MITIGATING THE CLIMATE IMPACTS OF SHALE GAS DEVELOPMENT UNDER
UNCERTAINTY
Zachary A. Wendling, Indiana University Bloomington, +1 (317)-531-0982, zwendlin@indiana.edu
Overview
Shale gas development has been hailed as a boon to climate change mitigation, primarily due to the fact that
substitution of natural gas for coal in electricity production can halve the emissions of CO 2 (EIA, 2013; IEA, 2012c).
Several scholars have argued that natural gas can serve as a “bridge fuel,” replacing dirtier fuels until low-carbon
energy sources mature and penetrate the market (IEA, 2012b; MIT Energy Initiative, 2011; Podesta & Wirth, 2009).
This argument is undercut, however, by the expectation that more abundant natural gas from shale gas development
(SGD) will depress fossil fuel prices generally, leading to increased consumption and yet higher CO 2 emissions
(Energy Modeling Forum, 2013; McJeon et al., 2014). More troubling, abundant natural gas might also crowd-out
investment in and development of the very low-carbon energy systems it is meant to facilitate (Davis & Shearer,
2014; Parenteau & Barnes, 2012; Shearer, Bistline, Inman, & Davis, 2014). The current literature indicates that SGD
alone will not bring about a low-carbon future (see also Myhrvold & Caldeira, 2012).
To meet the ultimate goal of reducing greenhouse gas (GHG) concentrations in the atmosphere, it will be necessary
to invest in new energy technologies that reduce emissions over the next several decades. Several studies have
produced possible pathways that meet GHG constraints by adjusting the mix of electricity generation stock over time
(Gracceva & Zeniewski, 2013; IEA, 2012a; Johansson, Patwardhan, Nakićenović, Gomez-Echeverri, & International
Institute for Applied Systems Analysis, 2012; Levi, 2013). The total cost of these pathways depends on many factors,
including technical constraints, experience curves, and growth in population and the global economy, among many
others. One factor that offers policy-makers a lever on these costs is the supply curve of natural gas. Or rather, with
the decision to ban or allow SGD, policy-makers have an opportunity to lower the supply curve relative to a world
with no unconventional gas production. Accordingly, the least-cost portfolio will depend on the price of natural gas
in the future: cheaper natural gas would imply greater investment in natural gas power plants, at least in the short-tomedium terms (Logan et al., 2013). Under a carbon constraint, SGD might make it cheaper or easier to transition
away from dirtier fuels.
The effectiveness of SGD as a lever for controlling climate mitigation costs depends a great deal on how shale gas
affects natural gas supply curves. As a nascent process, there is considerable uncertainty around two major
characteristics of SGD worldwide: the estimated ultimate recovery (EUR) and the production costs (Hilaire, Bauer,
& Brecha, 2015). In the case that the least-cost portfolio depends on the relative cost of natural gas as a fuel, policymakers are faced with an investment decision under uncertainty. Power generation technology is expensive and longlived; a misinvestment in technologies based upon faulty assumptions about natural gas supply curves might result in
a costly and counter-productive error.
This paper is organized as follows. First, I develop a method for calculating total costs of a given electricity portfolio
pathway over time, where natural gas price is the input of interest. Second, I create a distribution of natural gas
supply curves based upon underlying uncertainties about EUR and production costs. Third, I assess the value of
reducing these uncertainties. Fourth, I offer recommendations for how decision-makers should understand and might
mitigate the risk of misinvestment when formulating policies that could induce low-carbon portfolio pathways for
electricity generation.
Methods
Value of information assessment.
Results
A comparison of electricity portfolio pathways shows that the major differences in total costs depends most heavily
on several factors outside the control of policymakers. Cheap natural gas leads to a preference for portfolios that give
a greater share of electricity generation to natural gas plants, and natural gas plants with carbon capture and storage
are especially preferred only under optimistic supply curves with SGD. The value of reducing uncertainty is small
relative to uncertainty around factors unrelated to policy, though the choice of portfolio pathway can have
pronounced effects on long-term total costs through long-lived investments and learning effects on capital costs.
Conclusions
A climate-sensitive policy-maker would be inclined to ban SGD only in the absence of other policies to mitigate
GHG concentrations. In the presence of such climate constraints, however, SGD can be a valuable resource for
facilitating the transition to a low-carbon future. This resource, however, comes with risks due to the inherent
uncertainties about its actual effects on the costs and technical feasibility of possible portfolio pathways. Greater
certainty about natural gas supply curves with SGD would be valuable to the extent that it would help policy-makers
decide on how to invest in power generation technologies over the next several decades.
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