SHALE OIL AND GAS BOOMS AND EMISSION REDUCTION TARGETS:
TRADEOFFS BETWEEN GAINS AND COSTS
Farzad Taheripour, Assistant Professor, Department of Agricultural Economics, Purdue University, W. Lafayette, IN, USA, 765-4944612, tfarzad@purdue.edu
Wallace E. Tyner, James & Lois Ackerman Professor, Department of Agricultural Economics, Purdue University, W. Lafayette, USA,
1-765-494-0199, wtyner@purdue.edu
Overview
Producing oil and gas from shale resources generates job opportunities, increases sectoral and national outputs,
improves economic welfare, and reduces dependency on imported energy products. On the other hand, in the
absence of emissions reduction policies, using these resources leads to lower energy prices, higher demand for
energy, and expansion in emissions. Proper emission reduction polices could reverse these effects, shift energy
demands towards cleaner energy sources, and generate environmental benefits. While proper emission reduction
policies could generate environmental gains, they may adversely affect gains from the expansion in supplies of
energy resources. This paper uses a general equilibrium economic modelling approach to examine tradeoffs between
economic gains due to increases in oil and gas from shale resources and costs of emission reduction targets and
policies.
Methodology
The modeling framework used in this paper is an advanced version of the computable general equilibrium model
developed by Taheripour, Sarica, and Tyner (2013, henceforth: TST). These authors made major modifications in
the original the GTAP-E model developed at Purdue University (Burniaux and Truong (2002) and McDougall and
Golub (2007)) to examine the economic and environmental impacts of using shale oil and gas resources. While the
modeling framework developed by TST has several advantages over its original version, it does not does not cover
production and consumption of biofuels produced from agricultural resources. We introduced biofuels into the TST
modeling framework to incorporate interactions between biofuels and traditional fossil fuels in our economic and
environmental analyses.
Using the improved model and based on the Department of Energy (2013) projections on future expansions in
supplies of oil and gas from shale resources, two sets of experiments are developed in this paper. The first set of
experiments measures economic gains (compared to the status quo of 2007) due to increases in supplies of oil and
gas from shale resource in the absence of emission reduction targets and policies for the time period of 2008-2035.
The second set of experiments repeats the first set of experiments in the presence of several emission reduction
targets and policies. Then the results of these experiments are used to measure the economic costs of the implanted
emissions reduction policies and targets. Finally, the economic costs of the implemented emission reduction targets
and policies are compared with the social environmental benefits of reductions in emissions using the social cost of
carbon developed by the While House (2103).
Results
The paper provides a wide range of numerical results for alternative emission reduction targets and policies
under several sets of economic assumptions and parameters. For example, our preliminary results shows that in the
absence of any emission reduction target, the expected increases in supplies of shale oil and gas on average improve
the US annual welfare by about $300 billion (measured in terms of 2007 US dollars) over the time period of 20082035, compared to the status quo of 2007. Imposing an emission reduction target reduces the annual welfare gains.
The magnitude of the reduction in welfare increases with more aggressive emissions reduction targets. For example,
the combined goal of the existing regulatory policies (including the average fleet efficiency (CAFE) standard,
renewable fuel standard (RFS), and clean energy standard (CES)) is to reduce CO2 emissions in 2035 by 26.5%,
compared to 2007. Introducing an emissions tax which follows this target reduces the annual gains due the
expansions in shale oil and gas by $150 billion. This is higher than the social gains due to the reduction in annual
CO2 emissions estimated using the Social Cost of Carbon provided in the While House manual.
Conclusions
In the absence of emission reduction policies, increases in the US supplies of oil and gas from shale resources
generate job opportunities, enhance sectoral and national outputs, and improve welfare, significantly. Imposing
emissions reduction targets and policies exhaust large portions of these economic benefits, but create environmental
benefits. However, under normal economic conditions and for a wide range of model parameters and reasonable
emissions targets, the economic gains remain quite large.
References
- Burniaux J. and Truong T., (2002). GTAP-E: “An energy-environmental version of the GTAP model,” GTAP
technical Paper No. 16, Center for global trade analysis. Purdue University, West Lafayette, IN, USA.
- Department of Energy, (2013), “2013 Energy Outlook, Washington, D.C.
- McDougall R. and A. Golub. 2007. GTAP-E Release 6: A Revised Energy-Environmental Version of the GTAP
Model, Purdue University, West Lafayette, IN.
- Taheripour F., Sarica K., and Tyner W. (2013), “Shale Gas Boom, Trade, and Environmental Policies: Global
Economic and Environmental Analyses in a Hybrid Modeling Framework,” Presented at the 32nd USAEE/IAEE
North American Conference “Industry Meets Government: Impact on Energy Use & Development,” July 28-31,
2013, Anchorage, AK.
- White House (2103), “Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis Under
Executive Order 12866,” Washington, D.C.