How Natural Gas Supply Affects Governments’ Climate Change Goals

As developed countries are starting to peak in their emissions, they are also phasing out coal in favour of natural gas, which is less polluting. What this means is that it creates a strong demand for natural gas in the market.

The Economist reports that Europe and Asia are now facing energy shortages, causing prices of natural gas to soar to around 40 per cent. Factories from aluminium smelters in Mexico to fertilizer plants in Britain are slowing down their production, freaking out the markets. Even in the United States, the largest producer of natural gas, lobbyists are calling on their government to limit liquefied natural gas (LNG) exports.

What is causing this energy fallout? According to the article, fires at the natural gas plants in Russia, outages due to covid-delayed maintenance, and increases in energy demands as the global economy returns to pre-pandemic activities have affected the supply chains and led to the energy shortage.

CNBC reports other factors that contributed to the energy shortage and skyrocketing LNG prices – Europe’s long winter, which means that inventory levels will be lower than average heading into fall, the slow wind speeds and dry conditions that has decreased wind energy output, and high carbon offsets prices which has led the continent to move away from coal and towards natural gas drove up demands.

If anything, the energy fallout also revealed that the world is ill-prepared to transition to clean energy. Equally concerning is the timing of the energy crisis, which will coincide with COP26.

As countries are coming together for the COP26 and upgrading their NDCs, the current energy setback can discourage large emitters like China and India from making solid commitments to reduce their coal consumption.

Even the United States, which has an abundance of shale gas, has seen natural gas prices more than double. However, the CNBC report is reassuring. It says the U.S. is in a better position than Europe, U.K., and Asia because it is the world’s largest gas producer, and its inventory is not as depleted as they are in Europe.

The difference between Europe and the U.S. is that Europe’s gas production has declined in the last two decades, which pushed them to depend on Russia for supplies. Asia will also feel the pressure, especially China who plans to shift away from coal dependence.

The demands for natural gas will also depend on how cold this winter will be. Robert Thummel, managing director at Tortoise Ecofin, notes that the shortage does not stem from the lack of supply but rather lack of infrastructure, especially for liquified natural gas in the U.S., Europe, and most importantly in Asia.

But he believes that the U.S. is still in a better position than Europe heading into the winter. Thummel says that a normal winter could see prices slightly elevated, warmer winter could see prices retreat, and a cold one would spike prices into double digits.

For governments to deal with the problem will require an accurate diagnosis of what has gone wrong. The Economist article says,

“Governments have not taken sufficient account of the intermission of renewable energy. The world has too little nuclear power — a low-carbon energy source that is always on. Interventions and subsidies for gas will only make things worse. Expensive energy makes voters angry and hurts the poor. But subsidizing energy in a squeeze, as Italy does, or limiting prices, as Britain does, will exacerbate shortages and make politicians’ commitment to the green look empty. Governments should use the welfare system to support household incomes if they have to while helping energy markets to function efficiently.”

“The long-term challenge is to even out volatility while continuing the shift to renewable energy. Finally, cheap battery storage can solve the intermittency problem; right now, more gas storage would also help. Meanwhile, adjustments to the market can improve things.”

The challenge is for governments to manage the transition thoughtfully because, without reliable energy alternatives and volatile power prices, it could lead to a rise in inflation and a reduction in living standards, making high-emitting countries justify coal dependence and threaten goals towards a stable climate.