Estimating the emissions reductions from supply-side fossil fuel interventions

The article focuses on the potential for supply-side interventions to reduce global emissions despite concerns about market leakage, focusing on the oil markets. Leakage is the phenomenon by which a reduction in fossil fuel supply from one source leads to increased production from another, counteracting the intended emissions reductions. While some companies claim that market leakage is 100%, economic theory suggests that 100% market leakage is implausible, as it would imply that the demand for oil is perfectly insensitive to price (perfect demand inelasticity) or that the price of oil is a constant value that is unaffected by fluctuations in demand (perfect supply elasticity).  

Market leakage is not 0% either. The exact amount of emissions reduced from supply-side interventions depends on the levels of these elasticities, but they are difficult to empirically estimate. Furthermore, net emission reductions will also depend on the emissions intensities of different sources of oil supply; for example, substitute producers might emit more greenhouse gases per barrel of oil extracted than the production being replaced.  

In this paper, the authors undertake a comprehensive review of the economics literature on the existing estimates of the elasticities of demand and supply of crude oil, and produce reasonable ranges and central estimates of price elasticities for the global oil market. On emissions intensity, the authors estimate the relative emissions intensity of oil sources using the state-of-the-art Oil Climate Index plus Gas (OCI+) dataset on 586 oil and gas fields around the world.  

These data were used in a simple oil demand-supply model to assess leakage across different types of oil resources. A novel aspect of the approach is to use Monte Carlo sampling of the leakage rates to account for uncertainty in those assumptions, and assess the leakage under a wider range of conditions. Depending on the relative emissions intensity of the curtailed and substitute sources of supply, supply-side interventions are found to reduce gross emissions by 40-50% of each barrel curtailed. Although the exact magnitude of the reductions varies, the research finds that any supply-side interventions are very likely to result in net reductions of greenhouse gas emissions. Across the 1.53 million Monte Carlo simulations conducted, the research finds that nearly 99% of cases result in net emissions reductions from supply-side interventions. 

The reduction effects are especially powerful if the supply-side interventions target highly emissions-intensive heavy oils. For example, targeting oil sources such as the Canadian oil sands, which have an average emission intensity of 650 kgCO2e/boe, would yield emissions reductions of 350 kgCO2e/boe (95 percent range: 170 to 520 kg CO2e/boe) if production ‘leaks’ to countries with market-average emissions intensity. If the leakage comes from additional production in other oil sands fields, interventions yield a more modest reduction of 280 kg CO2e/boe (95% range: 90 to 460 kg CO2e/boe).  

This article presents a strong case that supply-side interventions can have strong positive effects on emission reductions. It can be used in response to market substitution arguments, especially for high-emission-intensity oil projects, as it shows how supply-side interventions will have a larger effect on emissions reduction if they displace heavy oils. The article strengthens the case for avoiding new or expanded fossil fuel extraction and counters the ‘perfect market substitution argument’ often made by proponents of new fossil fuel projects.