OCTOBER 2008 HOT TOPICS

What Is the Potential of Alternative Fossil Fuels?

Petroleum products from conventional crude oil constitute more than 95 percent of all energy used in the U.S. transportation sector. Almost 60 percent of liquid fuels are imported. Moreover, emissions from transportation fuels account for approximately 33 percent of national carbon dioxide (CO2) emissions. Both high import payments for petroleum motor fuels and concerns about CO2 emissions are spurring interest in possible fuel substitutes.

A RAND Corporation report assesses the potential of coal-to-liquids (CTL) fuels and synthetic crude oil produced from Canadian oil sands, comparing the costs of these fuels to conventional petroleum fuels in 2025 and considering the possible impacts on fuel costs from potential future limitations on CO2 emissions. The study also considered local environmental impacts from fuel production and high water demand in production from oil sands.

The study found that the alternative sources of fossil fuels have significant economic promise. More specifically, oil sands already are and likely will remain very competitive with conventional petroleum, even after accounting for the costs of emitting or capturing and storing CO2 emissions. The future cost of CTL also appears reasonably competitive with conventional petroleum, assuming oil prices do not fall back to pre-2006 levels for extended periods and there are further improvements in CTL technology as production volumes grow. But CO2 limitations could impose a large cost burden on CTL relative to conventional petroleum unless significant progress occurs in capturing and storing emissions.

Without emission controls, total CO2 emissions from the production and use of fuels from oil sands are about 20 percent higher than with conventional petroleum, while total emissions from the production and use of CTL are about twice that of conventional petroleum. CO2 emissions for both can be reduced to levels comparable to conventional petroleum by investing in equipment to capture and pump the CO2 into long-term underground storage. The technical and economic feasibility of doing so on a large scale is currently under study but has not yet been demonstrated. Moreover, even with implementation of capture and storage, these fuels do not provide a path to very sharp cuts in future emissions to slow climate change.

Read the Document: Unconventional Fossil-Based Fuels: Economic and Environmental Trade-Offs

Read the News Release: Alternative Fossil Fuels Have Economic Potential but Uncertain Environmental Consequences

Striking a Balance Between Energy and Climate Security:

An Interview with Michael Toman Michael Toman is a Senior Economist working on energy and climate change issues in RAND's Infrastructure, Safety, and Environment Division. Prior to joining RAND, Mike worked in the central environment division of the Inter-American Development Bank (IDB), coordinating the Bank's programs on sustainable energy and climate change. Before joining the IDB, Mike worked for a number of years as a researcher and research manager at Resources for the Future, with involvement in a number of topic areas including energy, climate change, and sustainable economic development. From 1994-1996 Mike served as a Senior Staff Economist for the Council of Economic Advisers, Executive Office of the President, handling energy and environmental issues for the Council. Mike also is an adjunct faculty member at the Nitze School of International Studies, Johns Hopkins University and at the Bren School of the Environment, University of California at Santa Barbara. Your recent study highlights the need for balancing energy security and climate change concerns. What does that involve? The study shows that alternative fossil fuels can contribute to diversifying supplies and reducing energy costs, but they also can complicate the transition to a low-carbon future energy system to address global warming. An earlier RAND report showed that biofuels also can diversify supplies and significantly reduce CO2 emissions, but this renewable option is still far from being economic. (READ THE DOCUMENT: "Impacts on U.S. Energy Expenditures and Greenhouse-Gas Emissions of Increasing Renewable-Energy Use"). Striking a balance between these competing objectives is a tough challenge. How do alternative fuels contribute to energy security? There is much talk about making the country independent of unstable or hostile oil suppliers and lowering payments to terrorists or other "bad actors." But true energy independence would be extremely costly and not really beneficial geopolitically, since much of our oil imports are from secure sources and we would not be depriving terrorists of the remarkably small sums of money they need to mount attacks. The contribution of alternative fuels is more economic: Larger and diverse supplies mean more competition for oil exporters, lower fuel prices, and lower risks of market disruption. But that benefit needs to be balanced against climate-change concerns? Right. As our report shows, oil sands and especially liquid fuels from coal lead to higher total emissions than conventional oil, accounting for emissions in fuel production and use. With large-scale geological storage of the CO2, the alternative fuels could have emissions no higher than conventional oil-based fuels. But if we want to achieve the deep, long-term reductions in national CO2 emissions needed to arrest global warming, emissions from motor fuels need to be well below those resulting from petroleum. What are some other options? One way to address this dilemma is to combine biomass with coal in concert with carbon storage—called "sequestration"—to produce liquid fuels that could have a very low "carbon footprint." However, our earlier study of renewable energy shows there is a real concern that biomass fuels may not be plentiful enough to support significant use in both liquid fuels and electric power, at least not without major increases in fuel costs. Ultimately, balancing energy security and climate change concerns requires developing long-term prospects for various types of renewable energy and energy efficiency and considering the risks that may confront investments in unconventional fossil fuels in a sharply carbon-constrained world.

The RAND Environment, Energy, and Economic Development Program conducts research and analysis on environmental quality and regulation, energy resources and systems, water resources and systems, climate, agriculture, oceans, natural hazards and disasters, and economic development. To access our research, please visit our Web site at http://www.rand.org/ise/environ/.

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