Over the last decade, 25 percent of US fossil fuel production has come from lands and waters managed directly by the federal government, and the resulting emissions are equivalent to nearly a quarter of all US greenhouse gas (GHG) emissions. Consequently, supply-side policy reforms targeting oil and gas production on federal lands have increasingly attracted attention as an option to reduce emissions, in particular from sources that are directly under federal control. In a new RFF working paper, I estimate the effects of three proposed policy reform options targeting federal oil and gas production on GHG emissions and government revenues: raising federal royalty rates, charging carbon adders, and implementing a moratorium on federal leasing.
Historically, emissions from fossil fuel production on federal lands have been driven largely by coal, but oil and gas are increasingly responsible for the carbon footprint of federal lands, given the decline of coal and the rise of the shale boom. Hence, a number of bills in Congress—such as the American Public Lands and Waters Climate Solution Act—propose ending new oil and gas leasing on federal lands as a strategy for reducing emissions. The Biden campaign’s proposal is more aggressive, recommending a ban on all new federal oil and gas drilling permits. While economists would generally prefer a broad-based carbon tax or cap-and-trade system, supply-side approaches like these simply face fewer hurdles to implement. Since the Department of the Interior has broad executive authority under existing law to change federal leasing policy, a leasing moratorium is likely to be implemented should Joe Biden win in November.
This broad authority has been used before, albeit in a more limited way. After the Deepwater Horizon oil spill, the Department of the Interior under the Obama administration unilaterally imposed a temporary moratorium on new offshore oil and gas leasing. The Obama administration also imposed a moratorium on federal coal leasing while it considered charging carbon “adders” (fees that reflect the external costs of greenhouse gas emissions, typically based on the social cost of carbon) on new mining leases. The Biden campaign is mulling over similar changes to federal oil and gas.
In short, clear legal authority and precedents exist for a potential Biden administration to reduce drilling on federal lands by altering policies around new oil and gas leasing. At the same time, much of US oil and gas production occurs not on federal land but on private, state, and tribal lands—which would not be covered by changes in federal policy. This is increasingly true due to the shale boom, because most shale resources happen to be on state and private lands. For example, the biggest drivers of the recent boom are oil in the Permian Basin of west Texas and natural gas in Pennsylvania’s Marcellus Shale. Those states happen to have very little federal land—while 28 percent of US land is owned by the federal government, only 1.8 percent of oil-rich Texas and 2.1 percent of gas-rich Pennsylvania are federally owned.
What’s more, recent economic research from RFF demonstrates that—due to the shale boom—oil and gas supply is more price responsive than it used to be. This raises the concern that reducing oil and gas production on federal lands could simply be offset by surges in production elsewhere. In some regions like southeastern New Mexico, where state and private lands are scattered about on a patchwork of federal land, it is easy to imagine drillers simply moving their operations across town. In economics, this effect is called “leakage,” where emissions reductions in one area simply shift to other, unregulated locales, making narrowly targeted climate policies less effective at cutting emissions than they would otherwise appear.
Of course, cutting emissions is only one goal of reforming the terms asked of companies that wish to extract and sell the public’s resources. After all, a key responsibility of the government is to ensure a fair return to the taxpayer on public resources. The Minerals Leasing Act of 1920—the law that continues to govern federal leasing policy to this day—sets a minimum royalty rate (the share of oil and gas revenues that the government gets) of 12.5 percent, but permits the Department of the Interior to charge higher rates. At the moment, federal onshore leases routinely charge this minimum 12.5 percent royalty rate for onshore oil and gas leases. By contrast, royalties on state and private lands tend to be substantially higher, often ranging from 16.67 percent to as high as 25 percent.
This desire to increase the taxpayer return on public resources has led to calls for the federal government to increase royalties—at least to market rates—which would raise additional revenues while also making production somewhat less profitable, and thus would reduce both emissions and oil and gas development. Other policies, including charging carbon adders (as the Obama administration considered for coal), or even an end to new drilling on federal lands (as endorsed by the Biden campaign and the recent report from the House Select Committee on the Climate Crisis [HSCCC]), are more ambitious. The HSCCC report has even endorsed a goal of net-zero emissions from federal lands by 2040, which would require aggressive reductions in federal oil and gas production.
In this new RFF working paper, I ask how much these proposed policies would meet the twin goals of cutting emissions and achieving a fair return on the public’s resources. I focus on the following three key policy approaches recently considered by policymakers and the Obama administration:
- raising federal royalty rates to levels commensurate with those charged on state and private lands (18.75 percent and 25 percent, respectively)
- charging carbon adders, equal to the social cost of carbon, on new federal oil and gas leases to internalize climate externalities (as considered by the Obama administration in the context of the federal coal leasing program, and as currently proposed by the Biden campaign for oil and gas)
- a moratorium on new federal oil and gas leasing
I estimate the impacts of these policies using a model of oil and gas supply built on the econometric and simulation approach developed in recent peer-reviewed academic research. The main results of my working paper are summarized here in Figure 1, which shows average annual effects of the three proposed oil and gas leasing policies on emissions and revenues between 2020 and 2050. Importantly, these are long-run effects; short-run effects would be considerably smaller, because drilling on existing leases would largely be unaffected by a change in leasing policy.
Figure 1. Average Annual Effects of Three Proposed Oil and Gas Leasing Policies on Emissions and Revenues (2020–2050)
Figure 1 displays two sets of results to show the sensitivity to assumptions about “demand elasticities”—that is, how responsive global oil and gas demand is to price increases induced by supply reductions, which is the biggest source of uncertainty in the estimated emissions reductions. (Specifically, the high-elasticity case assumes that oil and gas demand is about 2–2.5 times more price responsive in the base case, which leads to larger global emissions reductions.)
Raising royalty rates to 25 percent is unlikely to have a significant effect on oil and gas production or emissions, but would raise as much as $3 billion per year in additional revenues once fully phased in. At the other extreme, a leasing moratorium would lead to large reductions in federal oil and gas production and associated emissions—more than 300 million tons of CO₂-equivalent (CO₂e) annually on average (Figure 1C). But those reductions would be offset by significant increases in production and emissions from non-federal sources, including suppliers from both non-federal US lands and foreign countries. The net effect is that the 300 million tons of CO₂e in reductions from federal lands translates into around 100 million tons in global emissions reductions annually (black lines). This net effect is around one-quarter of the emissions reductions projected under the Clean Power Plan, the Obama administration’s signature climate policy. While these are substantial emissions reductions, the moratorium also would result in the loss of more than $5 billion annually in royalty revenues due to the decline in leasing (Figure 1F).
The carbon adder policy might be thought of as a “middle ground.” It permits continued development of oil and gas, but only if companies pay for the external costs of the GHG emissions from the oil and gas produced. Because those costs are large compared to the market value of oil and gas, the carbon adder policy makes much—but not all—of new federal drilling unprofitable. As a result, the carbon adder drives down oil and gas production substantially, achieving much of the emissions reductions that a full moratorium would achieve. At the same time, the large carbon charges levied on the producers that remain profitable would raise approximately $7 billion annually in incremental royalty and carbon revenues, as opposed to a loss of more than $5 billion from a moratorium.
While the recent HSCCC report endorses both royalty rates and moratoriums, carbon adders are notably missing, even though the policy option was explicitly considered by the Obama administration and is mentioned in Biden’s platform. My estimates suggest that carbon adders could help achieve the dual goals of reducing carbon emissions and ensuring a fair return to the taxpayer on public resources. And from an economic perspective, carbon adders function much like the approach favored by most economists—a carbon tax.
Figure 2. Projected Emissions Reductions for Federal Oil and Gas Production Under Alternative Proposed Leasing Policies (2020–2050)
Nevertheless, none of these policies—even the moratorium—would achieve the aggressive target of net-zero emissions from federal lands by 2040 (Figure 2). This is because production from wells on existing leases would be unaffected by the proposed changes, which are restricted to new leasing. Achieving the ambitious net-zero target would therefore require the modification of existing leases and/or a substantial role for carbon sequestration and renewable energy development on federal lands.
For more, read the working paper, and check out its accompanying infographic here: