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

2010 Energy Study

The Baker Institute proposes to examine the U.S. energy market consequences of potential greenhouse gas emissions regulations under a wide range of scenarios including the adoption of a national carbon management initiative as well as a continuation of the current trend towards a piecemeal, sub-national, state by state, policy. Utilizing its world gas trade model, we investigate how different carbon management schemes will influence natural gas supply and pricing in the United States and overall development trends in the North American energy market. The model determines the patterns of upstream and midstream investments that satisfy a required rate of return while also meeting demand.

Click here to see the study working papers 

 

Research Presentations are available on the following event pages:

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Workshop I: The Consequences of Potential Greenhouse Gas Emissions Regulations for the U.S. Energy Market
Houston, Tx - August 25, 2008

Workshop II: Energy Market Consequences of an Emerging U.S. Carbon Management Policy 
Houston, Tx - February 18, 2009

Workshop III: Energy Market Consequences of an Emerging U.S. Carbon Management Policy
Houston, Tx - August 28, 2009

Workshop IV: Energy Market Consequences of an Emerging U.S. Carbon Management Policy
Houston, Tx - January 29, 2010

Workshop V: Energy Market Consequences of an Emerging U.S. Carbon Management Policy
Houston, Tx - June 15, 2010

Energy Market Consequences of an Emerging U.S. Carbon Management Policy (final conference)
Houston, Tx - September 27-28, 2010

 

Modeling Workshop Series: Preliminary Findings

During the research period, the Baker Institute will organize a series of workshops with industry to get comment and feedback on its economic modeling approach and to gain data and opinion on regulatory trends in carbon legislation in the U.S. A major conference onEnergy Market Consequences of an Emerging U.S. Carbon Management Policy will be held at the Baker Institute at the end of the two year study. The conference will highlight the public release of the Baker Institute study findings and include other prominent speakers from government, political, academic, and policy circles.

Topics of Research

•  The impact of various kinds of carbon regulations on U.S. natural gas market trends of supply, imports, inter-regional flows, demand and pricing;

•  The net effect of the adoption of U.S. carbon regulations on the flow of LNG exports worldwide, including to the U.S. or Europe versus movements into the Pacific Basin under different U.S. carbon policy scenarios and resulting U.S. natural gas prices;

•  The impact of various kinds of carbon regulations on the competition of fuels in the U.S. industrial and power generation sectors and the relative price relationships between those fuels;

•  The differences in impacts of state-level versus national initiatives on GHG emission controls;

•  The effect of different costs of carbon avoidance technologies on U.S. energy market prices, supply and demand;

•  The effect of different carbon avoidance policy scenarios and natural gas price impacts on U.S. electricity demand trends;

•  The influence of potential migration of energy-intensive businesses from the U.S. and the consequent challenges for U.S. trade policy that could emerge under various scenarios for GHG emissions regulations in the U.S.;

•  Emerging Persian Gulf investment trends in energy intensive industries, including joint ventures with U.S. and international partners, and the consequences for U.S. trade and GHG emissions policies;

•  The geopolitics of emerging U.S. carbon management policies and impacts on diversification of U.S. natural gas import supplies, U.S. trade policy, and U.S. foreign policy.

Click here to see the study paper descriptions 

Background Information

Over the past year, the issue of climate change and carbon management has climbed to the top of the agenda in political and media circles in the United States. The 110th Congress introduced more than 125 bills, resolutions, and amendments specifically addressing climate change and GHG emissions, a significant increase in the pieces of relevant legislation from past years. The increase in the number of bills reflect a growing concern in the United States about the potential environmental consequences of global warming and growing public sentiment that a credible approach to reducing greenhouse gas emissions needs to be developed-one that allows for a gradual transition to new, lower carbon technologies while simultaneously protecting the U.S. economy.

In the absence of federal legislation, many U.S. states have adopted their own individual greenhouse gas emissions policies, such as New York and California. In addition, a number of states have formed multi-state coalitions, which have pledged to take joint action to reduce emissions. The two original state coalitions include the Regional Greenhouse Gas Initiative in New England, and the Western Climate Initiative. At the end of 2007, governors in the Midwest formed a third coalition, the Midwestern Greenhouse Gas Reduction Accord, which includes Wisconsin, Michigan, Minnesota, Illinois, Iowa, Kansas and the Canadian province of Manitoba . Goals include developing a market-based emissions trading system, producing 30 percent of electricity from renewables by 2030 and requiring carbon-capture standards on coal-fired plants by 2020. Leading presidential candidates have also put forth plans to establish federal regulation of carbon emissions based on a cap-and-trade system. These include Democrats Hillary Clinton, Barack Obama, and John Edwards, and Republicans Mick Huckabee and John McCain.

Emerging U.S. carbon management legislation has focused squarely on the energy industry, with many proposed bills targeting regulation for entities such as petroleum refineries, natural gas processing plants and liquefied natural gas facilities, large-scale coal generation plants, and oil import businesses. But little is known how proposed national or sub-national greenhouse gas emissions regulations in the United States would impact energy markets, including trends for demand, pricing and supply.

Study Aims and Procedure

The Baker Institute proposes to examine the U.S. energy market consequences of potential greenhouse gas emissions regulations under a wide range of scenarios including the adoption of a national carbon management initiative as well as a continuation of the current trend towards a piecemeal, sub-national, state by state, policy.

Utilizing its world gas trade model, the Baker Institute will investigate how different carbon management schemes will influence natural gas supply and pricing in the United States and overall development trends in the North American energy market. The Baker Institute World Gas Trade Model (BIWGTM) has been developed to examine possible futures in a globally connected natural gas market. In short, the BIWGTM proves and produces reserves, constructs transportation routes and calculates prices to equate demands and supplies while maximizing the present value of producer rents within a competitive framework. Thus, the model determines the patterns of upstream and midstream investments that satisfy a required rate of return while also meeting demand. Once reserves are proved and production commences, supplies are distributed to meet demand so that the present value of production over time is maximized. Producers in all regions of the world must compete for market share, with development costs and transportation costs being crucial determinants of the marginal source of supply into any demand region.

The resource data underlying the BIWGTM is based on the World Resource Assessment of the United States Geological Survey (USGS) as well as data for existing reserves from the Oil and Gas Journal Database. Long and short run capital cost curves for resource development were derived using data from the National Petroleum Council (NPC). Demand for natural gas is determined endogenously as the equilibrium price of natural gas adjusts, although there are also exogenous influences such as the level of economic development, the price of competing fuels, and population growth. Demand is modeled by end-use sector and regional detail varies throughout the model based primarily on the availability of data.

Using a scenario approach, carbon constraints will be levied to reflect the current wave of carbon abatement policies being adopted at the state level, and also nationally to reflect any future policy that may umbrella those being adopted by individual states. The scenario approach will be used to examine and compare various outcomes under different sets of assumptions. For instance, policies designed to limit carbon emissions can have uncertain effects on the demand for natural gas. One possibility is that such policies could accelerate demand growth as more carbon intensive fuels such as coal are penalized in favor of natural gas. The potential penalty that conventional coal will likely receive has already contributed to a substantial number of proposed new conventional coal facilities being canceled. Natural gas generation capacity is a likely candidate to replace canceled coal-fired megawatts. In constructing scenarios for consideration, the Baker Institute will assess the potential for growth in natural gas generation capacity and its consequence for natural gas demand.

A tilt toward more rapid growth in demand for natural gas is but one possibility. Another possibility is that competing alternatives - such as wind, coal with carbon sequestration, and eventually solar - could take market share, especially in the longer term. This would become more likely in the event that natural gas prices rise to sufficiently high levels and the required return to capital invested in developing and deploying alternatives is also sufficiently high. Thus, one sensitivity Baker Institute researchers will consider concerns the effect on natural gas demand of variations in the fixed costs and the required rate of return to investments in these alternatives.

The equilibrium price of carbon in a carbon-constrained world is of critical importance to the scenarios to be considered. The merits of various approaches will be investigated, and the price of carbon (or range of prices) will be incorporated in order to assess the effects of carbon regulation on fuel competition and demand. Carbon price scenarios will take into account studies on the impact of a cap and trade system on the projected cost of carbon credits as well as proposed values for a more direct carbon tax system. The importance of looking at a range of carbon values in the scenario analysis cannot be overstated as it is possible that under certain carbon price scenarios, natural gas could be rendered uncompetitive relative to alternative technologies resulting in the long term erosion of demand. In addition, rising prices for fuel under certain carbon policy scenarios may also impact overall electricity demand in the U.S. Modeling results will cover these possible changes in U.S. electricity demand trends.

The effects of future carbon abatement policies will be considered internationally as well, since the scope of competition for future natural gas supplies will be global. The effects of potential carbon policies in Europe and Asia are important for determining global demand growth, equilibrium prices, and international flows of natural gas. The study will consider and make projections on how global LNG export flows, sources of supply, and prices will be affected by the imposition of carbon legislation in the United States.

The institute will also study the impact that U.S. carbon legislation could have on U.S. domestic energy intensive businesses and the possibility that these businesses could migrate to regions where carbon legislation is either absent or less restrictive - the so-called "carbon leakage" phenomenon. Such an outcome would alter the demands for natural gas, or energy more generally, in various regions of the world and have implications for global energy flows. The analysis will include an examination of the recent trend towards the development of new aluminum and petrochemical businesses in the Persian Gulf and the resulting geopolitical and economic consequences of such trends on U.S. trade policy, U.S. energy policy, U.S. foreign policy and global climate policy.

 

This study was generously sponsored by Baker Institute Energy Forum Sponsors and ConocoPhillips.

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Associated Research

Renewable Energy and Carbon Management Strategies for the United States: International Energy Market and Global Climate Implications
IEEJ

Carbon Capture & Sequestration: Greenhouse Gas Emissions Reduction and Management Study Group
Rice Energy Program