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Assessing the Impact of the Diffusion of Shale Oil and Gas Technology on the Global Coal Market

Working Paper

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Program on Energy and Sustainable Development, page(s): 113

September 18, 2016

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A spatial equilibrium model of the world coal market is developed that accounts for coal to natural gas switching in the electricity sector in the United States and Europe, the potential for China to exercise monoposony power in its coal purchasing behavior, and the impact of increasing the western US coal export port capacity. The global coal market equilibrium is computed as the solution to a nonlinear complementarity problem. Where possible parameters of the model are estimated econometrically. Where this is not possible the parameters are calibrated to global coal market outcomes in 2011. The model is used to assess how the shale gas boom in the United States impacts global coal market outcomes for dierent models of Chinese coal buyers' purchasing behavior and dierent scenarios for the capacity of coal export terminals on the US west coast.  Athough reductions in US and European natural gas prices reduce coal consumption in the US and Europe, the percentage reduction in coal consumption in Europe is much less than that in the US. Increasing US west coast port capacity increases coal exports from the western US and reduces Chinese coal production. US coal prices increase which causes more coal to natural gas switching in the US, further reducing global greenhouse gas emissions. Modeling China as a monopsony buyer of coal reduces the absolute magnitude of these impacts.

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