This working paper first develops a Reference Case that allows required rates of return on investments in energy infrastructure to vary geographically. Those rates of return reflect an assessment of the risks associated with energy business investments in various countries. By comparison, the Base Case, which was presented in the working paper, The Baker Institute World Gas Trade Model, assumes the required rates of return on investments match those sought on similar projects in the United States. The working paper then contrasts selected scenarios with the Reference Case. The selected scenarios are meant to reflect a range of political actions and economic outcomes that could affect the world market for natural gas. The political scenarios selected for study were suggested by the kinds of events discussed in the historical case studies.

This working paper describes a spatial and intertemporal equilibrium model of the world market for natural gas. Specifically, the model calculates a pattern of production, transportation routes and prices to equate demands and supplies while maximizing the present value of producer rents within a competitive framework. Data incorporated into the specifications of supplies and demands in each location are taken from a variety of sources including the United States Geological Survey, the Energy Information Administration, the International Energy Agency, the World Bank and various industry sources. A subsequent working paper uses the model to investigate the possible effects of a number of scenarios including possible political developments.

This paper is part of the joint PESD - James A. Baker III Institute for Public Policy study on the Geopolitics of Natural Gas.

This paper presents interim findings of "The Experience with Independent Power Producers in Developing Countries," a research project being conducted by the Program on Energy and Sustainable Development at Stanford University ("PESD").

Most energy forecasts envision a shift to gas in the world energy system over the coming decades. To realize that vision will require tapping increasingly remote gas resources and shipping them to distant gas markets in other countries. Few analysts have explored the robustness of such projections in the real world where political and institutional factors exert strong influences on whether governments and private investors will be able to muster the capital for long-distance pipelines and other infrastructure projects that are essential to a gas vision. Although gas has strong economic, technological and environmental advantages over alternative energy sources, will the difficulty of securing contracts where legal institutions are weak-an attribute of nearly all the nations that are richest in gas resources-impede the outlook for global gas? Which gas resources and transportation infrastructures are likely to be developed? As gas infrastructures interconnect the world, what political consequences may follow? To help answer these questions, this study on the geopolitics of gas combines two tracks of research-one that employs seven historical case studies and another that rests on a quantitative model for projecting alternative futures for gas to 2030.

When addressing an externality such as air pollution, regulators can control policy inputs (e.g., pollution taxes and technology standards) or outputs (e.g., emission caps). Economists are familiar with this debate, known broadly as "prices vs. quantities," but analysts of international environmental agreements have rarely focused sustained attention to such questions. Using an inventory of all international air pollution agreements, we document the historical patterns in instrument choice. Those agreements that require little effort beyond the status quo are usually codified in terms of effort, but agreements that require substantial actions by the parties nearly always deploy a cap on emission quantities as the central regulatory instrument.

We suggest that this concentration of experience with emission caps and paucity of serious efforts to coordinate policy inputs may explain why the architects of international environmental agreements appear to believe that emission caps work best. We illustrate what's at stake with the example of international efforts to control the emissions that cause global climate change. We also show that the conventional history of the agreement that is most symbolic of the superiority of emission caps - the Montreal Protocol on Substances that Deplete the Ozone Layer - has wrongly overlooked a little-known provision that operates akin to a "price" instrument.