Question

Explain how fracking has reduced the cost of natural gas will affect the incentives for firms to invest in research into new renewable energy technologies if renewable electricity is a substitute for natural gas and coal electricity but is more expensive than either coal or natural gas right now.

Answer 1

Modern day fracking has created an unprecedented abundance of natural gas that led to a dramatic drop in prices triggering sweeping changes in the landscape of the US electric power sector. In the first part of the paper, we argue that the implications of the drop in natural gas prices for global
carbon emissions are not straightforward. To paint the full picture, it is important to consider three countervailing effects: coal-to-gas switching in the US electric power sector, an increase in the relative cost of US renewable sources, and an increase in US coal exports. While the first effect leads to a decrease in carbon emissions, the other two effects lead to an increase in carbon emissions. Our position is that without a meaningful cap on global emissions, the shale gas boom is likely to increase global emissions and the period during which natural gas is used as bridge fuel to clean energy should be limited. In the second part of the paper, we review recent environmental
policies that have contributed in reducing emissions from the US electric power sector and discuss the complex economics of the newly adopted Clean Power Plan. Although the availability of cheap natural gas has already been factored in US environmental policy and has helped electricity
generators to achieve compliance with various rules and regulations, it should not derail policy from its long run objective, which is the transition to a less fossil-fuel dependent economy.

Fracking differs considerably from traditional drilling for natural gas and oil. Geologists have long known that oil and natural gas exist in shale formations. However, within shale formations, the hydrocarbons rest in small pockets of the rock rather than large underground pools as with traditional oil and natural gas resources. The secret to extracting these resources is to combine the vertical drilling of a traditional well with both a horizontal section and pumping water down through the well to break up small pockets within the rock where the hydrocarbons lie. This fracturing of the shale rock then allows the hydrocarbons to escape up through the well. The first
well was fracked in this fashion by Mitchell Energy and Development in the Barnett Shale basin in 1998. Large scale use of the technique, however, began in 2005.

US electricity generators to switch from coal to natural gas—this response is well documented in numerous studies, the media, and the academic literature we discuss below. The immediate implication is a drop in CO2 emissions in the US. The drop in natural gas prices also makes electricity generation from renewable sources relatively more expensive in the US. This increases CO2 emissions because renewable sources produce essentially zero emissions. Shearer et al. (2014) find that abundant natural gas decreases use of both coal and renewable energy technologies in the future across a range of climate policies in the US. Investment in renewables is also sensitive to natural gas prices. For example, lower natural gas prices in the High Oil and Gas Resources scenario in EIA (2015a) result in fewer renewable capacity additions toward the end of the projection period (2040) and lower generation compared with the Reference case.
Finally, the downward pressure on the price of US coal due to lower domestic demand coupled with the inability of the US to export cheap natural gas in large scale in the immediate future, make US coal an attractive option for coal-importing countries leading to an increase in US coal exports.
This will tend to increase CO2 emissions, this time outside the US.Hence, it is important to take into account the implied carbon “leakage” in any discussion about the implications of increased US shale gas production for global emissions.