Europe emissions measures to have limited impact on gas

MADRID (ICIS)–A steeper cut in carbon emission allowance supply and a confirmed target of 40% renewable share in energy consumption by the end of the decade were among the proposals published by the European Commission on Wednesday, 14 July.

The so-called “Fit for 55 Package” is a roadmap for hitting a 55% carbon emission reduction compared with 1990 levels by 2030, as formally agreed by EU authorities last June.

But any impact on gas and LNG markets will be largely indirect, as the package focuses on fostering renewable sources of energy rather than penalising gas use.

Plans for gas in commodities and maritime transport will pave the way for deeper penalisation of methane emissions in the 2030s instead.

CBAM

One of Europe’s key regulations to limit emissions in markets, the Carbon Border Adjustment Mechanism (CBAM), will be gradually implemented as the EU ETS is reformed from 2023.

The result would be the phasing out or ending of free emissions allowances for sectors that join the CBAM.

Methane polluting products are intended to be included in these restrictions, but natural gas and LNG are also key products for power, heating and security.

Because of this and rules on a fair economic approach across the union, any inclusion of LNG or gas in the CBAM is as yet severely limited.

The burden of penalising LNG and gas imports for their emissions is likely to be imposed on a wide scale when the decoupling of gas and electricity prices is closer in sight, beyond 2030.

Aiming to increase the share of renewable power in Europe is therefore a building block of things to come.

“The premium on carbon that will stimulate investment in alternative technologies…that will take us where we need to be,” said EU vice president Frans Timmermans on 14 July, adding this was the architecture to allow for greater cuts in the 2030s.

Many pro-renewables governments like Portugal support this, as they perceive gas to be linked to higher or more volatile power prices.

Controls on gas prices and emissions in this sector is also something parliamentarians representing central and eastern European countries have campaigned against, as coal-to-gas switches continues.

If restrictions including taxes do emerge in the 2030s, this could have implications for LNG and gas balances, and where Europe finds it most favourable to import these products from.

It could encourage LNG imports from lower emissions regions like Canada and see some pipelines favoured for lower leakage rates.

The impact could be sweeping. It is because of this that regulators are unlikely to include gas and LNG here just yet.

MARITIME TRANSPORT

The maritime sector will be included in the EU ETS, with its impact gradual from 2023.

Plans will use the existing road transport measurement and control basis for fuel production under the Renewable Energy Directive II.

That means that in 2023, vessel operators would have to cover 20% of their verified emissions, 45% of emissions in 2024, 70% in 2025, and 100% thereafter, according to new regulations.

Regulations are to apply to ships only over 5,000 tonnes. This is where cost efficiencies also have the biggest impact.

Vessels on incoming and outgoing voyages in the European Economic Area, as well as intra-EEA journeys will be impacted.

It was previously expected that only incoming vessels would be affected, as this would be less likely to discourage transhipment activity in Europe.

Previously-leaked emissions calculation plans indicate LNG will generally be calculated to be about 15% less polluting than conventional Very Low Sulphur Fuel Oil, according to ICIS senior analyst Tse Man Yiu.

But low penalties mean operators can reduce costs of complying without switching to LNG or lower emission fuels for now.

Stricter penalties will come after 2030, to meet 2035 targets.

A direct electrification and gas package will be published later this year, expected to reveal more about the union’s plans for biogases as well as LNG this decade.