Knut Einar Rosendahl
UMB School of Economics and Business
CREE - Oslo Centre for Research on Environmentally friendly Energy Konferansen “Energimarkedene 2030”
Oslo, November 1st 2013
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Introduction
IPCC (2013:
– More than 95% certain that observed climate changes are mainly due to human activities
– Expect dramatic climate changes this century if emissions continue growing
2-degree target
– Established target by world leaders
– Probably avoid most dramatic climate changes
Global climate treaty in 2015?
– Sufficiently ambitious wrt. the 2-degree target?
– Or will current situation continue?
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– To reach the 2-degree target
– Implications for Norwegian oil extraction?
What are the climate effects of reduced oil extraction in Norway?
– Simply replaced by oil production elsewhere?
– Will reduced oil consumption be replaced by coal?
Is reduced oil extraction good climate policy? Depends on:
– Costs of reducing oil extraction – Alternative climate policies
What about Norway’s reputation in the world?
The Economist (2009):
– “Home to a green-minded people and government, Norway exports the
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Norwegian oil and gas: Big emissions abroad
Observation: Reduced extraction can potentially lead to big reductions in global emissions
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Utslipp fra norsk petro-
virksomhet
Totale norske klimagassutslipp
14 mt 53 mt
470 mt
Utslipp i utlandet ved forbrenning av
norsk olje og gass
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Global climate treaty – impacts on Norwegian oil
A global climate treaty will affect the profitability of Norwegian oil extraction
– Most likely: Less profitable
• Depends on how ambitious it is, and which measures are implemented – IEA’s 450 ppm scenario (≈ 2-degree):
• Global oil price reduced by 17% in 2035 compared to “New policy scenario”
(≈ 4-degree)
– Rystad Energy’s (2013) 2-degree scenario:
• 22% reduction in global oil production until 2050 compared to BaU
• Much bigger reduction after 2050
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Today: Some climate policies in some countries
Economic theory suggests (e.g., M. Hoel, 1994):
– Context: Unilateral policy by one or few countries
• Leakage in fossil fuel markets
– Cost-effective to implement combination of demand- and supply-side measures
• Tax on emissions of CO2
• Tax on extraction of fossil fuels
– The size of these taxes depend crucially on price responsiveness on supply and demand side
Hagem, C. (1994): Numerical study for Norway
– Global emissions can be reduced more cheaply by reducing domestic oil production than by reducing domestic emissions
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Effects of reduced oil extraction in Norway
Net effects on emissions depend on how steep supply and demand curves are
– Price elasticities
Extra steep demand curve?
– Little effect on consumption – Demand-side measures best
Extra steep supply curve?
– Big effect on consumption – Supply-side measures best
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Effects of reduced oil extraction in Norway
Many empirical studies of oil demand
– Different conclusions – average around -0.5 in the long run
Fewer empirical studies of oil supply (outside OPEC)
– Different conclusions – average around 0.5 in the long run
What about OPEC?
– Has market power – how is it utilized?
– Many studies of OPEC – unclear conclusions
– Our study: Consider both full and no use of market power
• Climate effects are almost the same
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Effects of reduced oil extraction in Norway
Summary of oil market effects:
– Supply and demand have quite the same price responsiveness in the long run
– Reduction Norwegian oil production of 1 barrel reduces global oil consumption by about 0.5 barrel
What about coal and gas consumption?
– Empirical studies give few insights
– Model simulations suggest that less than half of the reduced oil consumption is replaced by coal or gas
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Effects of reduced oil extraction in Norway
Norwegian oil extraction is “cleaner” than the world average
– World average: 160 kg CO2e per toe (ton of oil equiv.) – Norway: 60 kg CO2e per toe
– Middle East: 50 kg CO2e per toe
– Large variation across Norwegian fields
• Several oil fields above world average
– Emissions due to extraction not very important for the overall picture
• Emissions from using the oil are much bigger (3 tons CO2 per toe)
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Emissions per unit extraction of oil/gas in Norway
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Emission effects of Norwegian oil extraction
Summary: Effects on global emissions of reducing Norwegian oil extraction by one unit (CO2-emissions)
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-0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8 1
Gross reduction Leakage oil market
Leakage gas/
coal markets
Norwegian extraction
Foreign extraction
Net reduction
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Reduced oil extraction in Norway reduces global emissions
– Rough rule of thumb: 1% reduction in Norwegian oil extraction reduces global CO2 emissions by 1 mill. tons
= 2% of Norway’s emissions
– Size of effect uncertain – direction of effect quite certain
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Emission effects of Norwegian oil extraction
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Is reduced oil extraction good climate policy?
Climate benefits must be compared with costs of reduced extraction
– Costs = Lost profits from oil extraction
– Calculate costs per ton reduced global emissions
Compare reduced oil extraction with alternative climate policies, or against a CO2-price target
– Alt. 1: Based on the Storting’s (Parliament’s) ”Klimaforliket”
• Includes targets for domestic action
• Motive: Show that Norway does more than paying checks – Alt. 2: Based on Norwegian CO2-tax or EU ETS price
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Alt. 1: Compare with domestic emission reductions
Criterion: Costs per reduced global emissions
– Account for international energy market effects (leakage)
Data: Collected data for costs on Norwegian continental shelf
– Incomplete – probably overestimate costs of reducing oil extraction
Comparison: Klimakur 2020 – cost study on domestic emissions reductions consistent with Klimaforliket
– EU ETS sectors disregarded (100% leakage with fixed cap) – Klimakur 2020: Expensive to cut Norwegian emissions…
“Domestic emission reductions” interpreted as “domestic measures”
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Cuts in oil extraction vs. Cuts in domestic emissions
Cost-effective to take 2/3 of cuts in oil extraction
Total costs drop by 60%
Shadow price on global
emissions 350 USD per ton CO2
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Dom. cuts in emissions
Cuts in oil
extraction
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Shadow price on emissions can be transformed to a price per barrel of oil extraction
– 53 USD per barrel
• Interpretation: Oil extraction with net income below 53 USD per barrel should not be produced…
However 1: Has probably overestimated costs of reducing oil extraction
– Implication 1: Shadow costs of CO2 and per barrel of oil is lower
– Implication 2: More than 2/3 of total cuts should be taken in oil extraction
However 2: Don’t forget the market uncertainties
Cuts in oil extraction vs. Cuts in domestic emissions
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Alt. 2: Based on Norway’s CO2 tax
Highest CO2-tax (outside EU ETS) on petrol: 66 USD per ton CO2
– Reflects Norwegian shadow price on reducing global CO2-emissions through domestic measures?
= 98 USD per ton reduction of global emissions
Corresponds to a shadow price of 14 USD per barrel of oil extraction
– Given our results on energy market effects
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Policy recommendation…
Global climate effects should be taken into account when discussing policies towards the oil extraction industry
– First response: Introduce a tax per barrel of oil extraction that reflects the global climate costs
• How large?
– Introducing new taxes on fields in production increases policy uncertainties for companies in their investment decisions
• Taxes less harmful for new fields and projects
– Global climate effects should be taken into account when considering to open new areas for exploration
– The Norwegian Petroleum Directorate (OD) may reduce their pressure on oil
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Illustration from this week
Project to extend the lifetime of the Snorre field
– Two alternatives considered – OD has favoured the alternative with biggest oil production and highest costs - Statoil finally decided in favour of this – OD has been concerned that the project should be cancelled
– ”According to the companies, the project is already marginally profitable”
– Why the concern??
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