One Potential Benefit of Climate Legislation: More U.S. Oil

Posted by: John Carey on September 17, 2009

There’s a long-running, fierce debate over the cost of reducing the emissions of gases that cause climate change. Opponents say that the climate bill passed by the House of Representatives, which caps such emissions, amounts to a massive tax on the American people. Analyses by supporters—and by the Congressional Budget Office—put the cost per household a just a few cents per day. A new study by the Natural Resources Defense Council pegs the price tag at 25 cents per household per day.

These estimates are notoriously unreliable, however, because it’s very difficult for economic models to take into account innovations that might occur as the result of a cap on carbon emissions. In fact, the reassuring lesson from history is that new regulations, such as the 1990 rules on acid rain, usually spur enough clear ideas to both reduce costs below predictions and deliver greater benefits.

There are already many hints of such innovations, from more efficient solar cells to new ways to tap geothermal power. But consider just one area—carbon dioxide. If emissions curbs are enacted, many powerplants and factories will be forced to capture the carbon dioxide now coming out of their smokestacks. That’s a fairly costly process. And there are thorny questions about how and whether that carbon dioxide can be safely stored, such as by pumping it into the ground.

But the economics and prospects start to look better if valuable uses can be found for that CO2 – and a number of interesting ideas are beginning to emerge. Carbon Sciences in Santa Barbara, Calif, envisions using catalysts to turn the carbon dioxide into liquid fuels. Scores of algae companies plan to bubble the CO2 through vats of algae to make oils, chemicals, and biofuels. In a recent deal, Dow Chemical partnered with Algenol Biofuels to experiment with using some of Dow’s CO2 to make ethanol as an alternative feedstock for chemicals. “It’s a way to capture the value of the carbon,” explains Rich A. Wells, vice president for energy, climate change, and alternative feedstocks at Dow.

The biggest potential use, though, may be an ironic one—boosting production of oil. Carbon dioxide is already pumped down into old oil fields to push up more petroleum—a process called enhanced oil recovery. If more carbon dioxide becomes available, this practice can be greatly expanded. J. Wayne Leonard, CEO of New Orleans-based utility, Entergy, points out that his region is carpeted with old wells that are no longer producing oil. “We have people knocking on our doors” looking for carbon dioxide, he says. “They say, ‘we own so much property with so much oil that we’d like to get, and we just need some CO2 to get it back up.’” That means revenue for utilities that capture their CO2 emissions, helping them offset the costs of capturing it in the first place.

It also means more domestic oil production. How much? According to government estimates, as much as 40-60 billion barrels of oil could be made accessible with enhanced oil recovery approaches. Tapping into that oil could put a huge dent in imports of foreign petroleum, now running between 11 and 13 million barrels of oil per day. “U.S. production could go up by 5 million barrels of oil per day, making Americans more secure,” says Dan Lashof, director of NRDC’s climate center.

Toss in more fuel efficient cars (including plug-in hybrids and electric vehicles) and it’s possible to imagine cutting U.S. oil consumption by another 4-5 million barrels per day. That would virtually eliminate the need to import any oil at all—and would keep the $300 billion spent each year on imported oil at home.

Reader Comments

Frank A NYC

September 18, 2009 8:54 AM

"...That would virtually eliminate the need to import any oil at all—and would keep the $300 billion spent each year on imported oil at home."

Sounds like a good deal to me.

Lee

September 18, 2009 11:46 AM

We are missing a major point here. If the value of CO2 was as high as this article intimates, market forces would alreay have driven business to capture this waste gas long ago.

The fact is that CO2 will never command enough price in the market to even begin to dent the cost of capture. By expanding supply it will only drive the market value of this gas even lower.

The concept addressed in this article is a house of cards.

John Carey

September 18, 2009 4:01 PM

To quickly respond to Lee: Yes, of course, CO2 has little value now (though it does have uses today in things like soft drinks and a little bit of enhanced oil recovery). The point is that curbs on carbon emissions will inevitably spur carbon capture technologies, creating large amounts of available CO2. Rather than incurring the costs of sequestering that CO2 in the ground (i.e. paying to make it go away), it makes better economic sense to find uses for CO2 that have at least some value (thus reducing the costs of disposing of it).

Jonathan Teller-Elsberg

September 30, 2009 10:58 AM

There's one drawback (at least) to this vision of using captured carbon to increase enhanced oil extraction. The whole point of carbon capture is to prevent it from entering the atmosphere. However, carbon capture will only happen -- if it does happen -- at large, point-source emitters, such as utilities and industrial power plants. Those emitters mostly burn coal and natural gas, not petroleum. So what's being described here is a situation in which carbon from coal is used to promote the pumping of additional oil, and the oil will be burned by non-point-source emitters (e.g., automobiless etc.) so that the carbon from the oil enters the atmosphere. This oil will be lower priced than if enhanced oil extraction were not utilized, so that implies (via standard market theory) that there will be a reduced incentive for consumers to adopt higher efficiency vehicles. And that, finally, means more carbon ending up in the atmosphere than if the captured carbon were not used this way.

There's something of a caveat to this line of reasoning, and it speaks to one of the advantages of a cap-and-trade policy over a carbon tax policy. If the policy is cap-and-trade, then the total volume of fossil carbon allowed to be emitted is held constant regardless of shifting that might occur between coal, natural gas, and oil. However, a carbon tax could fall short in its goals if it allows relative price shifting that promotes the burning of additional non-capturable fuels, as in the chain of incentives I described above. I find this very interesting because in the past few weeks I've read some things that have made me waver in my long-standing preference for cap-and-trade. My preference for cap-and-trade is now re-solidifying in light of this post.

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BusinessWeek correspondents John Carey and Mark Scott, cover the green scene, keeping on top of the business aspects of energy, the environment and climate change, as well as the technologies, policies, markets and people that are shaping how the earth's resources will be used in the century ahead.

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