. Large parts of the U.S. central plains have “good” to “excellent” wind generating resources (corresponding to a wind speed of 7-8 m/s at 50 meters above the ground). But transmission capacity has been the major limitation on even more rapid expansion of wind generating capacity. New transmission lines under construction or in planning will alleviate some of these constraints. Hence, it is reasonable to expect wind capacity to keep growing at a substantial pace. 

This paper examines the impact of continued expansion of wind power on conventional fossil fuel markets in North America. Some existing studies have shown that wind capacity largely displaces natural gas. We argue, however, that this result will only be true in the short term. In the longer term, we expect increased wind capacity to favor natural gas relative to base-load sources of power, especially coal. In the United States, wind tends to generate most of its supply in off-peak hours. As a result, wind capacity steepens the load duration curve faced by the thermal generating system, which disadvantages base-load thermal plants relative to intermediate and peaking load plants. While previous studies have taken generating capacity as a given, this study examines the longer-term investment response to a larger supply of wind energy. 

Peter Hartley
Baker Institute Rice Scholar
George and Cynthia Mitchell Chair and Professor of Economics
Rice University

 

Project Six: Innovation, Renewable Energy, and Macroeconomic Growth

Is the energy sector under-investing in research and development (R&D)? Most studies assume that the optimal size of R&D in the energy sector is 5 to 10 times the current level. Knowing whether the energy sector is under-investing in R&D is important for several reasons. First, both in the United States and in the EU, energy is viewed as a sector with a direct connection to national security. Secondly, from an economic perspective, there is policy discussion about energy innovations in the “green economy” and their potential to act as a new engine of gross domestic product (GDP) and growth. With a large volume of public resources potentially about to be devoted to investment in R&D in the renewable energy sector, it is important to develop a framework in which different alternative research and investment policies can be evaluated. To study the question of the appropriate level of R&D spending and its impact on policy outcomes, this paper develops an economic model which examines an explicit link between R&D in energy and GDP and employment growth, with the objective to quantitatively evaluate the impact of possible R&D energy and clean tech policies proposed for the United States. Findings on the projected rates of technological growth will lead to a more accurate evaluation of different energy policy initiatives currently proposed at the national level in the United States.

Peter Hartley
Baker Institute Rice Scholar
George and Cynthia Mitchell Chair and Professor of Economics
Rice University

Kenneth B. Medlock III 
James A. Baker, III, and Susan G. Baker Fellow in Energy and Resource Economics
Baker Institute for Public Policy, Rice University

Ted Temzelides
Baker Institute Rice Scholar
Professor of Economics
Rice University 

Xinya Zhang
Ph.D. Student 
Department of Economics, Rice University

 

Project Seven: Implications of Offshoring Carbon Emissions for Climate Policy

In today’s globalized economy, outsourcing and globalization of manufacturing allows companies to reduce production costs. It is argued that this process benefits consumers with lower-cost goods, enhances global economic expansion, reduces global unemployment and poverty, and increases net productivity and job creation where it is most needed. But outsourcing and globalization of manufacturing has complicated the process of negotiating global agreements on climate and energy. 

The question arises whether carbon emissions should be most accurately assessed at the point of manufacture (as stipulated in the Kyoto climate accord) or at the point of consumption, leading to new questions on how to handle embedded carbon in international trade. The term “embedded carbon” refers to carbon dioxide emissions released to the atmosphere during all stages in the life cycle of a commercial product. 

In the United States, many analysts and political leaders have argued that international trade must be considered in a future climate change agreement to avoid “carbon leakage” to developing countries. For example, several scientific assessments have concluded that exported commercial products account for about 15 to 25 percent of China’s total CO2 emissions. The discovery of the magnitude of carbon dioxide emissions associated with China’s exports stimulated interest in how to incorporate the embedded carbon in global trade into future national and international policies that aim to reduce emissions of global carbon dioxide and other greenhouse gases. 

This paper will review and compare the results of published science and policy case study literature on embedded carbon in international trade to elucidate the potential importance of the embedded carbon issue for designing future international policy negotiations on climate change. The paper will evaluate the prospects of designing a better system to address the problem of carbon leakage in future international climate accords. 

Robert Harriss
President and CEO 
Houston Advanced Research Center 

Bin Shui 
Scientist 
Joint Global Change Research Institute 


Project Eight: Financial Imbalances, Middle-East Industrialization and Carbon Dioxide Emissions 


The theory that the global recession proved the “decoupling” hypothesis — under which Asian and Gulf Cooperation Council (GCC) economies could have turned to domestic consumption and production, respectively, to avoid contagion from OECD-based recession — was premature. However, the hypothesis was not without merit. It has been supported by the quick Chinese economic expansion in late 2009 and remains viable in the medium term with regard to potential expansion of absorptive capacities of GCC countries, which have sought to diversify their economies mainly through expansion of downstream petrochemicals industries and other energy-intensive industries such as metals. With environmental pressures mounting in the developed world, and Asian manufacturing countries such as China reaching the physical limits of environmental sustainability, multinationals in energy-intensive industries may find other advantages in relocating to the GCC region. The challenge for the GCC countries will be to diversify into industries for which they have comparative advantages without allowing distorted prices of energy and lax environmental protections to result in excessive carbon emissions. 

This paper investigates the prospects for sufficiently fast diversification of GCC economies to enhance their absorptive capacities, and whether or not such diversification will contribute to greater stability in the global economy. The paper also attempts — subject to data constraints — to quantify the environmental impact of industrialization-planning-led growth and diversification strategies for Gulf economies under different scenarios. 

Mahmoud El-Gamal
Will Clayton Fellow in International Economics, Baker Institute for Public Policy
Chair of Islamic Economics, Finance and Management and Professor of Economics and Statistics, Rice University

 

Project Nine: Gas Flaring and Venting: Extent, Impacts, and Remedies

Gas flaring and venting is a major contributor to global emissions of greenhouse gases. This paper will review available data sources on the global emissions from flaring and venting associated with oil production; explore approaches to estimate the emissions and efforts to mitigate the emissions; and assess the verification of the success of the efforts using data from multiple platforms such as satellites, airborne and ground-based measurements. The paper will include an overview of self-reported and satellite-estimated countrywide flaring data, economic and environmental impacts of the gas flared and vented, and the technologies to detect, estimate and measure the emissions associated with flaring and venting. Assessing existing data, the paper will then identify potential options for reducing gas flaring and venting, estimate the relative cost-effectiveness of those measures and assess their feasibility by exploring the best practices from several countries to identify rational approaches that could be implemented in places with the highest flaring and venting volumes. 

Birnur Buzcu-Guven
Energy Forum Postdoctoral Research Associate
Baker Institute for Public Policy, Rice University

Robert Harriss
President and CEO 
Houston Advanced Research Center

Donald Hertzmark 
Consultant


Project Ten: Lithium in Bolivia: Can Resource Nationalism Deliver for Bolivians and the World? 

The introduction of plug-in hybrid and electric vehicles at the end of 2010 has increased interest in the lithium supplies needed for their batteries. This paper elaborates on the challenges of producing lithium from Bolivia and speculates on ways in which these issues can be met to the satisfaction of the Morales government and Bolivians. According to the U.S. Geological Survey, four South American countries hold 90 percent of the world’s known economic, marginally economic and sub-economic lithium reserve base — Chile, with 7.5 million metric tons (mmt); Bolivia, 5.4 mmt;  Argentina, 2.2 mmt; and Brazil, 0.9 mmt. Chile is the top producer in the world, and Argentina expects its production to increase significantly in the next year, propelling it to the number four producer. Bolivia, on the other hand, has not begun production.

Prospective mining companies face many challenges in Bolivia today. The environmental impact from water use and construction on the remote Salar de Uyuni, the world’s largest salt flat and an area that has not previously been mined, is likely to be a major issue. Ownership rights are also likely to be an issue between the government and indigenous groups. Although there is interest from Japanese, Chinese and European investors, the government’s terms may be a further obstacle: 60 percent profit for the government, the manufacture of batteries within Bolivia and possibly even electric vehicle assembly in Bolivia. And it could become evident very quickly that the Morales government is overselling the benefits of Bolivian battery-making, a capital-intensive and highly automated process that produces few jobs. When the benefits of natural gas production were oversold in the late 1990s, it helped produce the riots that brought down the pre-Morales political system. 

David R. Mares 
Baker Institute Scholar for Latin American Energy Studies
Baker Institute for Public Policy, Rice University