Differentiation of Natural Gas Markets by Climate Performance

Any commodity can be described by its unique set of attributes. These attributes can include intrinsic characteristics, such as what the commodity is (e.g., natural gas), and where, how, and by whom it was produced. These attributes can quantify the externalities associated with production, processing, transport, and consumption. For instance, in the case of coffee, the price partially reflects how, where, and by whom it is grown and processed, as well as how much, and can also reflect a variety of external benefits. For example, “rainforest alliance” coffee signals protection against deforestation, “shade-grown” coffee signals lower biodiversity loss, and “fair trade” coffee signals that a purchase reduces economic inequality. A range of certification bodies transform these signals of value into an expectation of reality and integrity, often via labeling, facilitating consumer choice and price premiums. In this way, coffee, a commodity, has been transformed into a differentiated product based on the underlying attribute profile.Commodity differentiation has also taken place in the energy sector. Electricity is a homogeneous commodity, yet electrons are produced in different ways. Electrons produced by a coal-fired power plant have a much different attribute profile than those generated by a wind turbine or solar panel. In the case of power generation, there are established, robust, well-developed, and expanding markets for electricity with “green” attributes, including for voluntary renewable energy credits. Remarkably, similar attribute differentiation has yet to take place for fossil fuels, [1] despite attempts by companies to distinguish their products through advertising. One way hydrocarbon production can be differentiated is by greenhouse gas emissions. Estimates of the life cycle carbon emissions embedded in different US and Canadian oils range from the highest at Canada Abathasca (736 kilograms of carbon dioxide equivalent [kg CO2e] per barrel) to the lowest at Texas Eagle Ford (458 kg CO2e per barrel). [2]How natural gas is produced, processed and moved varies greatly, leading to large heterogeneities in methane emissions that vary temporally by company, sector, and operations. For example, a large body of literature indicates that a relatively small portion of production wells account for the majority of methane emissions, which led scholars to coin the term “super-emitters” to characterize poor (or perhaps unlucky) performers (Alvarez et al. 2012; Caulton et al. 2014; Rella et al. 2015; Zavala-Araiza et al. 2015).This paper explores the potential issues in the creation of a market for green natural gas—here meaning natural gas with low methane emissions [3] across the value chain—(oil with associated gas that has low methane emissions could also be considered green, by analogy, but this is beyond the scope of our paper) as a means of obtaining superior climate performance. The underlying heterogeneity, alongside our belief that greater vigilance can allow for quicker detection of major leaks, is the basis for our interest in considering this market. We narrowly define superior climate performance [4] as the achievement of a low methane leakage rate associated with the life cycle of natural gas. We also include as leakage any deliberate emissions of methane during maintenance events, through venting (which is generally not permitted), or as part of other aspects of normal operations.We focus on methane emissions from the natural gas sector because of concern about methane as a strong greenhouse gas (35 to 80 times greater than an equivalent amount of CO2) and because this energy sector has a real and a public relations problem with methane leaks. The extent of these emissions threatens the climatic benefit of transitioning power generation and fleet vehicles to natural gas over other fossil fuels (coal and diesel) and thereby endangers the status of natural gas as a transition fuel (Munnings and Krupnick 2017). However, the factor-based emissions reporting methodologies used by the US Environmental Protection Agency (EPA) significantly underestimate methane emissions (Brandt et al. 2014). Moreover, the Trump administration has pulled back significantly from the Obama administration’s attempts to regulate such emissions (although a few states have regulatory programs). Thus, the creation of a market for green natural gas could be a desirable mechanism for incentivizing superior climate performance to reduce greenhouse gases. In addition, those producers that are already operating with superior climate performance, or are planning to do so, may be monetarily rewarded for their efforts.NotesWith the possible exception of renewable natural gas, which is natural gas derived from organic waste such as cow manure.Oil-Climate Index, https://oci.carnegieendowment.org/#supply-chain.In this paper we sometimes use the term “methane leaks,” while recognizing that some methane escapes in the course of normal operations and so is not technically a leak.We focus narrowly on green natural gas and methane emissions in this paper, rather than the larger set of attributes involved in the creation of responsibly produced natural gas.To read the full paper, please download the PDF (above).