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Climate Economics Seminar: Leave it in the ground? Incorporating the social cost of carbon into unconventional fossil fuel development

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Date(s): March 19, 2014, 2 - 3:30 PM

Location: Room 4128, William Jefferson Clinton West Building, 1301 Constitution Ave., NW, Washington, DC

Contact: Carl Pasurka, 202-566-2275

Presenter: Andrew Leach (School of Business, University of Alberta)

Description: Soaring oil prices have made unconventional extraction methods profitable, unlocking massive carbon deposits but also generating significant amounts of greenhouse gases. This paper investigates whether the existence of unconventional energy development is socially efficient in spite of the large greenhouse gas footprint. To do this, we develop a model of unconventional energy development at the project level that accounts for lifecycle greenhouse gas emissions and the fiscal and regulatory environment. To determine a project's efficiency, we ask whether a project would remain profitable under a carbon tax set at the rate of the social cost of carbon. We quantitatively evaluate the efficiency of unconventional energy projects by focusing on the context of oil sands development and a large set of social cost of carbon estimates. We find that most such projects would remain profitably, and thus socially efficient, if the social cost of carbon is less than $50/ton. For higher values of the social cost of carbon, projects are socially inefficient depending on the incidence of the carbon tax and the growth of oil prices. We further investigate how the fiscal regime and royalty taxes interact with the carbon tax, and find there to be little effect on the social efficiency of such projects.

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