RFF Houston Briefing - Resources for the Future

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RFF Houston Briefing - Resources for the Future

RFF Energy Policy Briefing

Houston, Texas, February 14-15, 2011


CEEP Themes

Developed partly from stakeholder process

• Understanding the Present (policies and markets)

• Shaping the Future

• International Dimension

Completed projects

• Implications of Abundant Shale Gas Resources

• Assessing U.S. Energy Policy Options

• Policy response to the Macondo well oil spill

Future Designing Clean Energy Standards, Diesel

CAFE, Shale gas preferences; China energy efficiency


RFF-NEPI Study

Alan Krupnick

Senior Fellow and

Director of the Center for

Energy Economics and Policy

(CEEP)


Goals of Study

Consistently Assess and Score

Policies According to

• Security

• Costs

Reductions in oil use/imports

Welfare costs and cost-effectiveness

• Environment

CO 2 emissions reductions


Bottom Line

• We have the policy tools at hand to

make progress

Don‘t need to wait for new

technologies

• Core findings

• Oil: Pricing; Target least fuel-efficient

vehicles; don‘t pick winners

• CO 2 : Pricing or CES. Account for policy

interactions


What’s Distinctive?

• Policies (not technologies)

• Broad-Based – 35 (incl. 4 cross-cutting)

• Consistency (apples to apples)

(NEMS-RFF model across all policies)

• Welfare Costs

(not GDP or expenditures)

• Deal Quantitatively with Energy Efficiency

Paradox (hidden costs vs. market failure)


Individual Policies

OIL POLICIES

CO 2 POLICIES

Transportation

• Gasoline Tax

• CAFE

• Feebate

• Hybrid

Subsidies

• LNG Trucks

Mandate

All

• Oil Tax

Power

• Renewable

Portfolio

Standards

• Clean Energy

Portfolio

Standards

• Nuclear Loan

Guarantees

Conservation

• Building Codes

• Subsidies for

Geothermal

Heat Pumps

All

• Cap and Trade

• Carbon Tax

Cross-cutting combinations


Individual Oil-Related Policy Ideas

• Power of Pricing: Taxes for reducing oil

• Affects all aspects of consumer and business decisions

• Reduces VMT-related externalities

• Recycle revenues for political palatability. ―But take care‖

• Will deficit reduction potential raise its profile?

• Liquefied natural gas (LNG) heavy-duty trucks

• Diesel HD trucks: Very low fuel economy, high VMT

• Shale gas opportunities

• But need LNG for energy density

• Trucks operating in Port of Los Angeles


Are vehicle subsidies a good idea?

In almost all cases, subsidy has a strong effect on hybrid penetration of

the fleet….

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

2010 2020 2030 2020 2030 2020 2030

Core 1

Optimistic battery

costs

Optimistic

battery costs,

subsidies

Conventional Gasoline

Plug-in HEV10

Electric-Gasoline Hybrid

Plug-in HEV40


• But little effect on oil use and GHG emissions

• Reason is that CAFE is binding for the

manufacturers

When there are more hybrids purchased, it is

easier to meet CAFE

• Is this a likely outcome?

• One view is that CAFE would just change in

response


Most oil reductions are from imports >75%


Individual CO 2 Policy Ideas

• Cap and Trade/carbon tax is most

effective and cost-effective

• Clean Energy Standard (CEPS-

ALL) (all but coal) does relatively

well if pricing is not an option


Conclusion

• Getting even 2 MMBPD reduction in

oil consumption is tough

• Not a lot of good options beyond

taxes

• Except heavy-duty truck policy

• Clean Energy Standard (CEPS-ALL)

reasonably cost-effective CO 2 option

if CAT is dead.


Deepwater Drilling

Recommendations for a Safer Future


Bottom Line

Industry and government need to

raise their game and reduce the

real and perceived risks of

deepwater drilling


April 20 email from a Macondo well worker:

5:45 a.m.:

• ―We have completed the job and

it went well.‖

9:45 p.m.: Explosive disaster

• 11 people died

• Millions of barrels spilled


Disaster Revisited: The Big Picture

―Complex systems almost

always fail in complex ways‖

—From Space Shuttle

Columbia investigation


RFF’s Role

7 reports helped inform deliberations of Oil Spill Commission

Drew on analytic skills as economists, policy analysts, risk

experts, and scholars of regulatory processes and

industrial organization

Purpose NOT to attribute causation

Central focus: How to do better?


RFF Research Team

• Mark A. Cohen

• Alan Krupnick

• Molly Macauley

• Robert Anderson

• Sarah Campbell

• Roger Cooke

• Arthur Fraas

• Carolyn Kousky

• Igor Linkov

• Todd Gerarden

• Richard Morgenstern

• Lucija Muehlenbachs

• Timothy Murphy

• Ian W.H. Parry

• Nathan Richardson

• Heather Ross

• Lynn Scarlett

• Adam Stern


First things first: The Context

RFF Research Team Finds:

Deepwater Operations

ARE Riskier


Probability of reported incidents of all

kinds per year


1) Key Issues

Incentives & Accountability

• Some strong existing incentives for companies to

avoid catastrophic spills

• Existing liability laws

• Government permitting & enforcement

• Shareholder value

• Significant safety performance variations among

firms

• But neither government nor industry sufficiently

adjusted risk management to higher-risk context


Recommendations

• Set liability caps for individual wells at a level

reflecting damages from worst-case spill at that

site

• Financial responsibility should be at least as high

as largest cap on any of a firm‘s wells

• Third-party insurance should be further explored

as possible way to strengthen external monitoring

• If insurance pools are used to assist smaller firms,

fees should be related to risk


2) Key Issues

Prescriptive vs.

Performance Regulation

• Offshore development involves sophisticated and

rapidly evolving technologies

• No project is ‗business as usual‘

• Prescriptive regulations result in potential lag in

adoption of best practices

• Prescriptive regulations may generate a ―check the

box‖ perspective by regulators regarding

compliance and safety


Recommendations

• Transition to risk-based

performance regulations

• Use risk-based performance standards

• Use proven approaches such as the ―safety

case‖ and ―risk-based performance

evaluation‖ regulatory approaches of

Norway and the UK


Risk-based Performance Regulation

• Company builds ―safety case‖ (narrative or

quantitative approaches)

• Identifies risks & hazards on system-wide

basis

• Establishes systems, controls, and mitigation

strategies to meet risk standard

• Describes how operator will address risks

and achieve safety performance standards

• Verify with independent audit


3) Key Issues

Risk Assessment Capacity &

Practices

• Both government and the private sector lacked

capacity and practices for performing adequate risk

assessments

• ―You just don‘t know what you don‘t know‖

• Key Issue: How to better collect and utilize data to

enhance risk assessment?


Recommendations

• Consider ―precursor analysis‖

approach developed by nuclear

industry

• Broaden incident reporting, data collection, &

analysis to identify ―accident indicators‖ of risk

• Develop ―event tree‖ sequence of incidents

that could have resulted in catastrophic failure

• Use these data and event sequences to

identify significant risks and track safety

performance


4) Key Issues

Response & Containment

• Current response and containment

technologies and capacity are insufficient to

address catastrophic spills from deepwater and

ultra-deepwater wells

• Cookie cutter spill response plans


Key Questions

• Marine Well Containment Co.

major step to build industry

capacity, but….

• Key questions:

• How to assure innovation investment? By

whom?

• How to build capacity to identify and

anticipate future spill scenarios?

• How to validate/verify adequacy of plans &

capacity?


Thank you

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