A study published Sunday in Nature Climate Change uses an economic model to quantify the potential impact on greenhouse gas emissions resulting from the proposed Keystone XL pipeline, which would transport crude oil from Canadian oil sands projects to refineries in the US.
The authors say that previous analyses did not adequately account for the ways in which the increased production due to the pipeline’s construction could lower global oil prices and thereby increase consumption. That would in turn increase overall greenhouse gas emissions. Specifically, they estimate that the carbon emissions associated with the project could range from virtually none to 110 million tons of CO2 equivalent annually. This is in contrast to an estimate provided by the US State Department, which predicted 1–27 million tons of CO2 equivalent.
Here are some comments collected by the Science Media Centre of Canada.
***
Mark Jaccard
Professor, School of Resource and Environmental Management
Simon Fraser University
The paper seems to have sound analysis and its conclusions seem reasonable. To reiterate its main point, expanding oil supply infrastructure is likely to have some effect on oil prices by providing market access to more oil supply for consumers. Unless the production cost of that supply exactly matches current prices, its competitive availability will have some downward pressure on oil prices, which in turn increases oil consumption and associated GHG emissions (depending on what economists call the demand elasticity). Of course, there is considerable uncertainty about the magnitude of the effect. The authors represent this uncertainty by selecting from high and low points of a probability distribution – showing that the effect on oil consumption and emissions can range from 0 to 110 MtCo2 per year.
Overall, the paper suggests a flaw in the analysis of the US State Department because it did not consider this effect when addressing President Obama’s request to know the incremental effect of the pipeline on emissions.
***
Werner Antweiler
Associate Professor, Sauder School of Business
University of British Columbia
I am sympathetic to the findings in the forthcoming paper in the sense that extra supply of oil will have an impact in equilibrium that results in more consumption (and thus more greenhouse gas emissions). The analysis in the paper makes use of conventional supply and demand model using generally recognized assumptions about long-term supply and demand elasticities. So far so good. The full effect of the Keystone XL pipeline (as well as others such as the proposed Enbridge Northern Gateway, the Kinder-Morgan Trans Mountain Expansion, and the TransCanada Energy East project) depends on four additional considerations, however:
1. The impact of additional pipeline capacity on production. The assumption is that every extra barrel of capacity in transportation leads to a one-to-one increase in production. This assumption may be rather strong because capacity utilization may vary over time, and capacity that is currently using more expensive transportation modes (i.e., rail) may shift back to a lower-cost transportation mode (i.e., pipeline). Furthermore, refining capacity may also constrain any increase in output. In particular, the Keystone XL pipeline depends crucially on refining capacity in the southern US that is not expected to increase.
2. An increase in supply of (cheaper) oil may displace other more costly or more polluting energy sources such as coal. This means that there is a substitution effect across fuel sources. A change in oil prices affects prices in related markets (gas, coal) at least in the long term.
3. Oil markets are oligopolistic. There is the possibility that cheaper Canadian oil may lead to market-stabilizing actions by major oil producers that have an interest in maintaining prices. They can withdraw or withhold production capacity to offset new supplies. Thus, Canadian oil merely displaces other oil sources.
4. The GHG intensity of bitumen production is higher than the corresponding GHG intensity of conventional types of oil sources (about 20%). To the extent that Canadian heavy oil displaces other conventional oil sources in the market, it may lead to an overall increase of GHG intensity of oil production even if the total amount of oil consumed remains unchanged.
Quantifying these additional mechanisms is likely to be rather tricky, and I do not claim to have any deep insights empirically into these mechanisms.
Despite these caveats that I’ve pointed out, I reckon that additional pipeline capacity will ultimately lead to a net increase of greenhouse gases. The exact amount may be uncertain, but it is certainly not a negligible amount.
In conclusion, the new paper by Erickson and Lazarus is a welcome contribution to the debate even if the numbers will continue to be debated hotly. I agree with the authors that we need greater transparency of the economic models that are used to determine global impact, such as the EnSys WORLD model they refer to in the paper.
***
Claude Villeneuve
Professeur titulaire, Directeur de la Chaire en éco-conseil
Département des sciences fondamentales, Université du Québec à Chicoutimi
L’article est intéressant, mais il faut comprendre qu’il ne fait que soulever une hypothèse qui n’a pas été considérée dans le rapport du U.S. Department of Energy (DOE) fait pour répondre à la question “Est-ce que Keystone XL va augmenter les émissions de GES s’il est construit et mis en service?”
La réponse du DOE est que le résultat va être peu significatif, parce que les émissions liées à la construction et à l’opération d’un pipeline sont relativement faibles et se comparent aux autres modes de transport. Les auteurs ajoutent un effet d’élasticité de la demande sur le marché mondial du pétrole en supposant que l’apport de nouveau carburant, en contribuant à maintenir bas le prix mondial du pétrole, va entraîner une hausse relativement plus grande de la demande. (En gros, si l’essence est moins chère, on voyage plus loin pour ses vacances, donc on consomme plus de carburant dans le même temps et on produit plus d’émissions que si l’essence est plus chère…)
C’est une hypothèse, mais elle comporte beaucoup d’incertitudes. Cela conduit les auteurs à postuler un effet d’élasticité qui va se traduire par une demande accrue pour du pétrole. Selon la source de ce pétrole, Moyen-Orient ou Venezuela, les émissions supplémentaires devraient être imputées à la construction du Keystone XL selon les auteurs, alors que le DOE considère que le pétrole serait produit de toute façon et transporté autrement (autres pipelines ou train) et donc que l’effet est le même et ne peut être imputé au Keystone XL.
C’est un article de la section “Letters”, donc un élément de discussion légitime, mais qui ne donne pas une réponse définitive au problème.
***
Patrick Gonzalez
Associate professor, Department of Economics, Université Laval
L’article n’apporte rien de nouveau. Comme le précisent d’ailleurs bien prudemment les auteurs : This Letter offers no new insights on whether Keystone XL will ultimately enable higher oil sands production levels.
Le point des auteurs est que le Département d’État américain considère sans justification que le pétrole circulant par Keystone XL ne ferait que déplacer du pétrole vénézuélien, sans augmentation de la production mondiale, mais avec substitution du pétrole vénézuélien par le pétrole plus sale de l’Alberta. Les auteurs soulignent que ce pétrole pourrait en fait ajouter à la production mondiale par un effet de prix. Ils illustrent ce scénario avec un exemple plausible (mais extrême) où la construction de Keystone XL se traduit par une augmentation de la production mondiale de pétrole correspondant à la moitié de sa capacité.
Expert Comments – Carbon Impact of Keystone XL
A study published Sunday in Nature Climate Change uses an economic model to quantify the potential impact on greenhouse gas emissions resulting from the proposed Keystone XL pipeline, which would transport crude oil from Canadian oil sands projects to refineries in the US.
The authors say that previous analyses did not adequately account for the ways in which the increased production due to the pipeline’s construction could lower global oil prices and thereby increase consumption. That would in turn increase overall greenhouse gas emissions. Specifically, they estimate that the carbon emissions associated with the project could range from virtually none to 110 million tons of CO2 equivalent annually. This is in contrast to an estimate provided by the US State Department, which predicted 1–27 million tons of CO2 equivalent.
Here are some comments collected by the Science Media Centre of Canada.
***
Mark Jaccard
Professor, School of Resource and Environmental Management
Simon Fraser University
The paper seems to have sound analysis and its conclusions seem reasonable. To reiterate its main point, expanding oil supply infrastructure is likely to have some effect on oil prices by providing market access to more oil supply for consumers. Unless the production cost of that supply exactly matches current prices, its competitive availability will have some downward pressure on oil prices, which in turn increases oil consumption and associated GHG emissions (depending on what economists call the demand elasticity). Of course, there is considerable uncertainty about the magnitude of the effect. The authors represent this uncertainty by selecting from high and low points of a probability distribution – showing that the effect on oil consumption and emissions can range from 0 to 110 MtCo2 per year.
Overall, the paper suggests a flaw in the analysis of the US State Department because it did not consider this effect when addressing President Obama’s request to know the incremental effect of the pipeline on emissions.
***
Werner Antweiler
Associate Professor, Sauder School of Business
University of British Columbia
I am sympathetic to the findings in the forthcoming paper in the sense that extra supply of oil will have an impact in equilibrium that results in more consumption (and thus more greenhouse gas emissions). The analysis in the paper makes use of conventional supply and demand model using generally recognized assumptions about long-term supply and demand elasticities. So far so good. The full effect of the Keystone XL pipeline (as well as others such as the proposed Enbridge Northern Gateway, the Kinder-Morgan Trans Mountain Expansion, and the TransCanada Energy East project) depends on four additional considerations, however:
1. The impact of additional pipeline capacity on production. The assumption is that every extra barrel of capacity in transportation leads to a one-to-one increase in production. This assumption may be rather strong because capacity utilization may vary over time, and capacity that is currently using more expensive transportation modes (i.e., rail) may shift back to a lower-cost transportation mode (i.e., pipeline). Furthermore, refining capacity may also constrain any increase in output. In particular, the Keystone XL pipeline depends crucially on refining capacity in the southern US that is not expected to increase.
2. An increase in supply of (cheaper) oil may displace other more costly or more polluting energy sources such as coal. This means that there is a substitution effect across fuel sources. A change in oil prices affects prices in related markets (gas, coal) at least in the long term.
3. Oil markets are oligopolistic. There is the possibility that cheaper Canadian oil may lead to market-stabilizing actions by major oil producers that have an interest in maintaining prices. They can withdraw or withhold production capacity to offset new supplies. Thus, Canadian oil merely displaces other oil sources.
4. The GHG intensity of bitumen production is higher than the corresponding GHG intensity of conventional types of oil sources (about 20%). To the extent that Canadian heavy oil displaces other conventional oil sources in the market, it may lead to an overall increase of GHG intensity of oil production even if the total amount of oil consumed remains unchanged.
Quantifying these additional mechanisms is likely to be rather tricky, and I do not claim to have any deep insights empirically into these mechanisms.
Despite these caveats that I’ve pointed out, I reckon that additional pipeline capacity will ultimately lead to a net increase of greenhouse gases. The exact amount may be uncertain, but it is certainly not a negligible amount.
In conclusion, the new paper by Erickson and Lazarus is a welcome contribution to the debate even if the numbers will continue to be debated hotly. I agree with the authors that we need greater transparency of the economic models that are used to determine global impact, such as the EnSys WORLD model they refer to in the paper.
***
Claude Villeneuve
Professeur titulaire, Directeur de la Chaire en éco-conseil
Département des sciences fondamentales, Université du Québec à Chicoutimi
L’article est intéressant, mais il faut comprendre qu’il ne fait que soulever une hypothèse qui n’a pas été considérée dans le rapport du U.S. Department of Energy (DOE) fait pour répondre à la question “Est-ce que Keystone XL va augmenter les émissions de GES s’il est construit et mis en service?”
La réponse du DOE est que le résultat va être peu significatif, parce que les émissions liées à la construction et à l’opération d’un pipeline sont relativement faibles et se comparent aux autres modes de transport. Les auteurs ajoutent un effet d’élasticité de la demande sur le marché mondial du pétrole en supposant que l’apport de nouveau carburant, en contribuant à maintenir bas le prix mondial du pétrole, va entraîner une hausse relativement plus grande de la demande. (En gros, si l’essence est moins chère, on voyage plus loin pour ses vacances, donc on consomme plus de carburant dans le même temps et on produit plus d’émissions que si l’essence est plus chère…)
C’est une hypothèse, mais elle comporte beaucoup d’incertitudes. Cela conduit les auteurs à postuler un effet d’élasticité qui va se traduire par une demande accrue pour du pétrole. Selon la source de ce pétrole, Moyen-Orient ou Venezuela, les émissions supplémentaires devraient être imputées à la construction du Keystone XL selon les auteurs, alors que le DOE considère que le pétrole serait produit de toute façon et transporté autrement (autres pipelines ou train) et donc que l’effet est le même et ne peut être imputé au Keystone XL.
C’est un article de la section “Letters”, donc un élément de discussion légitime, mais qui ne donne pas une réponse définitive au problème.
***
Patrick Gonzalez
Associate professor, Department of Economics, Université Laval
L’article n’apporte rien de nouveau. Comme le précisent d’ailleurs bien prudemment les auteurs : This Letter offers no new insights on whether Keystone XL will ultimately enable higher oil sands production levels.
Le point des auteurs est que le Département d’État américain considère sans justification que le pétrole circulant par Keystone XL ne ferait que déplacer du pétrole vénézuélien, sans augmentation de la production mondiale, mais avec substitution du pétrole vénézuélien par le pétrole plus sale de l’Alberta. Les auteurs soulignent que ce pétrole pourrait en fait ajouter à la production mondiale par un effet de prix. Ils illustrent ce scénario avec un exemple plausible (mais extrême) où la construction de Keystone XL se traduit par une augmentation de la production mondiale de pétrole correspondant à la moitié de sa capacité.
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