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August 22nd, 2012

US Carbon Dioxide Emissions Reach 20 Year Low While Europe Misses An Opportunity

by Andrew Price, President & COO

The US Energy Information Administration recently reported that carbon dioxide emissions from energy consumption during the first quarter of 2012 was the lowest since 1992. What were the biggest factors driving the historic low? An abnormally warm winter reduced heating demand and gasoline usage continued its long trend lower in the US. Carbon Dioxide emissions were reduced from a less intuitive source as well, low natural gas prices. Natural gas prices dropped below coal on a $ per million btu basis and prompted an economic shift in electricity generation.  See my previous blog post: Coal Use Plummets For Power Generation.

Paradoxically, Europe also has a system of pricing natural gas that links the cost of the cleaner burning fuel to the price of oil under long term supply contracts. Because of this linkage, natural gas prices are kept artificially high and Europe has not experienced the full benefit of lower carbon emissions associated with record low natural gas prices. To be fair, natural gas is a continental market with significant transportation constraints. Europe does not yet have the same demonstrated natural gas resources as the major US shale fields. Still, wholesale natural gas commodity prices in Europe currently trade close to three times the price in the US ($9/MMbtu in Europe vs $3/MMBtu in the US). A small but developing spot market for natural gas in Europe – with much lower prices compared to the traditional long term contracts for natural gas – demonstrates that the oil linkage deserves a significant portion of the blame.

Natural gas emits about half the amount of CO2 as coal when used for power generation. Critics of a rapid expansion of natural gas usage point to the perceived dangers of hydraulic fracturing (“fracking”) as well as fugitive emissions of methane – a much more potent greenhouse gas than carbon dioxide – during the extraction and transmission of natural gas. 

Few predicted the dramatic fall of coal usage in the US, however, due to the success of natural gas fracking. I would guess that even fewer would have predicted that the US would cut carbon dioxide emission more than any other major industrial country over the past 6 years. According to the International Energy Agency CO2 emissions have fallen from roughly 6 billion metric tons in 2007 to around 5.2 billion metric tons this year. China emitted about 9 billion tons in 2011.

Of course, low natural gas prices in the US hurt renewables like wind, solar and biomass by reducing the price of “grid electricity” and lengthening payback periods. The artificially high price of natural gas in Europe has helped renewables stay more competitive with market prices. Still, the displacement of coal as the cheapest fossil fuel for power generation shows that the market can be a powerful force in the battle against climate change.

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