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Why U.S. Carbon Emissions Rose Last Year

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Thanks to a combination of horizontal drilling and hydraulic fracturing, the U.S. is awash with cheap natural gas extracted from shale formations around the country. Yet despite the nation's growing use of the cleaner-burning fuel, U.S. carbon dioxide emissions likely increased last year, according to recently released data from the federal Energy Information Administration (EIA).

Why U.S. carbon emissions likely increased
Though final estimates are not yet in, the agency estimates that carbon emissions linked to the use of oil, gas, and coal rose 2% in 2013 after reaching a 20-year low in 2012. This modest increase is due largely to a small rise in coal consumption by the electric power sector, as higher natural gas prices and increased summer demand for electricity led utilities to boost their use of coal-fired units.

In April 2012, when gas prices reached a record low of roughly $2 per MMBtu, the shares of natural gas and coal as a source of electricity reached parity for the first time ever, according to the EIA. But since then, coal has regained much of the market share it lost, accounting for more than 40% of the nation's electricity each month since November 2012, while natural gas' share fell to roughly 25% over the same period.

Still, one year does not a trend make, and the larger picture is that U.S. energy-related emissions have generally been falling since 2005 due to a combination of weak economic growth after the 2008 global financial crisis, major improvements in energy efficiency for transportation and buildings, greater use of America's abundant and cheap supply of natural gas coupled, and reduced use of coal. Indeed, 2013 carbon emissions are still expected to come in about 10% lower than 2005 levels.

Retirement of coal-fired plants
Going forward, emissions are expected to continue to drop through at least 2015, due to a combination of greater demand for natural gas and new environmental regulations that will essentially force the retirement of older coal-fired units. Through 2020, the EIA forecasts that roughly 49 gigawatts (GW) of coal-fired capacity will be retired, representing approximately one-sixth of existing U.S. coal capacity.

Several major utilities have already announced plans to retire some of their coal-fired plants over the next few years. For instance, Georgia Power, the largest unit of Southern  (NYSE: SO  ) , received approval from Georgia regulators in July to retire roughly 20% of its coal plants in the state by April 2015. The company's decision was shaped mainly by the high cost of complying with environmental regulations, as well as lower natural gas prices and expected economic conditions.

Similarly, the Tennessee Valley Authority (NYSE: TVE  ) said in November that it would retire more than 3,000 megawatts (MW) of coal-fired capacity, covering the five coal units at its Colbert plant in Alabama, one unit at the Widows Creek coal plant in Alabama, and two units at the Paradise coal plant in Kentucky. Though official dates for retiring these eight units have not yet been provided, the company's SEC filings say that the five Colbert units will be closed no later than June 2016.

Lastly, Duke Energy (NYSE: DUK  ) plans to retire up to 6,800 MW of coal-fired capacity by 2015 as part of its new fleet modernization strategy, which also entails construction of a new natural gas plant in North Carolina. By shuttering two coal-fired power plants in North Carolina, the company probably retired 3,800 MW of coal-fired generating capacity last year.

Slow and steady
The role of natural gas in U.S. power generation should continue to expand gradually over coming decades. The EIA said gas' share of power generation will grow from 24% in 2011 to 27% in 2025 and to 30% by 2040, while coal's share will decline from 42% in 2011 to 38% in 2025 and to 35% in 2040. So while coal will continue to play an overarching role in U.S. power generation, natural gas should slowly but surely start to catch up over the next couple of decades.

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To the coal industry's detriment, the surge in US natural gas production over the past few years has truly revolutionized the United States' energy position. That's why the Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free.


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Arjun Sreekumar

Arjun is a value-oriented investor focusing primarily on the oil and gas sector, with an emphasis on E&Ps and integrated majors. He also occasionally writes about the US housing market and China’s economy.

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