32nd USAEE/IAEE North American Conference July 30, 2013

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

Disclaimer 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.

Overview • 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 Source: ESPA Analysis

Results and insights • 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

Scenarios

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

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

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

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

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

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

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)

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

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

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

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

32nd USAEE/IAEE North American Conference July 30, 2013