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Global carbon budgets and the viability of new fossil fuel projects

Climatic Change volume 150, pages 15–28 (2018)Cite this article

Abstract

Policy-makers of some fossil fuel-endowed countries wish to know if a given fossil fuel supply project is consistent with the global carbon budget that would prevent a 2 °C temperature rise. But while some studies have identified fossil fuel reserves that are inconsistent with the 2 °C carbon budget, they have not shown the effect on fossil fuel production costs and market prices. Focusing on oil, we develop an oil pricing and climate test model to which we apply future carbon prices and oil consumption from several global energy-economy-emissions models that simulate the energy supply and demand effects of the 2 °C carbon budget. Our oil price model includes key oil market attributes, notably upper and lower market share boundaries for different oil producer categories, such as OPEC. Using the distribution of the global model results as an indicator of uncertainty about future carbon prices and oil demand, we estimate the probability that a new investment of a given oil source category would be economically viable under the 2 °C carbon budget. In our case study of Canada’s oil sands, we find a less than 5% probability that oil sands investments, and therefore new oil pipelines, would be economically viable over the next three decades under the 2 °C carbon budget. Our sensitivity analysis finds that if OPEC agreed to reduce its market share to 30% by 2045, a significant reduction from its steady 40–45% of the past 25 years, then the probability of viable oil sands expansion rises to 30%.

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Notes

  1. The Paris agreement also set 1.5 °C as an aspirational limit, but we restrict our analysis here to the 2 °C limit, the target that has stimulated most analysis.

  2. Except where a different date or currency is indicated, oil and carbon prices are in 2012 $US.

  3. As explained by one of the report’s authors in a personal communication.

  4. In a personal communication, one author explained that, being the result of an optimization procedure with foresight, their model’s oil price does not attempt to depict the real-world market oil price in each period.

  5. Following industry practice, we use the more encompassing term light tight oil instead of shale oil.

  6. Output continued to grow even after a significant decline in oil prices.

  7. Even if some scarcity rents exist, the “green paradox” hypothesis suggests that climate policy would force producers to lower oil prices from concern that demand would fall faster than consumption would deplete supplies (Sinn 2012). Of course, if scarcity rents are negligible, as the research literature suggests, the green paradox is of little importance.

  8. Aguilera and Radetzki (2015) attribute this underinvestment primarily to the “resource curse”—rent-seeking behavior within oil-endowed countries, and their state-owned oil corporations, that undermines the prospects for productive investments to expand capacity. Smith (2009) suggests that the underinvestment might to some extent also be a deliberate strategy. And, there have been sanctions that prevented low cost supply expansion in Iran. Regardless of the dominant underlying cause, the overall effect is the same: a higher oil price and a smaller share of global oil production for individual OPEC producers than would occur under a purely competitive global oil market.

  9. See Figure S1 in supplemental materials.

  10. See Figure S2 in supplemental materials.

  11. As one reviewer noted, we could have equally designed our model as an OPEC profit maximization model, with exogenous oil demand as a constraint. The oil price outcomes would be similar.

  12. Detailed data used to construct the cost estimates are in the supplemental material accompanying this article.

  13. See McCollum et al. (2014) for details on the global EEE models used in EMF 27, whose key algorithms range along a continuum from optimization to simulation, and which vary in their regional and technological resolution.

  14. We needed this calibration because the start year for EMF 27 simulations is 2010.

  15. Assumed to approximately reflect the West Texas Intermediate benchmark oil price.

  16. Detailed results and an expanded graph of marginal producers, Figure S3, are in the supplemental materials.

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Acknowledgments

We acknowledge helpful comments from Jotham Peters, Nic Rivers, Tiffany Vass, Duncan Noble, Michael Lazarus, Harro van Asselt, and the anonymous reviewers.

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Authors and Affiliations

  1. School of Resource and Environmental Management, Simon Fraser University, Vancouver, Canada

    Mark Jaccard, James Hoffele & Torsten Jaccard

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  1. Mark Jaccard
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  2. James Hoffele
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  3. Torsten Jaccard
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Corresponding author

Correspondence to Mark Jaccard.

Additional information

This article is part of a Special Issue on ‘Fossil Fuel Supply and Climate Policy’ edited by Harro van Asselt and Michael Lazarus.

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Jaccard, M., Hoffele, J. & Jaccard, T. Global carbon budgets and the viability of new fossil fuel projects. Climatic Change 150, 15–28 (2018). https://doi.org/10.1007/s10584-018-2206-2

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  • DOI: https://doi.org/10.1007/s10584-018-2206-2

Keywords

  • Carbon budget
  • 2 °C
  • Oil sands
  • Oil pipelines
  • Oil price models
  • Energy-economy-emissions models