1. 32nd USAEE/IAEE North American Conference July 30, 2013 Analysis of the Impacts of Shale Gas Supply under a CO2 Tax Scenario NETL Pittsburgh PA and Morgantown WV Chris Nichols Office of Strategic Energy Analysis and Planning National Energy Technology Laboratory

2. 2 This report was prepared as an account of work sponsored by an agency of the United States Government. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of any information, apparatus, product, or process disclosed, or represents that its use would not infringe privately owned rights. Reference therein to any specific commercial product, process, or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply its endorsement, recommendation, or favoring by the United States Government or any agency thereof. The views and opinions of authors expressed therein do not necessarily state or reflect those of the United States Government or any agency thereof. Disclaimer

3. 3 The primary objective of the analysis is to evaluate the techno-economic impacts of the shale gas supply and the CO2 taxation on the U.S. energy system We applied the Environmental Protection Agency’s Nine Region MARKAL Database (EPAUS9r 2012) that was developed by EPA around the nine U.S. Census divisions. The paper presents the range of findings from a selection of different scenarios to examine the impacts of increased shale gas supplies, increased gas demand and a CO2 tax, based on OMB’s social cost of carbon Overview Source: ESPA Analysis

4. 4 Other than the electricity sector, increased gas supply does not significantly change gas demand in the basecase – changes to model inputs are required to substantially increase gas use in the industrial and transportation sectors Increased gas supply does lower the price, with increased industrial demand having a minimal price increase. Large usage of gas in the transportation sector and a CO2 tax do increase price, though For deep CO2 reductions, CCS is an essential technology, especially if an industrial renaissance increases gas utilization Results and insights

5. 5 ScenarioDescriptionsDatabase Modifications BASE9R Original EPA 2012 base case scenario (resource supply and end-use demands from AEO 2012) BASE9RHG BASE9R modification (new natural gas supply curve under conditions of abundant natural gas supply at low cost; end-use demands from AEO 2012) Natural gas supply curves changes: in EPAUS9R2012 natural gas mining costs increase by 1.6-2.3% annually and in the modified database costs increase by 0.9-1.3% in 2005-2055. BASEHGIN BASE9RHG modification (new natural gas supply curve; high industrial demand; transportation, commercial and residential demands from AEO 2012) We modified industrial demand and assumed that industrial demand grows faster than in EPAUS9R2012 after 2020. The assumptions on annual demand growth rates are: Chemical sector (1.9%); Primary metal (1.9%); Food (1.8%); Nonmanufacturing industry (1.4%). All other industrial demands and other sectors demands are without changes. BSHCICNG BASEHGIN modification (governmental incentives enabling to invest in CNG vehicles and infrastructure) We modified transportation sector profile in order CNG vehicles became a more attractive choice. In EPAUS9R 2012 investment costs for CNG technologies are increasing, so we changed investments costs on zero growth or decreasing rates (-0.1- 1%) for CNG Vehicles. We also changed discount rates for few CNG technologies (decrease from 0.44 to 0.22-0.36). BCNGCO2 BSHCICNG modification (in June 2013 OMB released the revised social cost of carbon and the estimate for 2013 under the revision was $36 per ton of CO2, compared with $22 in the previous estimate) Total energy system CO2 taxes started in 2015 ($36/tCO2 in 2005 dollars with 5.8% annual growth rate). Scenarios

6. 6 Increased utilization in electricity sector Increased industrial growth Lowered capital costs for CNG vehicles CO2 tax based on current social cost of carbon

7. 7 Electricity growth in the Basecase is driven by natural gas and some loss in coal generation from EPA regulations

8. 8 With higher gas supplies, more coal is economically pushed out and overall generation is slightly higher

9. 9 Increasing gas supplies alone does not change industrial gas use substantially – modifications to industrial end-demand are required to model an industrial renaissance

10. 10 Increased gas supplies are not enough to change use of NG in transportation sector – changes to capital cost assumptions for CNG vehicles were required to move from gasoline to NG

11. 11 More abundant gas lowers the price path Industrial use only increases price minimally NG use in transportation drives a large price increase CO2 tax pushes prices back to baseline

12. 12 Various non-CO2 control scenarios do not move overall CO2 emissions much CO2 tax reduces emissions by 30%, much less than the 80% reduction from 2005 levels (~1,2000 Mt)

13. 13 In the CO2 Tax case, CCS-based electricity provides a large portion of electricity generation

14. 14 CCS allows the electricity sector to substantially reduce its CO2 footprint, but increased gas use in the industrial and transportation sectors limits the total CO2 reduction potential

15. 15 Conclusions “Socially optimal” reduction of CO2 may only be 30% by 2050, according to the model Energy market forecasting models may not “be ready” for shale gas – Changes to model inputs are required to make the industrial and transportation sectors able to accept more gas More abundant gas shifts the price path lower, but layering new demand shows that the price could increase substantially (not including the impacts of LNG exports) Natural gas can be a “bridge” to a lower-carbon future, but CCS will be required: – A large build-out of uncontrolled NG combined cycle plants in the near-term may be a long-term problem Mitigation options are needed in the industrial and transportation sectors, even when natural gas supplants higher-CO2 fuels

16. 16 Primary contributors: Nadja Victor, Booz Allen Peter Balash, NETL Chris Nichols christopher.nichols@netl.doe.gov 304 877-8087