We Need a Stronger Carbon Price to Justify Shale

15^th July 2014

Professor Samuel Fankhauser examines the policy measures needed to ensure shale gas extraction is commensurate with our wider climate change objectives

Much is being written about shale gas, both in its favour and against. The main controversies concern its impact on the local environmental. Like all big developments, shale gas exploration imposes costs, risks and disturbances on local communities. But there is also the question of how developing new fossil fuel reserves can be squared with our climate change objectives.

The UK has a statutory target, under the 2008 Climate Change Act, to reduce itsgreenhouse gas emissions by 50 per cent by 2025 (the midpoint of the fourth carbon budget), on the way to a 80 per cent reduction by 2050, relative to 1990.

Proponents of shale gas point to the US, where the shale gas revolution has not only cut energy prices, but also reduced greenhouse gas emissions, to a point where the US is now on track to meet its own (more lenient) greenhouse gas targets.

Natural gas is a relatively clean fuel; it emits only about half the amount of carbon per unit of energy as coal. So if shale gas is used to replace coal, and if the carbon reduction target is 50 per cent or less, shale gas is an unqualified part of the solution. This is the situation in the US, and the situation many hope China will soon find itself in.

In the UK it is a bit more complicated. In little more than a decade our carbon budgets will be so stringent that even natural gas becomes too polluting. By 2030, the average carbon intensity of power generation, where much of our gas is burnt, will have to come down to around 50-100 grams of CO2 per kWh of electricity. Efficient combined-cycle gas turbines emit around 400 g/kWh, so a gas-only power sector is not on the cards.

Gas still has an important role to play. The projections by the Committee on Climate Change anticipate around 40 GW of gas-fired generation capacity by 2030. Gas will also remain the main heating fuel until low-carbon alternatives like heat pumps become cheaper and more widely accepted. However, gas will have to be used much more strategically. Not as base load, but to balance fluctuating electricity demand and intermittent supply from renewables.

Whether this strategically used gas is supplied from conventional or unconventional sources is a question of energy policy, not climate policy. The carbon footprint of conventional gas and shale gas is broadly similar – as long as leaks in shale gas extraction are kept to a minimum. Carefully extracted shale gas may even have a lower carbon footprint than liquefied natural gas (LNG).

However, current regulatory arrangements will not necessarily create the right outcome for gas. In fact, the combination of a tight renewables target, a lenient cap under the EU Emissions Trading Scheme (EU ETS) and low coal prices (courtesy of American shale gas, which has reduced US demand for coal) is currently creating a market structure that combines renewable energy and coal at the expense of gas.

Electricity market reform, the creation of a capacity market and a tightening of the EU ETS are therefore essential. Without these reforms – and a sufficient carbon price in particular – the claims by ministers that shale gas is the tool to “kill coal” lack substance.

Globally, the carbon contained in existing fossil fuel reserves – oil, gas and coal – is already three times higher than can safely be emitted into the atmosphere. Adding to global reserves only makes sense if the new additions are more carbon-efficient and if there are complementary policies to keep the inefficient alternatives in the ground. Shale gas meets the first conditions, but climate policy does not yet meet the second.