ABSTRACT

This paper explores some basic economics of the climate change issue and how government response may impact the petroleum industry. Possible economic aspects are addressed by examining past and projected fossil fuel production numbers, calculating their resulting emissions, and then projecting how regulations or taxes might affect energy prices and production. Nine medium to major petroleum companies, which do business in the USA, are currently factoring in some kind of carbon emission restrictions into their long-range business plans. A driver for these plans is that the vast majority of countries, including the world’s largest CO2 emitters, have formally agreed to limit their CO2 emissions to avoid a 2°C (3.6°F) rise in global temperatures. Because there is no agreement yet on a set number of allowable emissions, this paper utilizes estimated carbon budgets from one paper, Meinshausen et al. (2009). Some pertinent results derived herein are the following: 1) oil and natural gas only comprise 33.3% of potential CO2 emissions from fossil fuels; 2) under a 50% probability scenario of exceeding 2°C (3.6°F), all proven reserves of oil and natural gas (as of 2012) could be consumed, whereas only 56% could be utilized with continued coal consumption. To demonstrate how a market approach might limit carbon emissions, a simple model shows how an annually increasing carbon tax affects the relative price of fossil fuels and alternative energy. The objective of this paper is to present arguments that there are economic reasons for American Association of Petroleum Geologists (AAPG) to address the issue of climate change.

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