What happens when natural gas is no longer dirt cheap?

March 22, 2013

Eduardo Porter has a nice column today on the fact that U.S. carbon-dioxide emissions have dropped 13 percent since 2007. He mentions the usual factors: the recession, better fuel-efficiency for cars and trucks, the switch from coal to natural gas.


(The Washington Post)

But here's the flip side to that story: The recent plunge in U.S. carbon emissions isn't likely to last — at least not without further changes to energy policy. One big reason? Natural gas prices are starting to creep back upward again.

By now, the shale-gas story is well-known. Four years ago, natural gas cost around $9 per million British thermal units — too costly for most electricity needs. But recently, thanks to big advances in drilling techniques, companies have been able to extract gas from shale-rock formations in places like Texas and Pennsylvania. Natural gas prices dropped below $2 per million BTUs last year. As a result, electric utilities switched from coal to cleaner natural gas, which emits less carbon when burned.

But that trend appears to be bottoming out. As Jerry Dicolo reports in the Wall Street Journal today, natural gas prices have recently crept back up to $4 per million BTUs. That's due to a combination of a colder winter, higher demand for heating fuel, scaled-back drilling, and also new storage facilities that are preventing a glut of gas on the market.

So what does this mean for emissions? Most analysts expect coal to regain at least some of its market share in the years ahead as natural-gas prices keep edging upward. Here are some projections from the U.S. Energy Information Administration and the Rhodium Group:

Coal generation is expected to rebound in the next two years as the shale frenzy settles down and natural gas prices tick up a bit. That, in turn, means that U.S. carbon-dioxide emissions from energy will likely rise 1.3 percent in 2013 and 0.4 percent in 2014:

It's important not to go overboard here. Natural gas is still far more dominant than it was in 2007, and it's not vanishing. Even in the EIA's worst-case projections, natural gas prices only rise to about $6 per million BTU by 2020. That might make it easier for existing power plants to burn more coal. But, according to most projections, it will still be uneconomical for utilities to build new coal-fired facilities for the foreseeable future.

What's more, new air-pollution regulations are putting pressure on many of the nation's coal-fired power plants, with up to 8.5 percent of the coal fleet — mainly the oldest, dirtiest units — expected to retire between now and 2016.

So don't expect a massive rise in U.S. carbon-dioxide emissions. Coal is set to make a comeback, but only a small one. What's more, any rise in natural gas prices could also provide opportunities for renewable sources like wind power, which keeps getting cheaper.

What this does mean, however, is that a continued drop in U.S. emissions is far from a given. Market forces appear to have done about as much as they can for now. And the United States is still quite far from the 17 percent cut in emissions by 2020 that President Obama pledged at Copenhagen:

As Trevor Houser and Shashank Mohan of the Rhodium Group put it, "Further emission reductions will require new policy, whether in the form of EPA regulation, congressional legislation (as called for in Obama’s speech), or state-level action."

Congress isn't likely to enact climate-change legislation anytime soon, but environmental groups have been calling on the Obama administration to use EPA regulations to drive greenhouse gases down even further. That could include restrictions on carbon emissions from power plants as well as new regulations for methane leaks from natural-gas wells and pipelines.

Further reading:

--Can natural gas help the U.S. tackle global warming? Here's what you need to know, including a discussion of methane leaks.

--A look at the Obama administration's options for driving down greenhouse-gas emissions even further.

--Eduardo Porter has a follow-up post at Economix putting the drop in U.S. carbon emissions in context. Globally, emissions are still rising. Which means that the world is still very, very far from solving climate change.

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Ezra Klein · March 22, 2013