Implications of alternative mitigation policies on world prices for fossil fuels and agricultural products

Emissions mitigation policies affect prices, including prices for fossil fuels and agricultural products. Consumer prices for coal and natural gas are expected to rise when climate policy is implemented, while oil prices may be reduced or remain the same in comparison to a no policy scenario. Impacts on agricultural prices are more controversial as reduced negative productivity impacts on yields are compensated by increased costs of energy inputs to agriculture, lower CO2 fertilization effect, and a competition for land from biofuels. In most of the mitigation scenarios considered in the paper, mitigation policies increase agricultural prices in comparison to the no policy scenario

Russia’s Natural Gas Export Potential up to 2050

Abstract and PDF report are also available on the MIT Joint Program on the Science and Policy of Global Change website (http://globalchange.mit.edu/).Recent increases in natural gas reserve estimates and advances in shale gas technology make natural gas a fuel with good prospects to serve a bridge to a low-carbon world. Russia is an important energy supplier as it holds the world largest natural gas reserves and it is the world’s largest exporter of natural gas. Energy was one of the driving forces of Russia’s recent economic recovery from the economic collapse of 1990s. These prospects have changed drastically with a global recession and the collapse of oil and gas prices from their peaks of 2008. An additional factor is an ongoing surge in a liquefied natural gas (LNG) capacity and a development of Central Asia’s and the Middle East gas supplies that can compete with Russian gas in its traditional (European) and potential (Asian) markets. To study the long-term prospects for Russian natural gas, we employ the MIT Emissions Prediction and Policy Analysis (EPPA) model, a computable general equilibrium model of the world economy. While we consider the updated reserve estimates for all world regions, in this paper we focus on the results for Russian natural gas trade. The role of natural gas is explored in the context of several policy assumptions: with no greenhouse gas mitigation policy and scenarios of emissions targets in developed countries. Scenarios where Europe takes on an even more restrictive target of 80 percent reduction of greenhouse gas emissions relative to 2005 by 2050 and reduces its nuclearbased generation are also considered. Asian markets become increasingly important for natural gas exports and several scenarios about their potential development are considered. We found that over the next 20-40 years natural gas can still play a substantial role in Russian exports and there are substantial reserves to support a development of the gas-oriented energy system both in Russia and in its current and potential gas importers. In the Reference scenario, exports of natural gas grow from Russia’s current 7 Tcf to 10-12 Tcf in 2030 and 15-18 Tcf in 2050. Alternative scenarios provide a wider range of projections, with a share of Russian gas exports shipped to Asian markets rising to 30 percent by 2030 and more than 50 percent in 2050. Patterns of international gas trade show increased flows to the Asian region from the Middle East, Central Asia, Australia and Russia. Europe’s reliance on LNG imports increases, while it still maintains sizable imports from Russia.This study received support from the MIT Joint Program on the Science and Policy of Global Change, which is funded by a consortium of government, industry and foundation sponsors

Will Border Carbon Adjustments Work?

Abstract and PDF report are also available on the MIT Joint Program on the Science and Policy of Global Change website (http://globalchange.mit.edu/).The potential for greenhouse gas (GHG) restrictions in some nations to drive emission increases in other nations, or leakage, is a contentious issue in climate change negotiations. We evaluate the potential for border carbon adjustments (BCAs) to address leakage concerns using an economy-wide model. For 2025, we find that BCAs reduce leakage by up to two-thirds, but result in only modest reductions in global emissions and significantly reduce welfare. In contrast, BCA-equivalent leakage reductions can be achieved by very small emission charges or efficiency improvements in nations targeted by BCAs, which have negligible welfare effects. We conclude that BCAs are a costly method to reduce leakage but such policies may be effective coercion strategies. We also investigate the impact of BCAs on sectoral output and evaluate the leakage contributions of trade and changes in the price of crude oil.This study received support from the MIT Joint Program on the Science and Policy of Global Change, which is funded by a consortium of government, industry and foundation sponsors

Marginal Abatement Costs and Marginal Welfare Costs for Greenhouse Gas Emissions Reductions: Results from the EPPA Model

Abstract and PDF report are also available on the MIT Joint Program on the Science and Policy of Global Change website (http://globalchange.mit.edu/).Marginal abatement cost (MAC) curves, relationships between tons of emissions abated and the CO2 (or GHG) price, have been widely used as pedagogic devices to illustrate simple economic concepts such as the benefits of emissions trading. They have also been used to produce reduced form models to examine situations where solving the more complex model underlying the MAC is difficult. Some important issues arise in such applications: (1) are MAC relationships independent of what happens in other regions? (2) are MACs stable through time regardless of what policies have been implemented in the past?, and (3) can one approximate welfare costs from them? This paper explores the basic characteristics of MAC and marginal welfare cost (MWC) curves, deriving them using the MIT Emissions Prediction and Policy Analysis (EPPA) model. We find that, depending on the method used to construct them, MACs are affected by policies abroad. They are also dependent on policies in place in the past and depend on whether they are CO2-only or include all GHGs. Further, we find that MACs are, in general, not closely related to MWCs and therefore should not be used to derive estimates of welfare change. It would be a great convenience if a reduced-form response of a more complex model could be used to reliably conduct empirical analysis of climate change policy, but it appears that, at least as commonly constructed, MACs may be unreliable in replicating results of the parent model when used to simulate GHG policies. This is especially true if the policy simulations differ from the conditions under which the MACs were simulated. Care is needed to derive MACs under conditions closely related to the policy under consideration. In such a circumstance they may provide approximate estimates of CO2 or GHG prices for a given policy constraint. They remain a convenient way to visualize responses to a range of abatement levels.Development of the EPPA model used here is in part supported by the U.S. Department of Energy, U.S. Environmental Protection Agency, U.S. National Science Foundation, U.S. National Aeronautics and Space Administration, U.S. National Oceanographic and Atmospheric Administration and the Industry and Foundation Sponsors of the MIT Joint Program on the Science and Policy of Global Change

Biomass Energy and Competition for Land

Abstract in HTML and technical report in PDF available on the Massachusetts Institute of Technology Joint Program on the Science and Policy of Global Change website (http://mit.edu/globalchange/www/).We describe an approach for incorporating biomass energy production and competition for land into the MIT Emissions Prediction and Policy Analysis (EPPA) model, a computable general equilibrium model of the world economy, that has been widely used to study climate change policy. We examine multiple scenarios where greenhouse gas emissions are abated or not. The global increase in biomass energy use in a reference scenario (without climate change policy) is about 30 EJ/year by 2050 and about 180 EJ/year by 2100. This deployment is driven primarily by a world oil price that in the year 2100 is over 4.5 times the price in the year 2000. In the scenarios of stabilization of greenhouse gas concentrations, the global biomass energy production increases to 50-150 EJ/year by 2050 and 220-250 EJ/year by 2100. The estimated area of land required to produce 180-250 EJ/year is about 2Gha, which is an equivalent of the current global crop area. In the USA we find that under a stringent climate policy biofuels could supply about 55% of USA liquid fuel demand, but if the biofuels were produced domestically the USA would turn from a substantial net exporter of agricultural goods ($20 billion) to a large net importer ($80 billion). The general conclusion is that the scale of energy use in the USA and the world relative to biomass potential is so large that a biofuel industry that was supplying a substantial share of liquid fuel demand would have very significant effects on land use and conventional agricultural markets.This study received support from the MIT Joint Program on the Science and Policy of Global Change, which is funded by a consortium of government, industry and foundation sponsors

Prospects for Plug-in Hybrid Electric Vehicles in the United States and Japan: A General Equilibrium Analysis

Abstract and PDF report are also available on the MIT Joint Program on the Science and Policy of Global Change website (http://globalchange.mit.edu/)The plug-in hybrid electric vehicle (PHEV) may offer a potential near term, low carbon alternative to today's gasoline- and diesel-powered vehicles. A representative vehicle technology that runs on electricity in addition to conventional fuels was introduced into the MIT Emissions Prediction and Policy Analysis (EPPA) model as a perfect substitute for internal combustion engine (ICE-only) vehicles in two likely early-adopting markets, the United States and Japan. We investigate the effect of relative vehicle cost and all-electric range on the timing of PHEV market entry in the presence and absence of an advanced cellulosic biofuels technology and a strong (450ppm) economy-wide carbon constraint. Vehicle cost could be a significant barrier to PHEV entry unless fairly aggressive goals for reducing battery costs are met. If a low cost vehicle is available we find that the PHEV has the potential to reduce CO2 emissions, refined oil demand, and under a carbon policy the required CO2 price in both the United States and Japan. The emissions reduction potential of PHEV adoption depends on the carbon intensity of electric power generation and the size of the vehicle fleet. Thus, the technology is much more effective in reducing CO2 emissions if adoption occurs under an economy-wide cap and trade system that also encourages low-carbon electricity generation.BP Conversion Research Project and the MIT Joint Program on the Science and Policy of Global Change through a consortium of industrial sponsors and Federal grants

The Economic, Energy, and GHG Emissions Impacts of Proposed 2017–2025 Vehicle Fuel Economy Standards in the United States

Increases in the U.S. Corporate Average Fuel Economy (CAFE) Standards for 2017 to 2025 model year light-duty vehicles are currently under consideration. This analysis uses an economy-wide model with detail in the passenger vehicle fleet to evaluate the economic, energy use, and greenhouse gas (GHG) emissions impacts associated with year-on-year increases in new vehicle fuel economy targets of 3%, 4%, 5%, or 6%, which correspond to the initially proposed rates of increase for the 2017 to 2025 CAFE rulemaking. We find that across the range of targets proposed, the average welfare cost of a policy constraint increases non-linearly with target stringency, because the policy targets proposed require increasingly costly changes to vehicles in the near term. Further, we show that the economic and GHG emissions impacts of combining a fuel tax with fuel economy standards could be positive or negative, depending on underlying technology costs. We find that over the period 2015 to 2030, a 5% CAFE policy would reduce gasoline use by about 25 billion gallons per year, reduce CO2 emissions by approximately 190 million metric tons per year, and cost $25 billion per year (net present value in 2004 USD), relative to a No Policy baseline.The Integrated Global System Model (IGSM) and its economic component, the MIT Emissions Predictions and Policy Analysis (EPPA) model, used in this analysis is supported by a consortium of government, industry, and foundation sponsors of the MIT Joint Program on the Science and Policy of Global Change. (For a complete list of sponsors, see: http://globalchange.mit.edu

The Future of Natural Gas in China: Effects of Pricing Reform and Climate Policy

China is currently attempting to reduce greenhouse gas emissions and increase natural gas consumption as a part of broader national strategies to reduce the air pollution impacts of the nation’s energy system. To assess the scenarios of natural gas development up to 2050, we employ a global energy-economic model—the MIT Economic Projection and Policy Analysis (EPPA) model. The results show that a cap-and-trade policy will enable China to achieve its climate mitigation goals, but will also reduce natural gas consumption. An integrated policy that uses a part of the carbon revenue obtained from the cap-and-trade system to subsidize natural gas use promotes natural gas consumption, resulting in a further reduction in coal use relative to the cap-and-trade policy case. The integrated policy has a very moderate welfare cost; however, it reduces air pollution and allows China to achieve both the climate objective and the natural gas promotion objective.The Joint Program on the Science and Policy of Global Change is funded by a consortium of Federal awards and industrial and foundation sponsors (for the complete list see: http://globalchange.mit.edu/sponsors/all). Support from the U.S. Federal Government in the past three years was received from the U.S. Department of Energy, Office of Science under grants DE-FG02-94ER61937, DE-SC0007114, DE-FG02-08ER64597; the U.S. Department of Energy, Oak Ridge National Laboratory under subcontract 4000109855; the U.S. Department of Agriculture under grant 58-6000-2-0099; the U.S. Energy Information Administration under grant DE-EI0001908; the U.S. Environmental Protection Agency under grants XA-83505101-0, XA-83600001-1, and RD-83427901-0; the U.S. Federal Aviation Administration under agreement 09-C-NE-MIT; the U.S. National Aeronautics and Space Administration under grants NNX13AH91A, NNX11AN72G, and sub-awards 4103-60255 and 4103-30368; the U.S. National Renewable Energy Laboratory under grant UGA-0-41029-15; the U.S. National Science Foundation under grants OCE-1434007, IIS-1028163, EF-1137306, AGS-1216707, ARC-1203526, AGS-1339264 , AGS-0944121, and sub-awards UTA08.950 and 1211086Z1; the U.S. Department of Transportation under grant DTRT57-10-C-10015; and the U.S. Department of Commerce, National Oceanic and Atmospheric Administration under grant NA13OAR4310084

Biofuels, Climate Policy and the European Vehicle Fleet

Abstract and PDF report are also available on the MIT Joint Program on the Science and Policy of Global Change website (http://globalchange.mit.edu/).We examine the effect of biofuels mandates and climate policy on the European vehicle fleet, considering the prospects for diesel and gasoline vehicles. We use the MIT Emissions Prediction and Policy Analysis (EPPA) model, which is a general equilibrium model of the world economy. We expand this model by explicitly introducing current generation biofuels, by accounting for stock turnover of the vehicle fleets and by disaggregating gasoline and diesel cars. We find that biofuels mandates alone do not substantially change the share of diesel cars in the total fleet given the current structure of fuel taxes and tariffs in Europe that favors diesel vehicles. Jointly implemented changes in fiscal policy, however, can reverse the trend toward more diesel vehicles. We find that harmonizing fuel taxes reduces the welfare cost associated with renewable fuel policy and lowers the share of diesel vehicles in the total fleet to 21% by 2030 compared to 25% in 2010. We also find that eliminating tariffs on biofuel imports, which under the existing regime favor biodiesel and impede sugar ethanol imports, is welfare-enhancing and brings about further substantial reductions in CO2 emissions.This study received support from the MIT Joint Program on the Science and Policy of Global Change, which is funded by a consortium of government, industry and foundation sponsors

An Analysis of the European Emission Trading Scheme

Abstract in HTML and technical report in PDF available on the Massachusetts Institute of Technology Joint Program on the Science and Policy of Global Change website (http://mit.edu/globalchange/www/).An international emissions trading system is a featured instrument in the Kyoto Protocol to the Framework Convention on Climate Change, designed to reduce emissions of greenhouse gases among major industrial countries. The US was the leading proponent of emissions trading in the negotiations leading up to the Protocol, with the European Union initially reluctant to embrace the idea. However the US withdrawal from the Protocol has greatly changed the nature of the agreement. One result is that the EU has moved rapidly ahead, establishing in 2003 the Emission Trading Scheme (ETS) for the period of 2005-2007. This Scheme was intended as a test designed to help its member states transition to a system that would lead to compliance with their Kyoto Protocol commitments, which cover the period 2008-2012. The ETS covers CO2 emissions from big industrial entities in the electricity, heat, and energy-intensive sectors. It is a system that itself is evolving as allocations, rules, and registries were still being finalized in some member states late into 2005, even though the system started in January of that year. We analyze the ETS using the MIT Emissions Prediction and Policy Analysis (EPPA) model. We find that a competitive carbon market clears at a carbon price of about 0.6 to 0.9 €/tCO2 (approximately 2 to 3 €/tC) for the 2005-2007 period in a base run of our model in line with many observers’ expectations who saw the cuts required under the system as very mild, but in sharp contrast to the actual history of trading prices, which have settled in the range of 20 to 25 €/tCO2 (approximately 70 to 90 €/tC) by the middle of 2005. In various comparison exercises the EPPA model’s estimates of carbon prices have been similar to that of other models, and so the contrast between projection and reality in the ETS raises questions regarding the potential real cost of emissions reductions vis-à-vis expectations previously formed based on results from the modeling community. While it is beyond the scope of this paper to reach firm conclusions on reasons for this difference, what happens over the next few years will have important implications for greenhouse gas emissions trading and so further analysis of the emerging European trading system will be crucial.This research was supported by the U.S Department of Energy, U.S. Environmental Protection Agency, U.S. National Science Foundation, U.S. National Aeronautics and Space Administration, U.S. National Oceanographic and Atmospheric Administration; and the Industry and Foundation Sponsors of the MIT Joint Program on the Science and Policy of Global Change: Alstom Power (France), American Electric Power (USA), Chevron Corporation (USA), CONCAWE (Belgium), DaimlerChrysler AG (Germany), Duke Energy (USA), J-Power (Japan), Electric Power Research Institute (USA), Electricité de France, ExxonMobil Corporation (USA), Ford Motor Company (USA), General Motors (USA), Murphy Oil Corporation (USA), Oglethorpe Power Corporation (USA), RWE Power (Germany), Schlumberger (USA), Shell Petroleum (Netherlands/UK), Southern Company (USA), Statoil ASA (Norway), Tennessee Valley Authority (USA), Tokyo Electric Power Company (Japan), Total (France), G. Unger Vetlesen Foundation (USA)