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Purdue Researchers Say Shale Boom Could Make Adopting Carbon Tax Easier

Two agricultural economists from Purdue University said the energy boom from shale development could help make a uniform carbon tax to reduce greenhouse gas emissions (GHG) more palatable, but annual economic growth and the windfall from shale would be impacted.

In a policy brief published by the National Agricultural and Rural Development Policy Center, Wallace Tyner and Farzad Taheripour estimate that shale development would provide an “economic welfare” increase of about $302 billion a year, on average. They added that a carbon tax levied on all sectors of the economy would be the most efficient way to spread the cost for emission reductions.

On Wednesday, Tyner told NGI’s Shale Daily that economic welfare is similar to gross domestic product (GDP), but the terms are not the same. “Welfare includes all of the changes in what economists call consumer and producer surplus, whereas GDP is a measure at given prices of changes in output,” he said.

The researchers said it was "interesting" that "policies that welcome shale oil and gas development and at the same time cause substantial reduction in GHG emissions still result in a substantial welfare and GDP gain for the economy.

"In a sense, we can more than pay for the reduction in GHG emissions with the economic gains from shale oil and gas...The question is do we use it all for higher economic growth or do we allocate part of it for reducing future global warming."

Using computer modeling, the researchers analyzed four possible scenarios. Excluding the first model, they envisioned that a 26.5% reduction in emissions from 2007-2035:

?       Expanded development of shale resources with no environmental policy;

?       Shale expansion, plus a carbon tax imposed on all sectors of the economy;

?       Shale expansion with a carbon tax equivalent applied only to the power generation and transportation sectors; and

?       Shale expansion with emission reduction targets only for the power generation sector.

Tyner and Taheripour said the nation's GDP has climbed 2.2% every year, relative to 2007, due to shale development. They added that the bulk of the positive impact from U.S. shale development would be felt in the United States, but the European Union would also benefit. Russia and the Middle East would be negatively impacted, they said.

"What is fascinating about this large benefit is that in 2007, just seven years ago, it was hardly on the radar screen," the researchers said. "Thus, in a sense, it could be viewed as a windfall...in total, the U.S. shale oil and gas expansion reduces welfare by about $14 billion in all of the rest of world, a comparatively small amount."

The researchers said oil and gas production are expected to increase by 31% and 39%, respectively, and their prices are expected to fall 8% and 12%, correspondingly. The trade balance would improve significantly for both oil and gas, but it would worsen for all industrial sectors because an increase in GDP would increase demand for industrial output, thereby increasing imports of industrial products.

Under the second scenario -- expanded shale development coupled with an economy-wide carbon tax -- the researchers said the average welfare gain would fall from $302 billion to $178 billion, a 41% decrease. They also forecast that the GDP level increase would drop from 2.2% to 1.2%.

"This may seem like a large loss, but it is a 'glass half empty' or 'glass half full' question," the researchers said. "Yes, 41% of the shale gain is lost, but substantial reduction in GHG emissions has been achieved.

"Another way to interpret these results is that we can at the same time increase fossil energy availability and achieve substantial economic gains while also reducing GHG emissions 27% from the 2007 base. In other words, we can use part of the shale oil windfall to pay for a lower carbon future."

They added that under the second scenario, coal output would fall 35.1%; electricity output would fall 4.6%; the industrial sector would contract slightly; coal prices would decline 4.7%, and electricity prices would increase 9%.

The researchers said the third scenario -- expanded shale, plus a carbon tax on power generation and transportation -- closely mimics current U.S. energy policy. Overall GHG emissions would be reduced 26.5%, but the welfare gain from shale development would also be cut, this time down to $148 billion. The GDP increase would drop to 1%.

"In essence, this policy concentrates all the emission reduction in the two sectors that together represent 71% of all GHG emissions," the researchers said, adding that the welfare gain of $148 billion is less than half of the $302 billion from unchecked shale development.

"Another way to interpret this case is that by refusing to go with the more efficient economy-wide carbon tax and instead using regulatory measures to achieve the same objective, the welfare cost to the economy is about $30 billion/year."

According to the researchers, coal output would fall 39% under the third scenario, and all fossil energy prices would fall significantly. But electricity prices would climb 12.5%, all industrial prices would increase more than the across-the-board carbon tax, and industrial trade would improve because there would be fewer imports of industrial products.

Under expanded shale development, and emission reduction targets only for power generation, welfare from shale would rebound to $151 billion and GDP would increase 1%. But coal output would fall 42.6%; coal prices would decline 7.8%; electricity output would fall 9.6%, and electricity prices would jump 15.7%. It was unclear precisely what would happen to industrial output; it would either decrease less or increase more than the third scenario.

"This case warrants a look because some observers in the U.S. believe that the nation's fuel economy standards may be weakened as a result of the upcoming 2018 review," Tyner and Taheripour said. "If so, much of the remaining emissions reduction policy would be on the electricity sector...this last policy concentrates all the emission reductions in the electricity sector, so most of the impacts are on coal, electricity and industry."

The researchers conceded that it was unlikely a carbon tax would be implemented on all sectors of the economy, at least in the near term. They also said the corporate average fuel economy standard would have a large impact on the transportation sector. Likewise, the nation's policy of reducing GHG emissions from power generation -- through not building new coal-fired power plants and retiring old ones -- would impact that sector as well (see Daily GPISept. 23, 2013Aug. 29, 2012).

"If we view the large shale oil gain as an unanticipated windfall for the economy, it may well be reasonable to use part of that dividend to pay for GHG reduction," the researchers said. "If we do, the most efficient way to do it is with a carbon tax.

"If for political reasons, we cannot do a carbon tax, we can get the same GHG reduction at an increased annual cost to the economy of $30 billion. Even in this case we still retain half the shale oil dividend while reducing GHG emissions substantially."

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