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Would constraining US fossil fuel production affect global CO2 emissions? A case study of US leasing policy

Peter Erickson and Michael Lazarus (2018)

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The article examines a specific policy proposal that would reduce coal, oil and natural gas production from US Federal Government-owned areas by ceasing the issuance of leases required for fossil fuel exploration and production. The article evaluates the net impact on carbon dioxide emissions of ceasing new leases, using economic tools to consider market substitution by alternative fuels.  

The methodology involves first estimating the future reference case for US coal, oil and gas production, then estimating quantities of federal production affected by the lease restriction policy, and then modelling market responses to cutting this production for 2030.  

For coal, the article draws on industry reports and information on actual annual production and new lease inflow. It assumes producers extract the same fraction of new stocks each year as they do existing stocks. Specifically, it relies on runs of the integrated Planning Model (representing each US power plant and coal resource). For exports, the article applies a price elasticity of demand (1.16), and of supply (2.6), and an elasticity substitution of 1.4. The results for coal are that leasing restrictions would reduce production by 5.4 EJ in 2030. The drop in CO2 emissions from the consumption of federal coal in that year would be about 490 Mt CO2. Increased coal and gas supplies from other sources would add back 90 Mt CO2. The net overall reduction in emissions would then be 240 Mt CO2

For oil, the article applies a microeconomic model estimating oil consumption changes as a function of production changes, using an elasticities-based approach. The analysis assumes a long-run elasticity of demand of 0.2, and three supply elasticities to represent different oil supply conditions, and therefore possible responsiveness to changes in demand. The results estimate that ceasing new leasing (and not renewing existing, non-producing leases) would avoid about “1.7 EJ (820,000 barrels per day) of oil in 2030, the equivalent of 110 Mt CO2”. Increased supply of other, substitute oil resources (44 Mt CO2) and other non-petroleum fuels (29 Mt CO2) would offset the reduction in production and associated emissions. The resulting net decrease is then 39 Mt CO2

Combining the results for both oil and coal, the article finds that the lease-restricting policy could reduce net global CO2 emissions by around 280 Mt per year by 2030, although the broader long-term implications of the policy may be even more profound than the 2030 results modelled. The article suggests the lease-restriction policy would lead to slightly higher fossil fuel prices, stimulating added production from other sources, which moderates but does not cancel out the overall net effect of reducing global fossil fuel use and CO2 emissions. Specifically, it estimates reductions in federal fossil fuel production of about 37% in 2030 relative to the reference case. 

The article shows the lease-restriction policy is comparable in effectiveness, if not more effective, at reducing emissions when compared to other climate policies.  

The article also provides a way to challenge models that assume perfect substitution in the market i.e. that new projects elsewhere fully offset unilateral production cuts. The analysis in the article demonstrates that the perfect substitution assumption is incorrect, shown through modelling the operation of supply and demand principles in the relevant coal and oil markets. The article shows how economic principles and modelling can be used to rebut an assumption that an extraction project will not increase emissions, or that rejecting the proposal will not reduce emissions. The article shows through linking a specific supply-side policy to its impacts, supply-side policies can reduce greenhouse gas emissions. 

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