Why a Global Shale Gas Boom is Key to Combating Climate Change
Reduction in Energy-Related CO2 Emissions
The United States has seen a remarkable run in reducing its greenhouse gas emissions over the last five years, reducing energy-related CO2 emissions from 2007 to 2012 by 12%, from six billion tons to 5.29 billion tons. While part of this reduction in emissions is attributable to a reduction in energy demand due to the economic downturn, another reason for this huge reduction is an increase in the use of natural gas for electricity.
In a story that is now familiar to most readers, the shale gas revolution in the United States has dramatically reduced the cost of natural gas. From a peak of $10.54 per million btu (mbtu) in July 2008, the spot price of gas at the well-head had fallen to less than $2/mbtu by April 2012.
Because utilities respond to price incentives, this caused fuel-switching of baseload electricity production from coal to natural gas, leading to a time in April 2012 when natural gas equaled coal as an energy source for the first time. This switch has partially been undone, with coal now producing 40% of electricity and natural gas 26% as gas prices have bounced back to $3.85/mbtu. Because burning natural gas for electricity produces half as much carbon emissions as coal, fuel switching is one of the main causes in the U.S. reduction in emissions.
Coal Export Boom
These reductions have some claiming that the United States, with just a few tweaks in policy, could reduce its emissions to the point of meeting the commitments that President Obama made in 2009 at the Copenhagen conference – a 17% reduction (from 2005 levels) by 2020.
While utilities respond to prices signals, so too do coal mining companies. The reduction in domestic use of coal for electricity has reduced the production of coal (as you would expect), but it has also led coal producers to seek markets overseas.
The data shows that, over the last 5 years, the U.S. is both producing less coal and exporting more, due to competition from low-priced natural gas. In 2012, the U.S. produced just over 1 billion short tons of coal, 7% less than 2011 and 11% less than the 1.15 billion short tons produced in 2007, before the shale boom really took off. In 2012, the U.S. exported a record 126 million short tons of coal (12% of total production), compared with 59 million short tons in 2007 (5% of production).
Outsourcing U.S. Emissions Abroad
So, while the U.S. has reduced its emissions, by exporting coal that is mined here, we are essentially outsourcing part of the emissions that would otherwise have been burned here. The atmosphere does not care where greenhouse gas emissions come from. New Energy Secretary Moniz recently praised the U.S. as “the only major industrial economy with lowering C02 emissions over the last few years” – but if we continue to export this much coal, the world will not see any actual environmental benefit.
Environmental campaigners like the Sierra Club realize that coal exports simply mean an exporting of American emissions abroad, hence the serious fight in the Pacific Northwest over licensing new coal export terminals. In the New York Times, they report on the fight over coal exports from the American West Coast, saying ”Coal Industry Pins Hopes on Exports as U.S. Market Shrinks.”
However, on the East and Gulf Coast, a rapid growth in coal exports from Baltimore, Norfolk, and New Orleans shows that the coal is getting out; the largest export terminal for coal to Asia is Baltimore!
Without the release valve that exports provide, many coal producers would no longer be economical and coal mining would cease due to domestic market pressures. However, no one is proposing to close already existing export terminals on the East Coast – they are growing rapidly.
How to Reduce Global Emissions
The way, then, to actually reduce global emissions is for the rest of the world to replicate the gains we have seen on U.S. emissions by using market forces – gas should replace coal in electricity production. The way to do that is to ‘globalize’ the shale gas revolution. That means two things. First, the United States and other major natural gas producers must build and permit more liquefied natural gas (LNG) terminals. Instead of exporting dirty coal, the policy of the United States should be to export cleaner-burning natural gas.
However, LNG exports can only bring us so far, because liquefying natural gas for export is costly – adding between $5 and $8/mbtu. In order to truly reap the benefits of a globalized shale gas boom, we should also export American technology and expertise to other countries with shale gas resources.
Last week, the EIA came out with a new report showing that shale gas resources are globally abundant, with shale gas increasing the total amount of technically recoverable global gas reserves by 32%. There are huge reserves around the world – with China, Argentina, and Algeria each having more shale gas resources than the United States’ huge reserves. Today, very little of that shale gas is being extracted. In the United States, technologies like horizontal drilling, computerized seismic analysis, and fracking have combined with a permissive regulatory environment and strong private property rights to allow for the exploitation of shale gas. So far, this combination has been difficult to replicate abroad.
Conclusion: For Natural Gas to be a Bridge Fuel, Shale Gas Boom Must be Globalized
In the short and medium terms, only natural gas will have the capacity to reduce the growing demand for coal in Europe and (especially) Asia. In the longer term, renewables like solar and wind combined with other new clean technologies can fully decarbonize energy production. But, in order for natural gas to truly be a bridge fuel to an actual clean economy, the shale gas revolution cannot be localized to the United States – it has to be globalized.
As recent IEA and World Bank reports have shown, the world is on a path toward dangerous levels of warming. We need immediate action to reduce emissions – and natural gas is ready to step in now. A global boom in both production and trade of shale gas would bring down prices and encourage rapid fuel switching from coal to natural gas. In time, zero-carbon and renewable energy would have to fill the gap, but they are not growing fast enough today to supplant coal. Ironically for many environmentalists, the only realistic way to effectively reduce emissions today is to promote and embrace a global natural gas boom.