The incoming administration has signaled the intent to rejoin the Paris Agreement in early 2021. The Paris climate agreement sets annual targets for country-level carbon emissions with 2005 emission levels established as the baseline. In 2005, the US emitted nearly 500 million metric tons (MMT) per month of carbon and as part of signing the original agreement agreed to reduce emissions 26-28% by 2025. With the US likely to rejoin the Paris Climate accords in 2021, today’s energy market insight will explore where the US stands in relation to reaching the goals of the Paris Agreement and potential implications to oil and gas consumption.
The chart below shows total carbon emissions from direct energy consumption from 2006-2020. To reduce seasonal volatility in emissions, the chart uses a 12-month moving average of historical carbon emissions.
From 2006 to 2008, US carbon emissions remained steady near 500 MMT per month. A long downward trend began in 2008, when the effects of the financial crisis paired with the growth of shale development contributed to a decline in both coal and petroleum emissions. Prior to the 2020 pandemic, US carbon emissions had declined nearly 15% in 2019 as compared to 2005 levels. Carbon emissions still stood at 428 MMT per month compared to the target goal of approximately 364 MMT per month for 2025 or about 17% above the targeted goal. The pandemic drove significant reductions in road fuel demand in 2020. As of August, the trailing 12-month average of emissions was down nearly 22% compared to 2005 levels.
The chart below shows the average emissions for the period of September 2019 to August 2020 compared to the previous year of September 2018 to August 2019. Coal emissions declined by 26 MMT per month compared to the previous period. Growth in renewables combined with cheap natural gas have led to significant reductions in coal consumption over the last year. As a result, natural gas emissions have climbed, but only slightly, over the same period.
The biggest drop in emissions in 2020 was driven by declines in transportation fuels. Transportation fuels have declined a combined 31 MMT in 2020. Road fuel demand though has been on a rebound in the second half of 2020. With a vaccine on the horizon, road fuel demand will likely continue to normalize in 2021 although still likely at a reduced level given the economic landscape. With road fuel demand likely recovering over the next 5 years, what must happen for the US to achieve the midpoint of the 2025 Paris targets of approximately 364 MMT per month?
The most likely case over the next 5 years is that the power sector will bear responsibility for achieving the goals of the Paris Agreement. Coal and natural gas represent 57% of US carbon emissions over the last 12 months. However, not all-natural gas emissions are from the power sector. Only 39% of natural gas consumption in the US occurs in power. The remaining emissions occur in industrial, commercial, and residential sectors with heating being the primary usage. Because most US natural gas emissions are not in the power sector and cannot be impacted by growth in renewables, coal generation will continue to face the most pressure. The chart below shows the emissions levels required to achieve the Paris climate goal assuming that road fuel emissions recover at least 50% of the way to 2019 levels and that natural gas emissions are held flat.
Coal emissions and thus coal generation would need to decline an additional 60% over the next 5 years to achieve this target. If road fuels were to recover more or these reductions were primarily met with natural gas, then coal would need to fall even further to offset the resulting increase of carbon emissions.
The long-term implications of rejoining the Paris agreement could be even more severe. The first chart highlights the 2050 goal of the Paris agreement. By 2050, the US will be targeting reducing emissions by 80% or to just 100 MMT per month of carbon. To achieve this goal, the US will need to significantly reduce emissions. BTU Analytics is hosting a webinar on December 8 discussing the long-term outlook for natural gas and will further discuss how renewables, coal retirements, and decarbonization will impact the outlook for natural gas over the coming decades. Click here to reserve your spot on the webinar.