Climate Change 2001:
Working Group III: Mitigation
Other reports in this collection The US Oil Market

The US Energy Information Agency (EIA, 1998), using NEMS, an energy-economy model of the US, projects that implementation of the Kyoto Protocol would lower US petroleum consumption by 13% in 2010, and lower world oil price by 16% relative to a reference case price of US$20.77/ barrel.

Laitner et al. (1998) argue that an innovation-led climate strategy would be beneficial to the US economy and manufacturing. However, they project a loss of 36,000 jobs in the US oil and gas extracting industry (11% of 1996 employment) and of US$8.7bn (1993$) in contribution to GDP (about 18% of the 1996 level) (US Department of Commerce, 2000; US Bureau of Labor Statistics, 2000). Losses in the petroleum refining industry are smaller, namely 1000 jobs (1% of 1996 employment) and US$0.5bn in contribution to GDP (about 2% of the 1996 level).

Sutherland (1998) reports on a study of the impact of high energy prices on six energy-intensive industries, including petroleum refining. Prices of refined petroleum products are increased in two steps: US$75/tC in 2005 and US$150/tC in 2010. The mechanism of the price increase is not described; thus there is no discussion of who receives the revenues or how they are handled. The study finds that these price increases reduce the US demand for refined products by about 20%. The cost of other energy sources is also increased, which along with decreased demand, raises the cost of refining in OECD countries and intensifies the on-going shift of refining capacity from OECD to non-OECD countries. Shifting refining capacity to non-OECD countries reduces employment in, and increases imports by, OECD countries. Reductions in fuel use results in reductions in the emissions of local air pollutants. Natural Gas

Global production of natural gas in 1998 totalled 2379bn cubic meters (approx. 93 EJ). In 1997, 45% of natural gas was consumed by industry, including for electric power generation, while 51% was consumed in other sectors, which include residential, commercial, agriculture, public service, and unspecified uses (IEA, 1998b). The emission scenarios in the IPCC Special Report on Emission Scenarios all show increased demand for natural gas in 2100, ranging from 127EJ in the B1 marker scenario to 578EJ in the A1FI illustrative scenario (Nakicenovic et al., 2000). These scenarios are baseline scenarios, which do not include policies to limit GHG emissions.

World gas demand has grown by 3.2%/year over the past 25 years, compared to 1.6%/year for oil and 0.6%/year for coal. Most of the growth has been in power generation where it grew by 5.2%/year. This growth has increased in recent years in response to a variety of technological advantages and policy actions to reduce local air pollutants, particularly sulphur oxides (SOx), a trend that is expected to continue through 2010, independent of policies to reduce GHG emissions (IEA, 1998b). IEA projects that demand for natural gas will grow at 2.6%/year from 1995 to 2020, 1.7%/year in OECD countries and 3.5%/year in non-OECD countries.

The IEA’s projections to 2020 show that, while there is considerable further scope for switching from coal or oil to natural gas in OECD countries, the contribution of fuel switching to the further growth of gas demand in these countries is likely to be more modest than in the past (IEA, 1998b). It is unlikely that there will be any significant switch from oil to natural gas in the transport sector during this period. Residential use of natural gas for space and water heating is reaching saturation. But it is uncertain whether natural gas demand for electricity generation will increase or decrease.

Natural gas has the lowest carbon content of the fossil fuels, and it is generally assumed that its use will increase as the result of efforts to reduce CO2 emissions. Because of this and the possibilities for substitution in the power generation sector away from coal, Ferriter (1997) shows an increasing demand for natural gas in the two carbon tax scenarios and the efficiency-driven scenario compared to the reference case. Switching towards natural gas - especially high efficiency combined cycle and co-generation - is likely to be a very important part of reaching Kyoto targets in some countries. However, other studies (IEA, 1998b; IWG, 1997; EIA, 1998) conclude that the emissions limits set by the Kyoto Protocol will require reductions in total use of electricity and replacement of older generating capacity with non-fossil fuel units, either renewables or nuclear, decreasing the demand for natural gas.

Another uncertainty is the growth in demand from gas in non-Annex B countries. The IEA projects rapid growth in the use of natural gas in many of the non-Annex B countries e.g., 6.5%/year in China, 5.8%/year in South and East Asia, and 4.9%/year in Latin America. Bartsch and Müller (2000) also see a significant growth in gas demand in China and India to 2020, but Stern (2000) questions whether the investments in the necessary infrastructure can be made. The Kyoto Protocol’s provisions on JI and the CDM could lead to further growth of natural gas use in EIT and developing nations. However, until the details of these mechanisms are agreed, it will be difficult to estimate their impact on natural gas demand.

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