Saturday, March 29, 2014

Fuming over Carbon Emissions Reporting

You know what really grinds my gears? When people give credit to the US for decreasing its emissions via increased use of natural gas while simultaneously scolding Europeans for burning more coal. It’s almost as if they forgot the first part of their argument by the time they got to the second part. Let’s just repeat after me: coal is traded globally. By reducing prices of natural gas in the US to unheard of levels, coal becomes less competitive domestically creating arbitrage opportunities for domestic coal suppliers and foreign end-users, or to put it more succinctly, cheaper coal has got to find some plant to burn in.  

It should be noted that the reason coal is being exported while natural gas is not is because LNG export-terminals have to be built, a very capital intensive and regulatory daunting undertaking. The regional nature of the gas markets means gas in the US will stay pretty close to home. This disparity can be seen by the fact the UK price for natural gas, the National Balancing Point, trades at 2-3 times the price of gas in the US, the Henry Hub Spot price. In fact, the regional nature of gas markets is one of the biggest reasons why for all the fomenting by Europeans over recent Russian escapades in Crimea, they will not be able to find an alternative gas supply anytime soon. 

So yes, the US is reducing its own emissions, but simultaneously those emissions are being exported to Europe. In fact, this theoretically could be welfare enhancing considering that emissions have a price in Europe, albeit a very low one. It’s this sort of refined analysis I keep looking for. Unfortunately, I just keep getting stuck with blame the Germans and God Bless the USA.