The development of unconventional gas extraction has led to significant declines in gas prices, recently followed by a large drop of oil prices. This is also the year which is supposed to deliver the long awaited post 2020 climate agreement. This article brings different pieces of research together, delving on both issues. First, we review the regional implications of a possible agreement at the UNFCCC meeting in Paris. We assess the impact of abundant natural gas on climate change. Finally, we conclude with an analysis of the interplay of natural gas and climate policy in Europe.
Keywords: Natural Gas, Climate Change Policies
JEL classification: Q4, Q42, Q48, Q5, Q55, Q58
This article draws and in some cases reproduces parts of 3 previous co-authored papers: (McJeon et al. 2014; Tavoni et al. 2015; and especially Tavoni 2015).
Suggested citation: Tavoni, Massimo, Natural Gas and Climate Change Policies (May 5, 2015). Review of Environment, Energy and Economics (Re3), http://dx.doi.org/10.7711/feemre3.2015.05.001
Climate negotiations and CO2 emissions in the major economies
Although the exact outcome of the Paris UNFCCC meeting will remain unclear till the last minute, the commitments put forward by some key countries (ie. Europe, US and China), and the experience with previous negotiation rounds, seem to indicate that if an agreement will be found, it will be based on a bottom up architecture with relatively limited integration.
Figure 1 provides estimates about regional cumulative emission budgets (2010-2100) coming from a multi model comparison exercise (Kriegler et al. 2013), which compares and contrasts the expected pledges with hypothetical scenarios aimed at achieving 2C with different probabilities. The figure indicates that in the No Policies scenario, unabated emissions of major emerging economies like China or regions such as the OECD would by themselves exhaust the entire global budget compatible with 2°C. The pledge scenario, which incorporates the announcement commitments of China, Europe and the US, as well as possible commitments from other countries, shows a marked decline in cumulative emissions for many countries. This mitigation effort would deliver a reduction in global temperature increase from about 4°C to about 3°C, a significant impact. However, as the charts exemplifies, it would fall short of attaining anything comparable with the stringent climate targets advocated by scientists and signed up by the governments at the major economies forum in 2009. A limit of 2°C would require a significant reduction of carbon budgets in all major economies. No major economy would emit more than few hundred GtCO2.
Figure 1 - Cumulative emissions (2010-2100) in the major economies for different policies (reproduced from (Tavoni et al. 2014), Figure 2).
Moreover, if countries attained the carbon budgets consistent with 2C without allowing for compensatory transfers, the distributional inequalities as measured by the diversity of economic costs across countries would be exacerbated. Research has shown that OECD countries would pay costs lower than average, and that developing economies and especially energy exporters would pay higher costs (Tavoni et al. 2015). These regressive policy outcomes could be compensated by international transfers, mostly north south, but the magnitude of these transfers, and the institutional capacity required to implement them, are likely to represent significant political obstacles.
Can shale gas help fill the gap?
The last few years have witnessed a radical change in the energy sector, especially in the US. The large deployment of hydraulic fracturing technologies has enabled the extraction of previously shale gas resources which were previously not economical. This significant dynamic has not been replicated in other countries, where extraction of shale gas is less economical or more regulated. It is thus unclear whether the ‘shale gas revolution’ will be able to expand beyond the borders of the North American continent, and whether it would even be able sustain itself in the US for several years to come. Yet, its importance in the global energy context cannot be underestimated.
In the light of evidence, it nature to ask whether the shale has revolution has the capacity by itself to reduce emissions anywhere near what we should to stabilize climate. After all, coal to gas substitution has been an important determinant of the reduction of US emissions in recent years.
(McJeon et al. 2014) have analyzed what could be the impact of increased natural gas availability on global climate change, in the absence of specific policies aimed at reducing CO2 emissions. Our results show that that expanding cheap natural gas alone without accompanying climate policies would not help to reduce greenhouse gas emissions worldwide. The reason for this apparently paradoxical result can infact be easily explained. As depicted in Figure2, the emission reductions from having a lower carbon intensity –resulting from gas substituting for more carbon rich fuels such as coal- is relatively modest across models. This is because natural gas would replace both more and less carbon intensive technologies: coal on the one hand, nuclear and renewables on the other. The net benefit would still be positive, with lower emissions, but of only few percentage points. In addition to this factor, cheap natural gas would push down energy prices, leading to a possible rebound in consumption. Figure 2 indicates that this effect would almost completely compensate the positive (and small) benefits of fuel substitution. Finally, cheaper energy could lead to higher economic activity (and thus higher emissions), though this is found to be of very small magnitude.
Figure 2 - Decomposing the impact of shale gas availability on 2050 global emissions across 5 energy economy models (source: data from McJeon et al., 2014, author elaboration).
All in all, mid century emissions would change very little across the models participating in the study, and even increasing quite significant in one model. If one adds the potential increase in CH4 emissions through leakage in the extraction of gas, the balance could even tilt in the opposite side.
Combining climate policies with abundance of gas: the case of Europe
In a nutshell, natural gas is no substitute for climate policy. But what about the other way around? If we are serious about climate change, and legislate policies aimed at reducing emissions for example by pricing carbon, would having more gas at a cheaper price help?
The IPCC 5th assessment report, which was released this year, indicated that natural gas could under certain conditions help climate policy. Specifically, natural gas is said to be a possible facilitator of the transition from more carbon intensive sources to low or zero carbon ones. Gas could also be used to allow a higher penetration of renewable in the energy system, given its comparable flexibility with other base load options. And it could also allow decarbonizing traditionally difficult sectors, such as the transportation one.
However, this assumption will be highly dependent on the policy context. If stringent policies in line with global targets such as the 2°C one would be promulgated, they would require a massive reduction in emission in a relatively short period of time. The bridge which gas promises to allow would be simply too long, and a more radical switch to low carbon sources could be preferred. Indeed, the impact assessment of the European ambitious 2050 roadmap doesn’t seem to indicate an increasingly large role for natural gas.
In another paper, (Carraro et al. 2013) have looked at the EU climate and energy package. They show that the recent revival of coal in Europe, resulting among other things from the very low carbon prices in the Emission Trading Scheme- would lead way to a resurrection of gas, but only after 2020 and only provided that carbon prices can be raised to about 30-70 Euro/tCO2. The likelihood of this happening will crucially depend on the economic performance of Europe, but also on the policy evolution. The 2030 framework recently approved by the European council has provided a continued focus on the ETS, but has failed to include a market stability reserve. Given the excess surplus of permits currently in the system, it would take long time before this surplus is absorbed, and prices of CO2 would rise again to those levels which make particularly successful. The importance of gas in climate policy will also depend on complementary policies, such as those supporting renewable and energy efficiency.
(Carraro et al. 2013) show that the 20% renewable target in 2020 has depressed carbon prices by about 10 Euro/tCO2, and that post 2020 energy efficiency legislation –if approved in the years to come- has the potential to influence the strength of the ETS signal even more. The impacts of natural gas consumption in Europe for the different policy combinations is outlined in Figure3. The figure shows that natural gas use might increase due to the European climate and energy framework, but that will occur only after 2020 and depending on which policies will be included. The energy efficiency policy to 2030, which at the moment has been put relatively on hold by making it voluntary but on which the commission plans to provide an update by 2020, is shown to have a particularly relevant impact on natural gas. This is because it would lower overall energy demand as well as carbon prices: given the currently large excess capacity, this combination of factors would not factor a resurrection of gas in Europe in the next couple of decades.
Figure 3 - Natural gas consumption (TWH) in Europe for different policy combinations (source: Carraro et al. 2013).
Abandon all hope, you who enter here’?
It is hard to anticipate the outcomes of the negotiation process in Paris. Similarly, we don’t know whether gas and oil prices will remain low in the years to come. Where does this leave us in terms of predictions about climate change?
A realistic interpretation of the scenario data presented in this short article would be that neither the climate pledges nor the abundance of gas are likely to induce the transformation of the energy system which is required to keep global temperature from exceeding 2C. Albeit this is in general true, it is also important to keep in mind the uncertainties associated with fundamentally all the long term scenarios which underlie the analysis presented here. Uncertainties in the climate system are such that no carbon budget can be associated with a unique temperature outcome. Uncertainties in the way the economic and technological systems will evolve could steer the direction of emissions either towards higher or lower targets. And so on.
However, Paris offers a terribly important opportunity for building the institutional capacity needed to start an international decarbonization process. Establishing and consolidating climate mitigation policies in the major emitting countries is an indispensable first step, which might lead to unanticipated advancement in technology and change in behavior. Complementary policy instruments aimed at increasing enforcement –such as trade measures- or lowering costs and barriers –such as innovation programmes- will arguably need to be deployed as well. And although the abundance of shale gas won’t do much to emissions by itself, it could provide a complementary strategy with properly designed policies.
Carraro, Carlo, Thomas Longden, Marangoni, Giacomo, and Massimo Tavoni. 2013. The Optimal Energy Mix in Power Generation and the Contribution from Natural Gas in Reducing Carbon Emissions to 2030 and Beyond. SSRN Scholarly Paper ID 2351322. Rochester, NY: Social Science Research Network.
Kriegler, Elmar, Massimo Tavoni, Keywan Riahi, and Detlef P. Van Vuuren. 2013. “INTRODUCING THE LIMITS SPECIAL ISSUE.” Climate Change Economics 04 (04): 1302002. doi:10.1142/S2010007813020028
McJeon, Haewon, Jae Edmonds, Nico Bauer, Leon Clarke, Brian Fisher, Brian P. Flannery, Jérôme Hilaire, et al. 2014. “Limited Impact on Decadal-Scale Climate Change from Increased Use of Natural Gas.” Nature 514 (7523): 482–85. doi:10.1038/nature13837
Tavoni, Massimo. 2015. “Natural Gas and Climate Change.” Submitted.
Tavoni, Massimo, Elmar Kriegler, Keywan Riahi, Detlef P. van Vuuren, Tino Aboumahboub, Alex Bowen, Katherine Calvin, et al. 2015. “Post-2020 Climate Agreements in the Major Economies Assessed in the Light of Global Models.” Nature Climate Change advance online publication (December). doi:10.1038/nclimate2475.