Energy Journal Issue

The Energy Journal
Volume 45, Special Issue
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Mitigating Climate Change While Producing More Oil: Economic Analysis of Government Support for CCS-EOR

Hossa Almutairi and Axel Pierru

DOI: 10.5547/01956574.44.SI1.halm

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By storing CO2 captured from the atmosphere or point sources into oil fields, carbon capture and storage with enhanced oil recovery (CCS-EOR) increases the fields' output by raising reservoir pressures. Since CO2-EOR has been experimented with for decades and the revenues from the additional oil production improve projects' economics, CCS-EOR is the most readily deployable CCS technology. However, government support for CCS-EOR projects is sometimes contested on the grounds that the resulting increase in oil production undermines their environmental benefits. Addressing this concern requires determining the effects of implementing CCS-EOR on global CO2 emissions. This paper presents a simple approach based on a marginal reasoning consistent with economic decision-making. It produces analytical formulas that account for the effects on the global oil market of incentivizing CCS-EOR. In addition, we quantify the volume of oil that can be decarbonized by storing a ton of captured CO2 through EOR from different perspectives. We produce numerical results based on a first-cut calibration. They suggest that, from an economic perspective, CCS-EOR is a technology that mitigates global emissions. However, after accounting for the need to decarbonize the EOR oil, the reduction in emissions is significantly less than the stored quantity of CO2. If fully allocated to oil production, the environmental benefits of capturing a ton of CO2 and storing it through conventional EOR can allow the oil producer to decarbonize 3.4 barrels on a well-to-wheel basis and 14.4 barrels when offsetting its oil-upstream emissions only. Fiscal incentives granted by governments to support CCS-EOR as a climate-change mitigation technology should be sized accordingly. We compare our findings to the size of the subsidy in the revised Section 45Q of the 2022 United States Inflation Reduction Act.




Long-term Energy Policy vs. Dynamic Public Preferences? A Review of German Energy Policy

Christina Kockel, Jakob Kulawik, Saskia Spiegelburg, and Aaron Praktiknjo

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During the energy crisis peaking in 2022, numerous countries have implemented short-term and immediate policy measures to reinforce security of energy supply and lower energy prices, often at the expense of environmental compatibility. This can be considered a sudden shift in the relative prioritization among these three energy policy goals. However, the sudden political rearrangement of energy policy priorities during the energy crisis in 2022 is only one illustration of a rapid shift. Historically, abrupt changes in public opinion have also prompted short-term adjustments in energy policy. This paper focuses on the dynamic relationship between public opinion and energy policy using the case of Germany. Specifically, we examine the relationship between changing public preferences and energy policy reaction regarding three significant events: the phase-out of nuclear energy, the phase-out of coal-fired power and heat generation, and the recent energy crisis in 2022. Our paper aims to assess the extent to which short-term shifts in public preferences can be aligned with efficient long-term planning of the energy system and identify the potential challenges that may arise during the process.




Multivariate Convergence toward the SDGs 2, 6 and 7: An Empirical Analysis of World and MENA Region Countries

Carlo Andrea Bollino and Marzio Galeotti

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This paper provides new evidence on the convergence process toward the achievement of three important SGDs: 2 6 and 7. We collect data on water, energy, and food per capita consumption for 108 countries from 1971 to 2018. We also analyze the group of countries in the MENA region, which is a critical region as far as water and food are concerned. We establish a new notion of multivariate sigma and beta-convergence. For the first notion, we look at the time behavior of the determinant of the covariance matrix of the three variables. For the second notion we use the Arellano-Bond method to jointly estimate the interrelated system of beta convergence equations for water, food, and energy. The results reveal that there is evidence of conditional sigma- convergence and beta-convergence processes for the countries. The multivariate approach reveals that there are spillover effects with complex positive impact of each variable on the others in the analyzed countries. The speed of convergence is computed to assess when the desired levels according to the prescription of the SDG are attained for water, energy, and food per capita consumption by each country. Results have important policy implications for interventions on macro variables. Investment has a positive accelerating effect on water and energy convergence. In addition, openness to foreign trade and inflow of foreign direct investment have a positive accelerating effect on water and food convergence, respectively.




Energy Transition in Oil-Dependent Economies: Public Discount Rates for Investment Project Evaluation

Fatih Karanfil and Axel Pierru

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Selecting welfare-enhancing projects necessitates determining the present value of cash flows from a public policy perspective. For an oil-exporting economy, the domestic energy transition often implies displacing oil from domestic consumption. Economic dependence on oil affects the public discount rate for oil price-related cash flows in two opposite ways: On the one hand, it renders the economy more volatile, which lowers the risk-free discount rate; on the other hand, it increases the correlation between consumption and the oil price, which results in a higher risk premium. To study these opposite forces, we first derive the public discount rate for an oil price-related investment project. Our framework considers economic uncertainty, an oil price-related risk premium, and allows for valuing oil at its opportunity cost. We illustrate our methodology using data from a panel of 26 oil-exporting countries. The results indicate that a risk-free discount rate of 3.1% is appropriate for our panel. However, to discount oil price-related cash flows, a risk premium of 1.4% needs to be added to the risk-free rate, which yields a risk-adjusted real discount rate of 4.5%. We find significant disparities between country-specific public discount rates. Additionally, for each country, we assess the present value of reducing domestic oil consumption by a barrel per day from 2023 to 2040, breaking down the different effects. Oil-exporting countries can use our estimates for making investment or policy decisions.




Strategic Commodities' Price Risk and Financial Contagion in Oil and Gas Exporting Countries

Ilyes Abid, Khaled Guesmi, Christian Urom, Saad Alshammari, and Leila Dagher

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This study investigates the occurrence of stock market contagion effects stemming from strategic commodities and the United States (U.S.) equity markets to major oil and gas exporting nations amid the COVID-19 and Russian-Ukraine crises. Employing a multi-factor asset pricing model and risks spillover technique, we scrutinize the sensitivities of market returns to these risk factors and the dynamics of shocks transmission among market sensitivities over time. Our findings reveal that these equity markets generally demonstrate positive and variable sensitivities to the three factors, with Canada, UAE, Kuwait and Saudi Arabia experiencing significant periods of negative response to the gas price factor. Notably, the Russian market exhibited the highest responsiveness to the U.S. factor at the outbreak of the Russian-Ukraine war, whereas the Russian market displays the greatest sensitivity to both oil and gas price risks. The degree of shocks propagation among market sensitivities is about 75.8% and is mainly driver by sensitivities to the U.S. market factor in the energy market, followed by the sensitivity of oil prices to the gas market. Policymakers in these nations should be cautious of potential contagion from the US market and these critical commodities, particularly oil, to mitigate any adverse impacts on their economies.




Export Diversification and Energy Consumption Efficiency in the Light of Non-linear Evidence

Canh Phuc Nguyen, Gabriel S. Lee, Muhammad Ali Nasir, and Binh Quang Nguyen

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We estimate the effects of export dynamics on energy consumption using a balanced panel of 95 economies and three subsamples, i.e., low- and lower-middle-income (LMEs), upper-middle-income (UMEs), and high-income (HIEs) from 1997 to 2013. We show the non-linear linkages between export diversification (ED) and energy use. More specifically, we show the inverted-U shape ED effects on energy use per output unit. This result implies the increases in energy inefficiency in the progress of diversification improvement in exports until a threshold level from which ED would help to enhance energy efficiency. Our analysis of the three subsamples shows consistent findings regarding the effects of ED across income levels. The inverted-U shape effects of ED are consistent in LMEs and UMEs, while it is ambiguous in HIEs. The results suggest that low and middle economies should diversify exports as much as possible to pass the threshold, where diversification can improve energy efficiency.




Net-Zero Policy vs Energy Security: The Impact on GCC Countries

Simona Bigerna, Maria Chiara D’Errico, Paolo Polinori, and Paul Simshauser

DOI: 10.5547/01956574.44.SI1.sbig

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Gulf Cooperation Council countries have accumulated large oil portfolio revenues. However, the world economy is seeking to reduce carbon emissions, and in turn, its reliance on fossil fuel resources through investments in renewable energy resources. The aim of this research is to analyze oil portfolio risk from an exporters' perspective, highlighting how relevant determinants, such as the increasing penetration of renewables in the importer counterparties, and financial and policy uncertainty, increase the volatility of oil export portfolios.We construct oil portfolios for four Gulf Cooperation Council countries (Kuwait, Oman, Saudi Arabia, United Arab Emirates) from 2008 to 2018, and compute volatility spillovers à la Diebold and Yilmaz. Then, the effects of policy and economic variables on volatility spillover indices are estimated using different panel linear regression models.We find rising renewable market shares significantly affects oil export portfolio risks and reduces adverse impacts on importing countries of oil market fluctuations.




Projecting Saudi Arabia’s CO2 Dynamic Baselines to 2060: A Multivariate Approach

Abdulelah Darandary, Anwar A. Gasim, Lester C. Hunt, and Jeyhun I. Mikayilov

DOI: 10.5547/01956574.45.SI1.adar

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Using an econometric model, we generate scenario projections of CO2 emissions under different sets of assumptions on the underlying drivers. These drivers include GDP, the energy price, economic structure, and the underlying emissions trend. Our baseline scenario projects that Saudi CO2 emissions will rise from 540 Mt in 2019 to 621 Mt in 2030 and 878 Mt in 2060. In a high GDP growth scenario, the corresponding numbers for CO2 emissions are 635 Mt in 2030 and 985 Mt in 2060. In contrast, in a low GDP growth scenario, CO2 emissions would grow to 607 Mt in 2030 and 781 Mt in 2060. In an economic diversification scenario, CO2 emissions would grow to 602 Mt in 2030 and 769 Mt in 2060. These projections are 646 Mt and 1096 Mt for the heavy industrialization scenario. Even in our lowest scenario, further efforts are needed to meet the net zero ambition.




The Role of the Petrochemical Sector's Exports in the Diversification of the Saudi Economy. A Scenario Analysis of the Foreign and Domestic Price Shocks

Fakhri J. Hasanov, Muhammad Javid, and Heyran Aliyeva

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Saudi Arabia's petrochemical sector accounts for a significant portion of non-oil exports and has the potential to contribute significantly to the Kingdom's diversification. In this study, Autometrics-a machine learning method, was first employed to estimate export equations of chemicals and rubber-plastics for 1993-2020. The estimated equations were then integrated into a macroeconometric model called KAPSARC Global Energy Macroeconometric Model (KGEMM) and a scenario analysis was performed for the diversification effects of foreign and domestic price shocks till 2035.The scenario analysis showed that a 10% increase in foreign prices leads to 0.40 percentage point and 0.13 percentage point more diversified exports and economy on average for 2023-2035. Regarding domestic prices, a 19% increase in industrial fossil fuel prices and a 10% increase in ethane price result in less than a 0.1 percentage point contraction in the diversification of exports and economy if the revenues from the price reforms are not recycled back to the economy. The reforms can boost economic diversification by 0.05 percentage point if the revenues are recycled back to the petrochemical sector as an investment. If domestic price reforms are coupled with the investment in the petrochemical sector and 50% of this investment goods are locally produced, then diversification of Saudi export and economy enlarge considerably-by 0.20 percentage point and 0.26 percentage point, respectively.




Which Way to Choose? A Generic Modular Life Cycle Assessment for Hydrogen Production and Import Pathways to Germany

Christina Kockel, Jakob Kulawik, David Wohlleben, and Aaron Praktiknjo

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Hydrogen is set to become a cornerstone of global low-carbon energy systems globally. This study uses Germany as a case study to examine various hydrogen production and import pathways, with a focus on their Global Warming Potential (GWP). Employing a modular life cycle assessment, we identify and evaluate the primary environmental drivers across these pathways, which include production, conversion, transportation, and reconversion stages. Our findings highlight the significance of the electricity source for hydrogen production and conversion, as well as the efficiency of subsequent processes, including carbon capture rates for blue hydrogen, as critical factors influencing GWP. The necessity for hydrogen imports in countries with high demand and limited domestic production underscores the importance of optimizing hydrogen supply chains for reduced CO2 emissions. This analysis offers valuable insights for advancing sustainable energy transitions in other high-demand regions as well.




Beyond Cost: A Multifaceted Look at Financial Incentives and Residential Energy Renovation Behavior

Fateh Belaïd and Camille Massié

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This article analyzes the structural barriers hindering the massive adoption of energy efficiency investments, and fueling the well-known energy efficiency paradox. Based on a rich cross-sectional dataset surveying 3,000 French homeowners in 2018, a Logit model is developed to estimate the probability of households to renovate their homes. A focus is made on financial incentives for energy-efficient retrofit works, which take the form of direct subsidies. Accounting for dwelling and household heterogeneity, results suggest the existence of a threshold effect in the impact of financial incentives, estimated around 2,400 euros minimum, optimal around 3,000 euros. It is only above this amount of aid that households feel encouraged to undertake renovation work. This has implications for the design of future effective energy policies.




Towards Net Zero Emissions: The Impact of Green Innovation, GHG and CSR on the Financial Success of U.S. Corporate Venture Capital Parents

Fatima Shuwaikh

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This paper analyzs the influence of green innovation and environmental performance on the success of US corporate venture capital (CVC) parent firms. Furthermore, it investigates the intermediary function of corporate social responsibility (CSR) in this relation. Our sample consists of CVC parent firms obtained from multiple databases between 2002 to 2019. Our findings suggest that incorporating sustainability into target company plans has the dual benefit of improving environmental outcomes and boosting long-term financial performance for CVC parent firms. We find that companies that have lower levels of greenhouse gas (GHG) emissions demonstrate better financial success over the long term. Moreover, allocating resources to environmentally-friendly advancements results in positive financial results in both the short and long term. Our findings have important significance for policymakers and practitioners, providing guidance for the creation of sustainable business strategies. By promoting innovation focused on sustainability and decreasing GHG emissions, CVC parent firms may actively contribute to a more sustainable future while also assuring long-term financial success.




 

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