Natural Gas Is Good, but Opposition Escalates

By Kenneth Costello -- May 15, 2019

By making federal certification more politicized, interstate natural-gas pipelines have had to spend additional money to defend their position, courts have become more burdened, and environmentalists have spent large sums of money…. These costs would seem to overwhelm any benefits: Demanding that FERC considers climate change is destined for failure.

The U.S. natural gas industry has enjoyed a great run over the past decades, continuing its stellar history upon the end of wellhead price controls several decades ago. The transition of interstate gas transmission to mandatory open access was also successful, freeing the commodity from public-utility regulation to introduce real-time scarcity pricing.

The natural gas sector has contributed greatly to the U.S. economy by creating quality jobs and reducing household and business energy bills on the order of hundreds of billions of dollars. This was particularly important during the Great Recession when a boost from a major industry mitigated further downward spiral of the economy.

Natural gas also benefited the environment by accelerating the retirement of coal plants. The shift from coal to gas was a major factor in lowering U.S. energy-related CO₂ emissions from power generation by 28% between 2005 and 2015.

Even after accounting for methane release, the most credible studies show that switching from coal to natural gas has mitigated greenhouse gas emissions. Added to this, natural gas emits fewer air pollutants—such as sulfur-dioxide, mercury, and nitrogen oxide—than coal does.

Because of the abundance of shale gas, the U.S. expects to be a net exporter of natural gas. Until this decade, the concern was that the country would be importing increasing amounts of natural gas from vulnerable areas of the world.

The environmentally prudent development of natural gas resources—highlighted by advanced technology for hydrocarbon extraction, such as 3D seismic, horizontal drilling and hydraulic-fracturing stimulation—positions this fossil fuel for a bright future. About two-thirds of U.S. natural gas production comes from “fracking” techniques applied in shale formations, whereas just 11 years ago this percentage was virtually zero.

Phasing-out Gas Has a Cost

Until about five years ago, most environmental groups viewed natural gas favorably, seeing it as facilitating the transition to a low-carbon environment. Today, these groups have radically altered their perspective on natural gas. They now view natural gas as a barrier to achieving climate-change targets that, in their minds, will help assure against catastrophes.

Some interest groups propose to phase-out—the sooner, the better—the use of natural gas in electricity generation and to include in the future energy mandates or inducements for residential and business customers to switch from natural gas to electricity in meeting their demands for space heating, water heating, and other end-uses.

This is referred to as “electrification.” But policymakers should never lose sight of the fact that, for most of the country, natural gas is the most economical energy sources for homes and businesses. A movement to electrification would carry a high economy-wide cost, especially when artificially stimulated by governmental subsidies and other distorted policies.

In 2016, 35% of natural-gas consumption in the U.S. was for power generation, 28% for industrial use, 17% for residential use, and 12% for commercial use. A premature phase-out of natural gas could slow down the economy and burden energy consumers with higher bills.

Politicization at FERC

The recent development of gas pipeline certification by the Federal Energy Regulatory Commission (FERC) exemplifies the increased politicization of the regulatory process at the federal level, stifling the development of natural gas. The agency is under pressure from environmentalists to consider the climate-change effect of new pipelines.

One can sensibly argue that FERC should ignore greenhouse gas (GHG) emissions, but the courts so far have agreed with climate advocates. But here is the problem: Even if FERC has the obligation to consider the environmental consequences of major pipeline projects, assessing their effects on climate change, let alone measuring them, overstretches its capability as an economic regulator. If anything, this task should fall under the responsibilities of environmental agencies and other governmental entities with more capability than FERC to address climate change.

Even if FERC has an accurate measurement of net changes in GHG emissions—which is a big if—and a reasonable estimate of their effect on climate change, it is unclear how it would apply that information for decision-making.

There is enormous uncertainty over how an increase in GHG emissions would affect the economy (in dollar terms) and other aspects of society. This would require FERC, among other things, to measure with tolerable accuracy how a new pipeline would trigger nuclear retirements and shrink renewable energy. Is it reasonable to imagine that FERC possesses such clairvoyant powers?

From a public-policy perspective, it seems far-fetched to think that FERC, as an economic regulator, should engage in the highly contentious climate-change controversy. FERC should have limited responsibility over climate change and consideration of other so-called social benefits inherently difficult to quantify, let alone substantiate.  

But what seems even more nonsensical is that the opposition to new pipelines on environmental grounds could hinder the use of natural gas to replace coal-fired facilities and as an economical back-up for intermittent renewable energy.

This is an example of where politicization could actually hurt the interest of the winning party in a regulatory decision. And it would be not the first time that an unintended consequence (in this instance an increase in GHG emissions) has occurred in public utility regulation.

Overall, by making federal certification more politicized, interstate natural-gas pipelines have had to spend additional money to defend their position, courts have become more burdened, and environmentalists have spent large sums of money. Although not by themselves socially harmful, these costs would seem to overwhelm any benefits: Demanding that FERC considers climate change is destined for failure: What can we expect other than a net cost to society from first-degree, ill-informed decision-making? This is a classic case of what academics call “regulatory failure”.

Rational Energy Policy Recognizes Gas Benefits

Society’s preferred policy should be to continue relying on natural gas for electric generation and other uses for the next two decades and probably even longer. During that time, the U.S. can also grow the penetration of zero-carbon technologies, like renewable energy and nuclear power, to satisfy the increasing demand for electricity and replace coal-fired power plants. (Of course, that assumes that these technologies become economical.) In the interim, natural gas offers the country an abundant, relatively low-cost energy source that it can depend on for a long time.  

A rational energy policy, in fact, should encourage the expansion of natural gas for different uses rather than its suppression. A proper balancing of economic and environmental considerations would champion such a policy. Those who advocate shrinking the share of natural gas in our energy future skew their findings by giving deficient weight to economic effects. Their fixation on the urgency of controlling climate change, no matter the cost, has no place in the energy dialogue. Climate change concerns should certainly be a factor in developing energy policy, but not the sole or even overriding factor.

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Kenneth W. Costello is a Regulatory Economist and Independent Consultant