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The Relationship between Shale Gas Production and Carbon Capture and Storage under CO2 Taxes: MARKAL Modeling

 

Nadejda Victor
Associate
Booz-Allen Hamilton 
Pittsburgh, PA
victor_nadejda@bah.com
 
 
Christopher Nichols
Senior Analyst
National Energy Technology Laboratory
Morgantown, WV

 

One of the major challenges of U.S. energy policy is to achieve greenhouse gases emissions reductions at low cost. Economists tend to prefer policies that effectively establish a price of emissions. This paper examines the impacts of carbon taxes that are equal to the social costs of carbon in the U.S. energy system under different assumptions about shale gas development and with respect to carbon capture and storage (CCS) deployment. We use the MARKet ALlocation (MARKAL) energy system model that allows policy instruments to be examined quantitatively in a dynamic energy system context. In this study we adopt the EPAUS9r2014 MARKAL database  representing the U.S. energy system by the nine U.S. Census divisions.

According to our results, inexpensive natural gas may offset the more competitive prices of electricity in all scenarios. Still, results show that increased gas supply does not significantly change gas demand in the industrial, residential and transportation sectors. What limits natural gas usage is infrastructure: pipelines are expensive to build and the efforts to use more compressed natural gas (CNG) and liquefied natural gas (LNG) will require infrastructure to support the shift. Thus, though the shale gas boom fundamentally changes the energy sector landscape, it will take time and policies for the infrastructure to catch up.

The results show that in the short term, the diversity of the fuel mix increases as fuel switching from coal to natural gas proceeds. In the long term, a sustained low natural gas price may discourage investment in nuclear generation, CCS and renewables. Therefore, natural gas does not catalyse the transition to a clean energy future but it becomes the primary future electricity source, displacing clean energy.

Shale gas development and low natural gas prices result in gas-fired plants construction, which replace coal power plants in the scenarios with abundant natural gas. Low natural gas prices and lower gas-fired plants capital costs (relative to coal plants) are a strong impediment to coal plant construction. Therefore, even without environmental regulation, earlier retirement of coal plants can be observed.

Including CO2 taxes on the U.S. energy system model shows a large effect only in the electricity generation sector, and that CCS on coal, natural gas and biomass power plants is necessary for CO2 reduction. The core finding of our research is that increases in unconventional gas supply in the energy market could substantially change the energy system over the decades ahead without producing appropriate changes in CO2 emissions. However, this result is potentially sensitive to a range of model assumptions. One important assumption is that market forces are allowed to work out, so results would be different if policies that limit natural gas’s ability to substitute for low-carbon energy were implemented. The results are also influenced by assumptions about technologies investments costs and deployment characteristics.

Our study shows that whether replacing old coal power plants or meeting new energy needs, the new natural gas plants will be around for decades. While the difference in CO2 emissions between combusted coal and natural gas is significant, that reduction alone is not enough to meet long-term CO2 emissions reduction targets. Scenarios with CO2 taxes show significant levels of CCS technologies deployments. Thus, there are needs for more research to lower costs and government incentives to help commercialize the technology, especially for natural gas facilities.

The big questions are whether and when CCS will become available, and how quickly it could be deployed. Under current cost and regulatory assumptions, a shift in electricity production from coal to natural gas without CCS is more likely, rather than to CCS-capable plants in order to reduce CO2 emissions. Because demonstration and pilot projects with CCS technology take years to build, and because the potential benefits of CCS are greater for coal-fired plants, the use of CCS at coal-fired facilities will probably remain at the forefront of the technology development.


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