The Exchange

Who Needs Kyoto? Cheap Natural Gas Is the Answer

The Exchange

By Joel Kurtzman, Executive Director, Center for Accelerating Energy Solutions, Milken Institute

Last week's global climate talks in Doha, Qatar ended without any further deal to curb greenhouse gas emissions. That leaves the 1997 Kyoto Protocol in place, which it extended. The only trouble is the United States never ratified the accords, which call for reducing national emissions of CO2 and related gases to 1990 levels by 2020. To make matters worse, in the intervening years, Canada and Japan opted out of the accords. With Doha a failure, and Kyoto in tatters, the environmental community was in a funk.

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But before the Doha meeting even began, a bright spot emerged that no one saw coming. According to the U.S. Energy Information Agency (EIA), America's greenhouse gas emissions are now at 1992 levels, down from their peak in 2008. Despite refusing to ratify Kyoto, the United States could be the first developed nation to reach the target.

Who would have thought?

The United States has become one of the cleanest, greenest countries on earth, relative to the size of its gross domestic product. In 2008, CO2 emissions were about 1,600 million metric tons a year, according to the EIA. Today, they are 1,300 metric tons, a drop of nearly 20 percent.

Price Wins

The reason for the change is price, not politics or treaties. Natural gas, which emits 43 percent less CO2 than coal, and releases no particulate matter into the atmosphere, is now the cheapest fuel available for producing electricity since the technology of hydraulic fracturing, or fracking, was perfected. As a consequence, the electricity industry has made a lightening fast changeover in the fuels it uses. In 2008, about half of America's electricity was produced by burning coal, with 20 percent produced from natural gas, according to the EIA. Today, 40 percent of our electricity comes from natural gas with coal's share just 32 percent.

To be fair, a deep recession followed by three years of lackluster growth contributed to America's unprecedented reduction in emissions. But while those reductions in emissions are likely to be temporary, the gains from the utility industry moving to natural gas are likely to be permanent. The reason for that is that the nation's largest natural gas fields have barely been developed.

But, with prices as low as they are today — natural gas sells for less than half of what it did in 2008 — companies have pushed the pause button on further development and exploration. Rig counts have gone from 1,600 in 2008, to about 400 now. Energy companies are waiting for prices to rise before rolling out more rigs.

[For more from Joel Kurtzman, check out his recent appearance on The Daily Ticker below:]

The Natural Gas Conversion Is Accelerating

At the same time, the industry is getting more efficient. New pipelines are being built, replacing trucks, and fracking technology is improving as larger drilling contractors and energy companies get involved. Some companies are beginning to recycle water and the industry is getting more transparent about the chemicals it uses.

It's difficult to precisely compare the price of a natural-gas kilowatt of electricity versus the price of a coal kilowatt, because of differences in technology and other factors at the nation's power plants. And, it is true that coal prices have been falling due to slack demand. But as more natural gas fields come online, coal's share of the market is likely to fall even further

Is Government Intervention Really Needed?

Post Kyoto, policymakers and pundits argued that the only ways to lower greenhouse gas emissions was either to put a tax on carbon or to create markets for CO2, using the mechanism of cap and trade. Since cap and trade was successful in reducing emissions of sulfur dioxide, which causes acid rain, the reasoning was it could solve the much larger problem of CO2 emissions.

But neither of these governmental alternatives are needed as the United States races ahead of other countries in the reduction of emissions. Cheap natural gas, not expensive carbon, is what's pushing emissions down.

It is ironic that the a country that declined to ratify the Kyoto protocols is now poised to exceed the standard in levels and perhaps timing. But prices send a message policymakers are hard pressed to duplicate and should not ignore. In a market environment, whatever is cheapest sells. And what is selling now is cleaner air.

Joel Kurtzman is a senior fellow, executive director of the Center for Accelerating Energy Solutions and publisher of The Milken Institute Review. He is also a senior advisor to Knowledge Universe. Previously, he was global lead partner for Thought Leadership and Innovation at PricewaterhouseCoopers, where he was responsible for developing new, marketable ideas in strategy, technology, the capital markets and business policy. He was also responsible for the firm's Menlo Park Technology Research Centre, its technology forecasting teams and its innovative R&D.

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