The rush to quit coal is leading countries into the ‘gas trap’

Increased natural gas production could inadvertently slow investment in clean energy and lead to higher carbon emissions, a new paper finds.

In 2015, 195 countries met in Paris to sign a global agreement to cut carbon emissions. A key part of that plan is reducing the amount of coal burned to create power. Now, a decade later, coal consumption has plummeted. South Korea and Germany have eliminated coal power altogether. But in this rush to ditch the dirtiest fuel, climate-conscious countries could be making one big mistake.

In much of the world, the best alternative to coal is natural gas, a fossil fuel that releases less carbon. Getting more countries to use gas will reduce emissions in the short term. But that switch comes with an unintended consequence.

In a new paper, Bård Harstad, a professor of political economy at Stanford Graduate School of Business, and Katinka Holtsmark, an assistant professor of economics at the University of Oslo, show that natural gas exports have the effect of discouraging investments in renewable energy. Ultimately, that will increase carbon emissions over the long term, a dilemma the authors call “the gas trap.”

“The gas trap means that countries that are very climate-concerned might increase gas production even more,” Harstad says. “The more they care about climate change, the more they try to outcompete coal. But the outcome of this well-intended action is a reduction in the investments of renewables and, ultimately, more emissions.”

Harstad hopes to alert policymakers and show them a way to avoid this pitfall. “Our hope is that this paper provides a warning,” he says. “Unless countries find a way to commit to reducing or regulating their production of natural gas, then their eagerness to compete with coal might do more harm than good.”

The problem starts—as many climate problems do—with coal. Scientists agree that to avoid devastating increases in global temperatures, coal needs to be replaced by cleaner, renewable energy sources like wind, solar, and hydroelectric. But those technologies require large investments and years of development before they can fully compete with coal.

For now, the market for renewables can’t respond quickly to variations in supply and demand, unlike a coal mine, which can adjust its output according to market pressures. Although renewables will eventually be able to make their output as elastic and their prices as competitive as coal’s, that isn’t true right now.

One temporary solution is natural gas, which releases about half the carbon emissions of coal. Switching to this “transition fuel” could give countries time to create more solar arrays and wind farms while satisfying their power needs with a less dirty solution. To incentivize other countries to buy natural gas, exporters make it cheap by extracting lots of it and undercutting the price of coal.

Giving renewables time to catch up

Using Norway as a case study, Harstad and Holtsmark modeled how the competition between coal and natural gas affects investments in renewable energy. They found that all that inexpensive natural gas makes it less likely that countries will build renewable power sources—with energy at such a low price, it just isn’t profitable to make those investments. That further delays their transition to clean energy.

Although these countries are burning a fuel that releases less carbon than coal, over the long term they will release more carbon than they would have if they had transitioned more quickly to renewables. Ironically, Harstad notes, “It’s the climate concern itself that is creating the problem.”

The alternative, Harstad and Holtsmark say, is for natural gas producers to make credible commitments to producing less so that investors who are looking more than a year into the future can see that it will be more profitable to put money into renewable energy in the long run. Fossil fuels won’t always be the cheapest option, but Harstad says renewables can take a few years to catch up and build capacity.

In their paper, Harstad and Holtsmark suggest three policies that would effectively limit natural gas production and jumpstart the market for renewables. The first is for gas-producing countries to make large-scale investments in renewables. Harstad says this would be a great option in places without a lot of renewable technology and where construction is cheap. However, this policy wouldn’t be feasible in Norway, where the cost of building large solar arrays, for example, is so expensive that it’s not realistic.

Another solution would be to levy a tax on search and exploration for natural gas. “Keeping new areas closed for exploration, or even limiting the number of licenses provided to the industry in already opened areas, must be expected to affect future extraction, and can thus pose as a commitment mechanism,” the authors write.

Because it takes a year or more for new natural gas fields to be mined, these limits would reassure investors that the energy market will stay stable in the future and that it will be profitable to invest in renewables. In the U.S., the Biden administration used a similar strategy by limiting the creation of new terminals that could export natural gas.

Finally, Harstad and Holtsmark suggest creating a coalition of natural gas producers, similar to OPEC, which could work together to regulate prices. Such a coalition could include countries that are not highly motivated to combat climate change but would benefit from higher natural gas prices that boost their export revenues. With more financial incentives to switch to renewables, this arrangement could help steer more countries away from the gas trap.

Harstad emphasizes that the gas trap isn’t inevitable. “The gas trap is not always going to be there,” he says. “We might run out of gas. We might reach a point when renewables can outcompete gas anyway.”

Based on his findings, it seems like the European market is already experiencing the trap. In Asia, where new coal mines are still being developed, this dilemma hasn’t emerged. Yet as more countries become concerned about reducing their emissions, the more likely they too will fall into the gas trap.