Biobased Industry Center The “other” indirect effects: Alternative Energy and Fossil Fuel Markets James Bushnell, Dept. of Economics, Director, Biobased Industry Center

Biobased Industry Center Outline “Local” Carbon Policies and Spillover Problems –Policies for mitigating negative spillovers Biofuels and petroleum market spillovers Implications and Research Questions

Biobased Industry Center Options for Extending Carbon Policy Upstream vs. Downstream Regulations –Capping/taxing sources or consumers Border adjustments –Taxing imports or subsidizing domestics Offset Markets –Paying for reductions elsewhere Subsidies for alternatives (e.g. biofuels)

Biobased Industry Center Options for Extending Carbon Policy Upstream vs. Downstream Regulations –Capping/taxing sources or consumers Border adjustments –Taxing imports or subsidizing domestics Offset Markets –Paying for reductions elsewhere Subsidies for alternatives (e.g. biofuels)

Biobased Industry Center Downstream Regulation Through Life Cycle Analysis: Carbon “accounting” LCA attributes current emissions to various current activities –production and consumption It does not ask the key question for policy –How will emissions change if we change an activity? –It is sometimes used as if it does answer that question Analogy of accounting costs to marginal cost in business decision making

Biobased Industry Center LCA and Biofuels Increasing refinement, categorization and ranking of biofuel types through LCA This increases the likelihood of market response to rankings through reshuffling –E.g. “clean” fuels to CA, other fuels elsewhere Underlying assumption that 1 gallon (equivalent) of biofuels displaces current consumption of 1 gallon of gasoline

Biobased Industry Center Indirect Effects and Fossil Fuels Fossil fuels are ``exhaustible’’ resources –Drawn from finite stocks –Much of the price is tied to the scarcity value of the resource Alternative energy decreases the value of the stocks in the ground –If future value is worth less, producers are more willing to pump oil (sell for lower price) now –Sellers will sell for what they can get They can’t drink it

Biobased Industry Center Fossil Fuels and Carbon Leakage Increased alternative energy will lower price of fossil fuels from what it otherwise would be Carbon charges (or indirect charges like RIN costs) can offset this –But are probably be applied “locally” (e.g. US or OECD) OECD efforts may lead to lower fuel prices for developing countries –If their demand is more “elastic” (price responsive); can offset much of the local savings

Biobased Industry Center Implications To fully displace fossil fuels, alternative energy costs need to get below marginal extraction costs –Again, unless fossil fuel prices are raised by other charges As resources deplete, extraction costs rise –Alternative energy is displacing more future fossil fuels, rather than currently producing fields Technological change can help –But it’s a race between lower costs of “GreenTech” and extraction costs of fossil fuels

Biobased Industry Center The Future of Oil

Biobased Industry Center Coal vs. Oil For petroleum – more expensive (higher MCE) resources are generally also “dirtier” For electricity it’s the opposite –Coal still cheapest option in many places Sequestration of fossil fuel emissions may have significant indirect benefits –Lowers local emissions but does not lower the price of fossil fuels

Biobased Industry Center Economic Implications GreenTech is competing against a moving target –May be threatened by their own success From a national economic standpoint lowering oil prices are a good thing –At least outside of Texas and Alaska –Helps other consuming countries also – but that’s ok –US the “Saudi Arabia” of grains

Biobased Industry Center The Carbon Budget CO2 in current “proved” oil reserves is Gtons IPCC “budget” of total cumulative emissions over next 100 years is Gtons to stabilize at 450 ppm Can we afford to use all that oil? –Are we likely to?

Biobased Industry Center Where does the fuel go? Assume 1.5% annual growth ~ 900 Billion bbls BP estimated reserves = 1.3 – 1.5 Trillion bbls. Billion Barrels/yr

Biobased Industry Center Implications: Questions for Research Empirically, what is the source of oil that is delayed? (e.g. the short-run “marginal” oil?) –Saudi oil vs. tar sands If biofuels only delay extraction of petroleum, what is the proper way to value that time shift? If all of that existing petroleum gets extracted can we afford the emissions from even “advanced” biofuels? How much of the world needs to tax carbon to offset the Hotelling (price-reduction) effects?

Biobased Industry Center Thank You James Bushnell