Blog Post

What the President’s Climate Plan Means for Natural Gas

Jun 27, 2013 | Alan J. Krupnick

If the President’s Plan can ever get out of the blocks—by no means a given with the legal challenges coming—natural gas is likely to be the big winner in the electricity fuel mix at the expense of coal, and may also make further inroads against oil in our transportation fleet.

Because of the much lower carbon emissions of natural gas relative to coal per kilowatt hour of electric generation, any policy limiting CO2 emissions from the electric sector—as Obama is calling for—is likely to advantage natural gas. The problem for embracing natural gas as a bridge to a low carbon future has been uncertainty about the amount of methane emitted in gas production, processing and distribution. However, a host of studies are coming forward to reduce this uncertainty and the best information available shows that such emissions are well under the amount that would make lifecycle global warming potential of gas equal to that of coal. Further, the President’s plan rightly creates a federal task force to develop a strategy for dealing with methane emissions throughout the economy, including massive amounts from agriculture, putting the pressure on all such producers, not only the politically unpopular oil and gas industry.

Natural gas should also be a winner against climate-friendly nuclear fuel for at least the next 5 years or more, if for no other reason that it would take that long to get a new plant fully permitted, built and on line.  And renewables, for all their new support from the President’s plan, start from such a low fraction of electricity generation that it will still take many years and some technological breakthroughs before they can make significant inroads against gas.

For all the scaremongering of those opposed to any climate change plan, the shale gas revolution has made it far less costly than it would have otherwise been to reduce GHGs from the electricity sector. The economics and practice of shale gas production have made natural gas more abundant in the marketplace, and therefore, much cheaper, as well as making its price less responsive to increases in demand that would arise from implementing Obama’s plan. RFF researchers Dallas Burtraw and Matt Woerman estimate in a forthcoming paper that a tradable performance standard that covered coal and natural gas with a marginal cost of $33 per ton CO2 could achieve emissions reductions of 340 million tons in 2020—about 5 percentage points of the President’s Copenhagen pledge of a 17 percentage point reductions from 2005 levels. In previous work Burtraw and Woerman estimated that the US already has baked in policies and technology changes, including expanded use of natural gas even before regulation under the Clean Air Act, to achieve about 10 percentage points of reduction. Further this cost is less than the new 2020 social cost of carbon estimate from the Administration of $40/ton.  Thus President’s new plan for utilities, if done “right,” could efficiently close this gap.

Turning to the transportation sector, cheap natural gas is already fueling a revolution in trucking, with over half of all new refuse trucks running on natural gas and a growing demand for liquefied natural gas to fuel long-haul trucks. Whether natural gas is a climate change winner over diesel fuel is still an open question because the CO2 advantage of gas over diesel is less than that over coal. But backing out oil from our energy mix has been a goal of every U.S. President since at least Nixon.

The President’s plan has both positives and negatives for the natural gas upstart in transportation (currently at only 1 percent share of transportation fuels). On the positive side, the President endorsed natural gas as a transport fuel—repeating what he said in previous visit to Nevada. Less clear is his call for tighter fuel economy standards for trucking. If manufacturers can increase diesel fuel economy at relatively low cost, this might give an advantage to diesel. How natural gas trucks are credited for their lower carbon emissions would also be important.

All in all, the President’s Plan is good for reducing GHGs and good for natural gas, relative to the status quo. Even so, implementing a carbon tax on all sectors of the economy, or even just the electricity sector, would save costs by allocating emissions reductions where they are cheapest to obtain. Given the benefits to natural gas and a relatively benign position with oil, the oil and gas industry ought to get behind the President’s plan, while simultaneously signaling their preference for a carbon tax.