M-RCBG Associate Working Paper No. 174
Is natural gas the next coal? A framework for utilities and governments to think about the place of natural gas in the energy mix
with Yara Beaini and Michael McGetrick
This study analyzes the role of natural gas in electricity generation and the implications for public policies by comparing the evolution of two hypothetical global electricity systems: one designed to reach zero-CO2 emissions by 2035 and another one with the objective to maximize global social welfare by instituting an international CO2 tax reflecting the estimated social cost of carbon. We show that the implicit CO2 cost of imposing a zero-CO2 emission target is an order of magnitude higher than the typically accepted social cost of carbon as a consequence of the non-dispatchable nature of renewable technologies. A tax approach would be much more cost-efficient and leads to a different mix in which natural gas still plays an important role as firm capacity provider. Public policies should better take into account the additional costs of integrating renewable technologies above 70% penetration level and dedicate more R&D efforts for alternative storage solutions, which may include batteries and green gases such as H2, before committing to replace natural gas. This paper provides a simple framework to structure a reflection around those issues.