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Breathe Easy: Natural Gas Is Lowering CO2 Emissions

By Arjun Sreekumar - Apr 11, 2013 at 8:03AM

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How the switch away from coal and toward natural gas has helped drive last year’s carbon dioxide emissions lower, according to the EIA.

America's shale gas revolution is already paying off big time. Not only has it been a boon to consumers and companies who use natural gas for heating their homes and offices, it also appears to be benefiting the environment. Let's take a closer look.

EIA reports lower CO2 emissions
Last week, the U.S. Energy Information Administration (EIA) reported that U.S. energy-related carbon dioxide emissions for 2012 fell to 5.3 billion tons – the lowest level in nearly two decades. What's more is that since 2007, emissions have declined consecutively each year, with the exception of 2010. The reason?

The EIA attributed the decline in CO2 emissions primarily to the shift away from coal, the most carbon-intensive fossil fuel, and toward natural gas, the least carbon-intensive fuel, for electric power generation. Less demand for transportation fuels and relatively weak demand for winter heating also played a role in driving emissions lower.

Coal-to-gas switching
Over the past few years, the transition toward natural-gas-fired plants and the retirement of older, coal-powered plants has been an unmistakable trend among utility companies.

For the better part of the past couple of decades, coal traded at a substantial discount to natural gas on an energy equivalent basis. In fact, it held up as the least expensive thermal fuel in the U.S. over that time period.

But all that changed in 2011, as natural gas prices slipped below $3 per Mcf that November. The downward trend in prices continued until spring of 2012, when gas hit a decade low of around $1.82 per Mcf on April 20.

Massively discounted gas prices drove utility companies with the flexibility to rebalance their production mix to burn more natural gas and less coal. In the first half of 2012, when natural gas was especially cheap, several utilities announced plans to curtail coal-powered generation in favor of gas-fired plants.

For instance, Southern Company's (SO -0.89%) share of coal used for total power generation fell from 70% to 30%, while the share of natural gas rose from 11% to 47%. Not surprisingly, the company ended up burning more natural gas than it did coal for the first time in its century-long history.  

Impact on coal producers
As increasing numbers of utility companies made the switch to natural gas, the price of thermal coal – the varietal used mainly for power generation – plummeted, leading many producers to reduce production drastically and, in many cases, lay off workers.

For instance, in the second quarter of last year, Arch Coal (NYSE: ACI) shuttered four thermal coal mines in Appalachia and idled another, as it struggled to cut costs in the face of falling demand for thermal coal. Not long after, in September, Alpha Natural Resources (NYSE: ANR) announced that it would idle mines in Pennsylvania, West Virginia, and Virginia and lay off almost 10% of its employees.  

However, some coal producers, such as Cliffs Natural Resources (CLF 0.59%) and Peabody Energy (BTU), fared relatively better due to the type of coal produced and the location of their operations.

Cliffs' savior was its focus on metallurgical coal – the varietal used primarily in steel production – which traded at a significant premium to thermal coal. Still, the company was forced to sell its stake in Sonoma Coal last year, as even metallurgical coal saw a sharp drop-off in demand. For Peabody, a relatively robust foreign export market buoyed profits, as the company benefited from its dominant presence in Australia and the broader Asia-Pacific market.

Final thoughts
Falling carbon dioxide emissions are great news, especially considering the resurgence of the climate change debate precipitated by the Keystone XL discussion. However, with natural gas prices on the rise and coal prices still depressed, the coal-to-gas switching trend is expected to decelerate. It will be interesting to see what impact this has on the level of emissions this year.

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Stocks Mentioned

The Southern Company Stock Quote
The Southern Company
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Cliffs Natural Resources Inc. Stock Quote
Cliffs Natural Resources Inc.
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Peabody Energy Corporation Stock Quote
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