Shale Oil and Gas Boom and Emission Reduction Targets:
Tradeoffs between Gains and Costs
Farzad TaheripourAsst. Prof., Dept. of Agricultural EconomicsPurdue University (W. Lafayette, IN) Wallace E. Tyner
James & Lois Ackerman ProfessorDept of Agricultural EconomicsPurdue University (W. Lafayette, IN)
Supplies of oil and gas from shale resources have increased in recent years in the US, and they are expected to increase in the future as well. The expansion in supplies of these energy sources provides substantial economic benefit for the US economy. But how large is the economic benefit? How does the size of the economic benefit of shale oil and gas compare with the likely costs of climate policies to reduce US greenhouse gas (GHG) emissions? These are the questions we address in this paper.
To evaluate the economic impacts of the shale oil and gas technologies and also the economic impacts of different policies aimed at reducing GHG emissions, a computable general equilibrium (CGE) model is used. The model captures all the varied economic interactions between consumers and producers and among product and factor markets. We use a special version of a well-known CGE model named GTAP for this research. The standard GTAP is a global CGE model which traces production, consumption, and trade of a wide range of goods and services at the global scale, containing up to 113 regions and 57 sectors.
We made substantial modifications to the standard model to handle production of shale oil and gas. Essentially we had to re-do the entire natural gas sector in the model and data base and make other needed changes in the way natural gas substitutes with other energy sources. We also chose to change the model closure to reflect the current reality that the US economy is not at full employment for labor or capital. We changed the normal full employment closure to a supply function for capital and labor. For details about the model and its modifications, the background of this research, and literature review see Taheripour, Tyner and Sarica  and Taheripour and Tyner .
In the analysis we simulated four cases:
1) Expansion in shale oil and natural gas with no emissions reduction policy in place,
2) Expansion in shale oil and gas with an economy-wide carbon tax,
3) Expansion of shale oil and gas plus emission regulations on the electricity and transportation sectors, and
4) Expansion of shale oil and gas with emission regulations only for the electricity sector.
The expansion in shale oil and gas was accomplished through production shocks aimed at reproducing the US Department of Energy  forecasts for shale oil and gas through 2035. Shale oil and gas production increases by 31 and 39 percent respectively over the 2007 base. The economy-wide carbon tax was calibrated to achieve a 27% emission reduction target during the time period of 2007-2035. The electricity sector emission reductions were patterned after the emission reduction proposals from President Obama. The transportation sector reductions were from the revised CAFE standard that achieves 54.5 miles per gallon fleet average by 2025. The fourth case in which all the emission reductions come from electricity was done because some now argue that the CAFE standard is so high and expensive that it will not be fully implemented.
For the case of expansion of shale oil and gas alone, we estimate that US annual economic welfare is increased on average by $302 billion relative to 2007. We also estimate that GDP is on average 2.2% higher each year between 2008 and 2035 compared with 2007. The main regions negatively impacted by the US shale expansion are the Middle East and Russia. However, the impact outside the US is small with only a $14 billion welfare loss for the rest of the world.
For the case of shale expansion plus a carbon tax that reduces emissions about 27%, the GDP increase drops from $302 billion to $178 billion, a drop of 41%. The other major impact – to be expected – is a 35% decrease in coal production. There was also small decline in electricity production with an increase in electricity price, by 8.9%.
The third case has the same shale expansion and same emission reduction as the carbon tax case, but the reduction is achieved through regulations in the electricity and transport sectors. These two sectors have 71% of the total US GHG emissions. With this policy set, the economic welfare increase falls from $302 billion in the shale expansion case to $148 billion, a drop of 51%. The welfare drop in this case is $30 billion more than in the carbon tax case. In essence, the carbon tax is a more efficient way to achieve the emission reduction, and the $30 billion is the implied cost of choosing this regulatory route instead of the more efficient carbon tax. Coal output falls even more (39%) in this case since more of the emission reduction is forced on the electricity sector. In this case, the price of electricity increases 12.5%.
For the last case in which all the emission reduction is in the electricity sector, the net welfare increase is $151 billion, $3 billion higher than the case with emission reduction in both electricity and transportation. The reason for this slight increase is that it is less expensive to achieve emission reductions in the electricity sector than in the transport sector. As would be expected, coal production falls even more (43%) and electricity production falls, and its price increases by 15.7%.
Finally, we do sensitivity analysis on the level of emission reductions. The cases in the analysis described above all use a 27% reduction. Figure 1 provides the welfare gains from shale oil and gas minus the costs of the different levels of emission reductions. As is clear from Figure 1, the shale welfare gains could “finance” up to about a 50% reduction in GHG emissions.
In this paper, we demonstrate that the shale oil and gas dividend for the US economy is quite large. At the same time, we show that it would be possible to use part of that dividend to pay for substantial reductions in GHG emissions. It is clearly a political choice to what extent we do that, but with this analysis, we have a good indication of the costs of different options.
Figure 1. Net welfare gains at different levels of emission reduction
1. Taheripour, F., W.E. Tyner, and K. Sarica, "Shale gas boom, trade and environmental policies: Global economic and environmental analyses in a multidisciplinary modeling framework," in Issues in Environmental Science and Technology, Vol. 39 Fracking, R.E. Hester and R. Harrison, Editors. 2014, Royal Society of Chemistry: Cambridge, UK.
2. Taheripour and Tyner, "Shale oil and gas: Modeling economic and environmental impacts in a computational general equilibrium modeling framework," Presented at the 17th Annual Conference on Global Economic Analysis, June 18-20, Dakar, Senegal.
3. U.S. Department of Energy, Annual Energy Outlook. 2013: Washington, D.C.