Oil Change International

Exposing the true costs of fossil fuels

Counting the carbon kept in the ground

co-authored with Steve Kretzmann

In a report released last week, Oil Change International and the Institute for Energy Economics & Financial Analysis demonstrated how the movement against Keystone XL and other tar sands pipelines has contributed to a decline in the profitability of the tar sands industry.

The declining profitability of tar sands production has led to lower investment forecasts and the cancellation of three major projects, with further cancellations looking increasingly likely.

In the report, we calculate the amount of tar sands bitumen and associated carbon dioxide kept in the ground via the cancellation of these projects (0.2 billion tonnes to 2030 with 2.6 billion tonnes more over the potential lifetime of the projects). We also model how much tar sands production would be curtailed if all proposed pipeline projects are stopped, projecting the curtailed production and emissions out to 2030 (4.1 billion tonnes of CO2). In total, 4.3 billion tonnes has been saved to 2030 and a total of 6.9 billion tonnes if including the lifetime production from the cancelled projects.

Now we have published the chart below showing these emissions savings against those of key climate policies of the Obama Administration.

Tar-Sands-Oct-2014_crop

Should the emissions saved from demand-side policies such as vehicle efficiency standards (CAFE) and power plant carbon rules be compared to those saved by supply-side changes such as the cancellation of oil production projects? We, and others such as the Stockholm Environment Institute, believe they should be, although it is important to understand how these approaches differ.

  • Both approaches depend on assumptions – the question is which assumptions do you prefer?  The projection of emissions savings from demand-side measures, such as vehicle efficiency standards, depends on the full implementation of those policies and is vulnerable to regulatory weakness, industry intervention, legal challenges or even policy changes over the time period -for example, a future administration or Congress may reverse or deemphasize these policies. Therefore, these are estimates of the maximum likely emissions reductions.

Estimates of savings from cancelled projects assume that the economics of these projects will not change sufficiently to restart them. By counting this carbon as ‘avoided’, Oil Change International is assuming that the industry will not succeed in improving the economics of these projects and that the climate movement will continue to have a material impact on tar sands production for the foreseeable future. In other words, do you want to count on public concern and activism around climate growing, or do you want to count on politicians successfully taking action on climate?

  • Demand projection models are approximate but we know how much oil is buried below a cancelled project. Improving efficiency and switching to clean energy production is absolutely crucial. But there are uncertainties in how policy measures will actually impact public behavior. One such factor is the behavioral response to more efficient energy use, which may include increased energy consuming activity such as driving more as the cost of driving goes down. This could reduce the actual emissions savings estimated for certain measures such as CAFE.

However, if a tar sands mining project does not go ahead then the bitumen that would have been extracted by that project will remain underground. The emissions that would have been released to the atmosphere by extracting, processing and consuming that bitumen can with a high degree of certainty be considered to have been kept in the ground with the bitumen.

While it might be argued that some comparable amount of crude oil will simply be extracted elsewhere to make up for cancelled production, it is far from clear that barrel-for-barrel this is actually the case. The argument assumes a predictable level of demand and supply when in reality both are in flux due to a number of factors.

On the supply side, this can be seen most clearly in the current behavior of the oil markets. Until recently, most oil analysts expected Saudi Arabia and the rest of OPEC to reduce supply if prices fell below roughly $90/barrel.[1]

However, thus far Saudi Arabia has refused to cut production preferring instead to let prices fall and maintain market share. The key here is that oil markets are unpredictable and we cannot make assumptions based on either the past or standard economics.

On the demand side, while levels of demand cannot react quickly to changes in supply and price, this is not true for the longer term response. Indeed, over the period of the coming decade or two, the trajectory of global oil demand is seriously in question.

This is because the future market share of emerging technologies that reduce oil demand – whether they are hybrid vehicles that reduce gas mileage, electric vehicles that eliminate it or more sustainable biofuels that can directly replace oil in existing vehicles – is repeatedly surpassing most forecasts. Plug-in hybrid and electric vehicles for example, appear to be gaining market share more quickly than hybrid gasoline vehicles did.

The fact is that the future demand for oil is a matter of speculation – not a statement of fact. Agencies tasked with making forecasts have highly sophisticated models for making informed predictions but these are often inaccurate and are frequently adjusted as circumstances, particularly technology, changes. According to its own review, the EIA has overestimated crude oil consumption in nearly 69% of its projections since 1994. In other words, it overestimates oil demand more times than it underestimates it.

The math of extraction based carbon accounting and fossil fuel supply is much simpler. The world’s leading climate scientists have calculated how much carbon can be emitted to the atmosphere before average global temperature rise will exceed 2 degrees Celsius (3.6 Fahrenheit), beyond which climate change may become irreversible and catastrophic. They have also calculated that to avoid surpassing that limit, less than a third of existing proven fossil fuel reserves can be exploited.  Therefore, most of these reserves must be left in the ground.

Exactly which reserves, and whose, to leave in the ground, is of course the sticking point. But it’s hard to believe that those reserves that are most expensive and carbon intensive such as the tar sands and the Arctic would not be on that list.

Stopping tar sands projects and leaving billions of barrels of this carbon intensive form of crude oil in the ground is imperative.  So too is counting the carbon sequestered whenever a tar sands project is cancelled.

 

-Lorne Stockman and Steve Kretzmann

See the Material Risks report here

 

[1] OPEC’s manipulation of prices is often cited as a reason the oil market does not usually function according to the standard economic formula of: additional supply = lower prices = more demand.

 

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