Burning Down the House: The Climate Change Treaty's Probable Effects on the Natural Gas Industry

At the 1992 United Nations' Earth Summit in Rio, the United States signed a treaty establishing the voluntary goal of returning to 1990 levels of greenhouse gas emissions by the year 2000. By 1996 it was evident voluntary action was not working. In response, Timothy Wirth, U.S. Undersecretary of State for Global Affairs, told a 1996 U.N. conference on climate change in Geneva that the Clinton administration was committed to legally binding limits on greenhouse gas emissions.

And on December 11, 1997, more than 160 of the world's nations agreed to a treaty in Kyoto, Japan, that seeks to reduce greenhouse gas emissions, at least by most developing countries.

The Clinton administration's position and the Kyoto treaty raise several questions. Why is a treaty to reduce or stabilize the levels of greenhouse gases in the atmosphere thought necessary? Will the proposed treaty solve the problem it was created to address? If the treaty is implemented, what will be the probable effect on the economy? And particularly, what are the likely impacts of this treaty on the gas industry?

Background on the Greenhouse Effect and the Evidence for Human Caused Global Warming. Global warming is the scientific theory that increased levels of atmospheric greenhouse gases due to human activities are contributing to generally rising temperatures around the world. Supporters of the theory argue that human caused global warming could have severe consequences for the humans and the environment.

To better understand global warming, one must first understand the natural greenhouse effect. Sunlight heats the earth, but the Earth would be far cooler if not for the presence of water vapor and other greenhouse gases (e.g., carbon dioxide (CO2), methane, nitrous oxide and several other trace gases) in the atmosphere. These gases act like the walls and ceiling of a greenhouse, letting sunlight through to warm the Earth, but keeping a portion of the solar radiation from escaping back out into space.

Without these gases the earth would be largely uninhabitable. Water vapor accounts for as much as 96 percent of the greenhouse effect. The other greenhouse gases account for most of the remainder of earth's warmth with CO2 and methane being the most significant contributors. Most scientists grant that human activities (primarily the burning of fossil fuels for energy) have caused a 30 percent increase in atmospheric CO2, from approximately 280 parts per million (ppm) to 360 ppm, and a 150 percent increase in methane. Global warming theorists argue that all other factors being equal, increasing the levels of greenhouse gases in the atmosphere – like using thicker glass in a greenhouse – allows less heat to escape, leading to a general warming or "global warming."

Two other factors are cited as evidence that humans are causing global warming. First, ground-level temperature measurements indicate that Earth has warmed between 0.3 and 0.6 degrees Celsius in the last century. Second, computer climate simulations suggest the current warming is due to increased greenhouse gases in the atmosphere. According to the models, absent a sharp and immediate reduction in the level of greenhouse gas emissions, the earth will warm further between 0.8 and 3.5 degrees Celsius over the next 100 years, causing all manner of calamities. For instance, some scientists claim continued global warming could melt the polar ice caps, raise sea levels and flood coastal cities and low lying island nations around the globe. Others argue that global warming could cause droughts and floods in increased numbers and of greater severity.

All of the evidence for human caused global warming is problematic. First, there are several factors that would tend to show a warming bias in the ground based temperature measurement system. Most of the measurements come from a the relatively small portion of the globe that is heavily industrialized, while both the Southern Hemisphere and the world's oceans (the vast majority of the earth's surface) are underrepresented. This highlights a second bias: temperature measurements from large urban areas suffer from the "urban heat island effect." Many temperature gauges are found in heavily developed areas (often on the airport tarmacs) surrounded by concrete; these areas are notably hotter than the surrounding areas simply due to the level of development. More evidence that the ground based measurement systems are flawed comes from other sources of meteorological data: global satellites and weather balloons. Neither satellite data nor temperature measurements from weather balloons, the most reliable sources of climate evidence that we have, show any evidence of warming over the past 19 years. Indeed, the satellite and weather balloon data track each other in showing a slight cooling trend.

Second, there is little evidence that increased CO2 has had more than a small part to play in this century's temperature increase. Most of the recorded warming occurred before the 1940s, before the vast majority of human-caused CO2 emissions. Most scientists recognize that the world came out of a "little ice-age" around the middle of the last century, which would account for the warming in the early part of this century.

Finally, the models used to predict warming are more noted for their weaknesses than their strengths. The models fail to track past and present temperatures by more than a degree (which is greater than the lower end of the range of predicted future temperature increases). In fact, every time the models are run with new data, they do track temperature and climate trends more closely; but the amount of predicted temperature rise falls by more 1/3 and the time over which the predicted rise occurs doubles – in other words, every time the models improve, they indicate that catastrophic global warming is less and less likely.

Despite the fact that there is considerable uncertainty about the magnitude of global warming (if any), whether CO2 is contributing to global warming, and the environmental consequences of possible global warming, the United States agreed to a treaty that would force reductions in energy use.

The Kyoto Treaty: What Did the U.S. Agree to and Will it Reduce Greenhouse Gas Emissions? Going into Kyoto the Clinton administration endorsed four principles to guide their negotiations. First, the U.S. would agree to cut greenhouse gas emissions to no more than 1990 levels between the years 2008 – 2012. Second, six greenhouse gases that humans partially contribute would be included in any treaty signed and the pact would account for carbon sinks as well as emissions cuts. Third, that different countries could use different schemes to reduce emissions and one of the major initiatives to reduce emissions would be the creation of a market in greenhouse gas emissions credits. Fourth, the treaty would include meaningful participation by developing countries. In other words, developing countries would have to be part of the solution – they would have to commit to emissions reductions as well.

What did we agree to in Kyoto? Something quite different. The U.S. did get all six greenhouse gases into the treaty, a limited form of emissions trading, and policy differentiation so countries wouldn't have to standardize emissions reduction policies. However, what the Clinton administration failed to get is more important than the concessions it received from the rest of the world. First, the U.S. agreed to make emissions reductions seven percent below 1990 levels between the years 2008 – 2012. This means the U.S. would have to cut greenhouse gas emissions between 12 and 15 percent from current levels and more than 33 percent from what they would otherwise have been with continued moderate economic growth. This stands in stark contrast to some developed countries like Australia who not only do not have to cut emissions, but may actually increase emissions in the coming years. Second, though countries agreed in principle to allow limited emissions trading and to count carbon sinks, the treaty does not include any mechanism for counting sinks. In addition, it limits those partners with whom countries may trade emissions credits. Many developed countries have already expressed the opinion that less than half of any greenhouse gas emissions reduction credits can come from emissions trading. More importantly, the Clinton administration failed to secure developing countries participation – in fact, leaders from the developing world flatly refused to participate, vowing to scuttle the deal if even voluntary emissions reductions for developing countries were included in the treaty language.

Before discussing the possible impacts of this treaty on the natural gas industry one should note that the treaty itself may never come into force. In July the Senate passed a resolution cosponsored by Senator Chuck Hagel (R-Neb.) and Senator Robert Byrd (D-W.Va.), that requested the Clinton administration to not agree to a treaty mandating greenhouse gas emissions reductions if developing countries did not also commit to reduce greenhouse gas emissions or if the cuts would harm the US economy. This resolution passed 95 – 0 and everyone from the administration to the Senate recognizes the treaty agreed to in Kyoto does not meet the first condition and according to most analysts is unlikely to meet the second condition.

The Clinton administration recognizes this treaty fails to meet the conditions of the senate resolution. It has said that it will not submit the treaty to the senate for ratification until it gets meaningful commitments from developing countries. This appears unlikely to occur. Absent Senate approval, many analysts and senators suspect the Clinton administration will try to circumvent the Senate and meet the treaty's goals via regulations, executive orders and the budget process. Some evidence that this is the case has already surfaced. The Clinton administration has asked for more than $6 billion in additional funds to be spent over the next five years on energy conservation measures, tax credits for consumers who install home solar panels or purchase electric cars and further subsidies for the development of renewable energy sources and technologies.

Even if the Senate approves the treaty, and its ambiguous accounting and enforcement mechanisms are worked out and it is fully implemented, it will fail to halt the rise in greenhouse gas levels and thus prevent human caused global warming should it be occurring. Why? Because in 1995, the U.S. State Department and other developed countries agreed to the Berlin Mandate, which stipulated new climate change commitments would apply only to developed countries.

According to the International Energy Agency, as much as 85 percent of the projected increase in CO2 emissions will come from developing countries – the same countries and regions exempted from the proposed treaty (China, India, South Korea, Mexico, Brazil, etc.). The U.N. estimates exempted countries will contribute 76 percent of total greenhouse gas emissions within the next 50 years. By 2025, China alone will emit more carbon dioxide than the current combined total of the United States, Japan and Canada. Thus, even if developed countries unilaterally stopped all their greenhouse gas emissions immediately (something no one seriously proposes), total greenhouse gas emissions would continue to rise.

Indeed, greenhouse gas emissions may rise faster under the treaty than would have otherwise been the case – this is the "carbon leakage" problem. Industries in developing countries will have a competitive advantage due to lower energy costs and no restrictions on greenhouse gas emissions. As these domestic industries expand, greenhouse gas emissions will rise faster because they use less efficient technologies and "dirtier" fuels which use more energy and produce more CO2 per dollar of gross domestic product (GDP) than do comparable industries in the U.S. and other developed countries. For instance:

  • India, the fifth largest emitter of CO2, uses approximately three times the energy and emits four times the CO2 per unit of GDP as the U.S.
  • China, the second largest emitter of greenhouse gases in the world, is even less efficient, using approximately five times the energy and emitting eight times the CO2 per unit of GDP as the U.S.

In addition, agreeing to unilateral, binding greenhouse gas reductions would give American businesses another reason to move production facilities overseas. This would entail a loss of jobs in both the service and high-wage manufacturing industries, and add to the carbon leakage problem.

The Kyoto Treaty's Impact on the Natural Gas Industry. One might think the effects on the natural gas industry of the Kyoto Treaty would be quite positive. After all, natural gas emits much less CO2 than coal, so as fuels are substituted to reduce emissions, natural gas is a clear winner. But not so. Natural gas is affected negatively both directly and indirectly by the treaty. Directly, natural gas is not a clean fuel by greenhouse gas standards. Natural gas emits much more methane as a by product than other fossil fuels. Methane is a much smaller percentage of greenhouse gases than CO2, and it has a much shorter life in the atmosphere – 10 – 15 years. However, its productio is increasing at a much faster rate and it has as much as 25 times the heat-trapping capability of CO2 on a per volume basis. This is why environmentalists, when they support switching to natural gas at all, are willing to do so only on a short term basis. Even in the short term, Kyoto would impose costs on the natural gas industry by forcing methane leakage reductions at the wellhead and for pipelines.

Indirectly, the natural gas industry is negatively affected by this treaty in a number of ways. Natural gas would have been the fuel of choice for future electricity generation, even absent the Kyoto treaty's mandates for lower carbon emissions. But, because the treaty would negatively affect the economy in general, the natural gas industry will also suffer. Every credible economic analysis of the impact of reducing CO2 emissions at or below 1990 levels shows severe economic harm as a result:

  • Some analysts estimate that meeting the administration's proposal, cutting emissions below 1990 levels would reduce U.S. gross domestic product by $200 billion annually.
  • A DRI/McGraw Hill study projects that over the next 14 years more than 500,000 Americans annually would lose their jobs if the 1992 Rio commitments were implemented.
  • The study also estimated that the government would have to increase gas prices by more than 60 cents a gallon and double the price of heating oil just to hold carbon emissions at 1990 levels, and more than double those increases to reduce emissions another 10 percent.
  • A study of the proposed commitments by Consad Research, Inc. estimated that meeting them would kill off 1.6 million jobs over the next nine years and put another 3.5 million or so "at risk," primarily in Texas, California, Ohio, Michigan, Pennsylvania and Louisiana.

In addition, the price of food and transportation would rise dramatically. Low-income families who spend a higher proportion of their incomes on food and energy will suffer the most under these policies.

Artificially high energy prices are the cause of the expected economic downturn. One recent analysis found that gas costs for electricity would rise from $10 billion to 21 billion. Fuel costs for power generation via natural gas projected to be double that of coal on a BTU basis by 2010. The electricity sector's demand for natural gas would have increased at a steady rate to approximately 7.21 quads in 2010 without the treaty to 15.68 quads with it. Such an increase would require a large investment in new pipeline capacity and in new combined-cycle plants. For instance, a Department of Energy (DOE) study estimated that pipeline expansion to meet natural gas demand could cost upwards of $70 billion.

The domestic energy market can be expected to respond in a number of ways to dramatically higher gas prices. First, higher gas prices are likely to extend the life of older coal fired plants and nuclear plants as the cost of substituting natural gas for existing electric power capacity rises. In addition , natural gas use priorities will shift dramatically. Currently about 25 percent of natural gas demand goes to residential use, 50 percent to industry and 22 percent for electricity generation. The Department of Energy has indicated the demand for natural gas could fall from a business-as-usual case more than two quads overall as gas demand decreased relative to low-carbon technologies that do not use natural gas – wind, nuclear, hydropower expansion, cofiring with biofuels and energy efficiency.

Indeed, since the rise in natural gas prices will be comparable to the rise in oil prices due to the Arab Oil embargo and President Nixon's price controls in the 1970s, one would expect that, as in the 70s, energy use overall will go down quite dramatically. While the electric industry may increase its natural gas demand, this demand may be more than offset by a reduction in industrial and direct consumer use. This reduction in the industrial sector will come from fuel switching, increased cogeneration for heating, and as companies close plants in the US and move overseas to countries not bound by the Kyoto treaty – many of which have large deposits of cheap coal. The decrease in consumer use will come from fuel switching, energy conservation efforts and the purchase of energy efficient products.

The impact on the economy in general and the natural gas industry in particular, only gets worse when one realizes that the Kyoto Treaty is only a small first step. Members of the Clinton administration has stated that to substantially reduce the likelihood of human-caused global warming greenhouse gas reductions on the order of 70 percent (and thus accordingly energy use reductions) will probably be necessary within the next 50 years.

Conclusion. Predicting the future is always fraught with uncertainties. This is especially true in predicting future climate, energy needs and the economy because there are so many factors to account for (both known and unknown).

What we can say is that as the climate science has improved, the best evidence indicates that catastrophic human caused global warming is not likely. If a dramatic rise in energy prices and the concomitant slowing of the economy would ensure a cleaner, safer environment for us and our children the sacrifices called for by the Kyoto treaty might be justified. But scientific analyses suggest that it will not – signing the treaty will be all pain and no gain. This is true even for the natural gas industry which, just a few short years ago, some analyst thought might be a boon for gas suppliers. Increased demand for gas will increase for some uses but decrease in others and the overall economic decline which most analyst predict will result from the Kyoto treaty will most assuredly show up as red ink on the bottom line of the gas industry.