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Study: Cap-and-Trade to Force Move Away from Domestic Gas

President Obama's proposed cap-and-trade plan for controlling greenhouse gas (GHG) emissions is expected to push up demand for natural gas over the next decade, especially by power generators, but a large part of the demand isn't likely to be met by domestic gas due to the emission allowance costs that will be imposed, according to a study released last Tuesday. Rather it said foreign imports of liquefied natural gas (LNG) are expected to fill the void.

"Annual natural gas demand is projected to [rise above the Energy Information Administration's (EIA) Annual Energy Outlook (AEO) for 2009] baseline levels by 0.9 Tcf in 2015 and 3 Tcf by the year 2025. However, the allowance costs associated with domestic production of natural gas (allowance costs not imposed on the production of natural gas overseas) would make it less attractive to supply this new demand from domestic sources. As a result, the reliance on supplies of natural gas from foreign sources is projected to grow markedly," said the study by energy consultant Charles River Associates (CRA).

"Domestic natural gas production is projected to [rise above the EIA] baseline levels by 2% (0.4 Tcf) in the year 2015 and by 5% (1 Tcf) in the year 2025. At the same time imports of natural gas are projected to grow from baseline levels by 24% (0.5 Tcf) in 2015 and 160% (2 Tcf) by 2025," according to the study, which was commissioned by Coalition for Affordable American Energy, a group of more than 180 energy-user trade associations that support greater domestic oil and natural gas production.

"After 2025, the emission cap in the cap-and-trade policy becomes so stringent that it is expected to require a move away from natural gas to other sources of energy, renewables, clean coal and nuclear. The result is projected lower increases in natural gas demand in the year 2030."

The projections are based on several assumptions, according to CRA. "First, they assume that there are no additional restrictions enacted that would further limit access to domestic natural gas resources. Second, they assume that new LNG terminal capacity can be permitted, constructed and made operational in a timely fashion to receive the additional natural gas imports. [And] they assume that the U.S. can purchase LNG at or near scenario prices, which [are] less than what the world market has traditionally supported except in times of excess supplies of natural gas. Any one or more of these assumptions not being realized would be expected to result in greater cost of natural gas to consumers."

The forced shift to natural gas under the administration's cap-and-trade policy is expected to increase gas prices above the EIA's AEO 2009 baseline levels by 16% ($1.90/MMBtu) in 2015; by 39% ($4.70/MMBtu) by 2020; by 56% ($7.20/MMBtu) by 2025; and by almost 53% ($7.70/MMBtu) by 2030, according to the 34-page CRA study.

The higher prices for natural gas and other energy fuels will be due primarily to the higher carbon allowance prices under the Obama plan: $29/metric ton of carbon in 2010; $66/metric ton by 2020; $101/metric ton by 2025; and $116/metric ton by 2030.

Obama's cap-and-trade policy also is likely to increase the costs to find, develop and produce crude oil in the United States. As a result, fewer projects would likely be pursued and domestic production is projected to decline, the study noted.

By 2015 "domestic crude production is estimated to decline by approximately 0.3% (22 million boe/d) relative to the [EIA] baseline. This increases to 5.8% (507 million boe/d) relative to baseline by the year 2030. During the same period crude imports decline relative to baseline from 2.9% (265 million boe/d) in 2015 to 22% (1538 million boe/d) in 2030."

At the same time electricity prices are expected to soar. They are estimated to increase by 27% (3.6 cents/kWh) above the EIA baseline for 2020, rising by 44% (5.8 cents/kWh) in 2025, according to the CRA study. It foresees motor fuel prices climbing by 19% (74 cents per gallon) above the baseline after 2020.

It also sees the job market contracting as energy prices spiral. The CRA study projects a net job loss of 800,000 in 2015; 1.9 million by 2020; and approximately 3.2 million by 2025. Household purchasing power is expected to decline as well by $1,020 in 2015; by $1,381 in 2020; and by $2,127 by 2030. While all regions of the country would be adversely impacted, the Southeast, Oklahoma, Texas and California would be disproportionately affected, it said.

"Aggregate U.S. investment is projected to drop by 1.4% below [the EIA] baseline level in 2015, but then is projected to increase over the 2020-2030 time frame as required investments in lower-emitting GHG technologies and 2energy efficiency improvements are put in place in order to comply with ever more stringent carbon caps. By 2030 investment is estimated to be 5.6% above baseline level," the study said.

By 2025 the Gross Domestic Product (GDP), a measure of total economic activity, is expected to be roughly 0.7% ($150 billion) below the EIA baseline level driven principally by declining consumption. The GDP is projected to be about 0.2% ($39 billion) below the baseline level in 2030, the study said. "This [will be] a temporary effect resulting from the need for substantial investments in order to comply with the tightening of future-year emission caps," the study said.

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