Implementing a methane pricing model for the EU gas market - Pricing methane
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Report 10/2021 HINTERGRUNDPAPIER / STUDIE Pricing methane Implementing a methane pricing model for the EU gas market Isabel Schrems, Peter Wieland, Carolin Schenuit and Swantje Fiedler October 2021 On behalf of
A methane pricing model for the EU gas market • Page 2 von 21
Summary
The reduction of methane emissions from oil and gas is legal and political feasibility, an appropriate price level,
one of the most cost-effective ways to slow down the geographic scope, covered emissions as well as the
global warming. To meet the goals of the Paris Agree- use of revenues. In order to enhance its climate impact,
ment, the reduction is an indispensable requirement. In we propose to combine the methane pricing model
this study, we propose to implement a set of instru- with a methane performance standard on all natural
ments to incentivize necessary measures to abate me- gas traded in the EU.
thane emissions arising from natural gas production in
the EU and gas imports into the EU – a methane pric-
Publication: October 2021
ing model in combination with a performance stand-
ard. We discuss how such a pricing model should be
designed – taking into account relevant aspects like the
Imprint
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the potential and benefits of environmental fiscal re- capacity to evaluate and develop policy proposals in
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Forum Ökologisch-Soziale Marktwirtschaft e.V. • Green Budget GermanyA methane pricing model for the EU gas market • Page 3 of 21
Implementing a methane pricing model for the EU gas
market
Table of contents
1 Time to act ....................................................................................................................................................................... 6
2 Methane emissions from the gas industry ................................................................................................................. 6
2.1 Climate impact of methane emissions ................................................................................................................................... 6
2.2 Natural gas consumption and imports in the EU ............................................................................................................... 7
2.3 Countries of origin and methane intensities ........................................................................................................................ 7
3 Design of a methane border levy for natural gas imports into the EU ................................................................. 9
3.1 Replication of the EU-ETS for imports: CBAM Proposal ............................................................................................... 9
3.2 Excise duty ....................................................................................................................................................................................... 10
3.3 Import tax ......................................................................................................................................................................................... 10
4 Implementation of an EU import tax for natural gas imports ............................................................................... 11
4.1 Practical concerns .......................................................................................................................................................................... 11
4.1.1 Implementation of a methane price for natural gas inside the EU ............................................................................ 11
4.1.2 Determination of covered methane emissions ............................................................................................................. 11
4.1.3 Data/ measurement ................................................................................................................................................................ 12
4.1.4 Legal and political feasibility ................................................................................................................................................ 12
4.2 Price level .......................................................................................................................................................................................... 13
4.2.1 Abatement costs ....................................................................................................................................................................... 13
4.2.2 Climate damage costs ............................................................................................................................................................ 13
4.3 Geographic scope and included emissions ........................................................................................................................ 14
4.3.1 Geographic scope .................................................................................................................................................................... 14
4.3.2 Emissions covered by the tax............................................................................................................................................... 14
4.4 Use of revenues .............................................................................................................................................................................. 14
4.5 Impact on methane emissions and EU natural gas prices ............................................................................................ 16
4.5.1 Impact on methane emissions ............................................................................................................................................ 17
4.5.2 Impact on natural gas prices ................................................................................................................................................ 17
5 Combination with a performance standard ............................................................................................................ 17
Literature ............................................................................................................................................................................... 19
Forum Ökologisch-Soziale Marktwirtschaft e.V. • Green Budget GermanyA methane pricing model for the gas industry in the EU • Page 4 of 21
Executive Summary
According to the newest report by the Intergovern- gas imports) into the EU (like the CBAM proposal by
mental Panel on Climate Change (IPCC), methane the European Commission), a consumption duty or
has already contributed an increase of 0,5 degrees an import tax. Taking the criteria of:
Celsius to global climate change. The contribution 1. legal feasibility,
of carbon dioxide is estimated at 0,8 degrees. Ac-
2. administrative and political feasibility and
cording to the IPCC AR6 one ton of methane has an
83 times higher climate impact than CO2 over 20 3. climate impact
years and still a 30 times higher impact over 100 years. into account, we propose to introduce a methane im-
So, despite the relative decline of methane’s climate port tax for natural gas imports into the EU. However,
impact over time, it is a way more potent greenhouse this option also comes with its difficulties and open
gas than CO2. questions.
The reduction of methane emissions is one of the
most cost-effective ways to slow down global To introduce a methane import tax in the EU, first a
warming. To meet the goals of the Paris Agreement, methane price must be implemented within the
the reduction is an indispensable requirement. The EU. Otherwise, the import tax would not be in line
most cost-effective reductions of methane emissions with WTO law as the exporters of gas from countries
can be achieved in the oil and gas industry. outside the EU would be discriminated against trad-
The EU´s share of the global natural gas demand is ers of gas inside the EU.
currently around 10%. More than 85% of the natural The methane emissions footprint of the natural gas
gas consumed in the EU is imported from countries imported into the EU could either be calculated on a
outside the European Union. Only 15% is produced product level or estimated referring to a default
inside the EU. value. We propose to refer to a default value during
The methane intensities of traded natural gas in the the first implementation phase of the methane im-
EU differ greatly depending on where the natural gas port tax. The MRV framework must be established ef-
was extracted. Furthermore, due to a lack of data fectively within a certain timeframe – e.g., three years
there is still high uncertainty in defining appropriate after the implementation of the import tax – so that
methane leakage rates. the use of the default value is no longer necessary.
With the EU Methane Strategy released in October The proposed default value is based on average EU
2020 as part of the new European Green Deal, the methane intensities. However, importers should
European Commission took an important step to have the opportunity to prove that their product is
raise political attention for methane emissions. The less methane intensitive than the average.
European Commission seeks to improve detection
and repair of leaks in gas infrastructure and to pro- The methane price needs to be higher than the
hibit flaring and venting practices in the EU. Further- abatement costs to incentivize actual abatement.
more, within the EU Methane Strategy, the explora- Though there is high uncertainty on how high the
tion of standards and targets for methane intensities abatement costs really are, the literature shows that
for energy imports to the EU are considered. with a price between around 500 and 700 €/t CH4,
This study outlines a complementary set of instru- which is the equivalent to a relatively low price be-
ments to incentivize necessary measures to abate tween around 17 and 23 €/t CO2eq assuming a
methane emissions arising from natural gas produc- GWP100 (30) for methane, there is high probability
tion in the EU and gas imports into the EU – a me- that already at this price levels there would be an in-
thane pricing model in combination with a perfor- centive to reduce methane emission. We therefore
mance standard. As the majority of methane emis- propose to start with a methane import tax between
sions arising from traded natural gas in the EU goes 500 and 700 €/t CH4. To ensure that the entire
back to gas imports from countries outside the EU, damage of methane emissions is internalized, the im-
the primary focus thereby lies on the implementation port tax should increase to the full climate damage
of a methane border levy. costs of methane emissions. UBA recommends an
average value of climate damage costs of 195 €2020/t
CO2eq, which increases over time - up to 250 €2050/t
There are several options to implement a methane
CO2eq in 2050.
border levy for natural gas imports into the EU: A rep-
lication of the EU-ETS on imports (including natural
Forum Ökologisch-Soziale Marktwirtschaft e.V. • Green Budget GermanyA methane pricing model for the EU gas market • Page 5 of 21
We propose to cover only upstream methane emis- be implemented for all natural gas sold in the EU
sions during the first implementation phase of the market. If the methane intensity of natural gas would
methane import tax and to broaden the emissions be above the performance standard, importers
scope in a second phase when measurements are would not be able to import this type of natural gas
improved and more widespread. Furthermore, all into the EU.
countries would be included as this is the legally most The combination of a regulatory instrument of a per-
feasible option. formance standard with methane pricing instru-
ments would therefore establish a safeguard to ex-
How the revenues from this tax are used must be in clude gas with extraordinarily high methane intensi-
line with the expectations of Member States and ties and set incentives to adapt further measures to
trading partners at the same time and be compliant reduce methane emissions at the same time.
with WTO law. To ensure WTO conformity, the total Figure 1 shows how the methane performance
use of revenues should be tied to the purpose of fi- standard and the methane price could develop over
nancing climate policy within the EU and outside the time if the methane performance standard would be
EU. To ensure the cooperation and consent of all EU implemented already in 2022 and a methane price –
Member States at least a small share of revenues within the EU and also in form of the proposed me-
should fund the EU budget - and could be used for thane import tax – in 2025. Whereas the methane
an EU GHG- (or methane)-reduction fund. The rest performance standard would decrease from a me-
of revenues should be returned to countries outside thane intensity of 2% in 2022 to 0,05% in 2035, the
the EU. Therefore, a share of revenues could be in- methane price would increase from 25 €/t CO2eq in
vested in existing climate funds that support climate 2025 up to the amount of the total climate damage
transition in low- and middle-income countries or costs of around 220 €/ t CO2eq in 2035.
new investment funds could be created that focus on
support for methane reductions in partner countries, Figure 1: The development of the methane perfor-
which are directly impacted by the methane import mance standard and the methane price over time
tax.
2,5 250
2 200
A study (Enervis 2021) analyzes the impact of a price
in €/t CO2eq
on upstream methane emissions on methane emis- 1,5 150
in %
sions and EU natural gas prices. The results indicate
1 100
that the global oil and gas methane emissions would
decline by 1-3% at 25 €/t CO2eq to 100 €/t CO2eq only 0,5 50
taking possible methane abatement measures by
0 0
producers of natural gas inside the EU into account.
2022
2023
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
2035
2034
Assuming that also in countries outside the EU, pro-
ducers would abate 75% of their methane emissions, methane performance standard in %
global oil and gas supply chain methane emissions
methane price in €/t CO2eq
would even decrease by around 15-25%.
The results further indicate that the increase in nat- Source: own depiction
ural gas prices stays limited (between 0,3% and
8,4%) – even under a relatively high price at Implementing both instruments, the EU could take
100 €/t CO2eq. on a global pioneering role, as one of the world’s larg-
In addition to the pricing of methane emissions aris- est gas markets, and inspire other markets to take
ing from the natural gas production in the EU and gas ambitious action to reduce methane emissions.
imports into the EU, a performance standard should
Forum Ökologisch-Soziale Marktwirtschaft e.V. • Green Budget GermanyA methane pricing model for the gas industry in the EU • Page 6 of 21
1 Time to act 2 Methane emissions from the gas
Natural gas consists to a large extent of methane, an industry
extremely climate-damaging gas whose harmfulness In 2019, around a quarter of the EU's energy mix con-
to the climate is often underestimated. Methane is the sisted of natural gas (22%). Behind petroleum products,
second largest driver of climate change after CO2 and natural gas is the EU´s second most used fossil energy
is responsible for almost a quarter of the greenhouse source (Eurostat 2020a). The second chapter of the
effect (Environmental Defense Fund 2019). According study will serve as an overview of the most important
to the newest report by the Intergovernmental Panel facts and numbers of the natural gas use in the EU and
on Climate Change (IPCC), methane has already con- the resulting methane emissions.
tributed 0,5 degrees to global warming. The contri-
bution of carbon dioxide, is estimated at 0,8 degrees
(IPCC 2021). Methane emissions thus play a decisive 2.1 Climate impact of methane
role in mitigating greenhouse gases. emissions
According to recent reports, the reduction of me-
thane emissions is one of the most cost-effective Natural gas is often seen as a transition technology in
ways to slow down global warming and to meet the the energy transition and as a less environmentally
goals of the Paris Agreement (United Nations Environ- harmful alternative to coal combustion (Safari u. a.
ment Programme/Climate & Clean Air Coalition 2021). 2019). What is often overlooked are the extremely
The most cost-effective reductions of methane emis- damaging climate effects of methane emissions from
sions can be achieved in the energy sector, or more the production, transportation, processing, and con-
specifically: in the oil and gas industry (IEA 2020a). sumption of natural gas.
The EU Methane Strategy released in October 2020 Figure 2 belows shows methane’s global warming po-
as part of the new European Green Deal, gave the sub- tential over time. The Global Warming Potential
ject of methane emissions necessary political attention. (GWP) is measured relative to the potential of CO2.
The European Commission seeks to improve detection Therefore, one ton of methane has an 83 times higher
and repair of leaks in gas infrastructure and to prohibit impact than CO2 after 20 years and still a 30 times
flaring and venting practice in the EU. Furthermore, the higher impact after 100 years. So, despite the relative
EU Methane Strategy explores the idea of standards decline of methane’s climate impact over time, it is a
and targets for methane intensities for energy imports way more potent greenhouse gas than CO2 (IPCC
to the EU (European Commission 2020). 2021).
In this study, we propose a complementary set of in-
struments to incentivize necessary measures to abate Figure 2: Climate impact of methane emissions per
methane emissions arising from natural gas production kg over time
in the EU and gas imports into the EU – a methane
140
pricing model in combination with a performance
Global Warming Potential (GWP)
standard. 120
Internationally, there already exist distinct methane 100
83 x higher than CO2 (per kg,
pricing models – e.g., in Norway, Russia, New Zealand after 20 years)
80
and various states in the USA, e.g., Alaska. Norway’s 30 x higher than CO2
combination of a mandatory greenhouse gas tax that 60 (per kg, after 100
years)
applies to gas flares with a regulatory strategy presents
40
a best practice example of how methane emissions
arising from the gas sector can be reduced. The flaring- 20
related methane releases dropped by 36% in the first 0
years following the tax implementation. The methane 0 10 20 30 40 50 60 70 80 90 100
intensity of Norway’s gas production remains far below Years after emission
global averages (Rabe et al. 2020).
The majority of methane emissions arising from traded Source: own depiction based on (IPCC 2021)
natural gas in the EU goes back to gas imports from
The next decade will be crucial in the fight against cli-
countries outside the EU. Therefore, the primary focus
mate change. Therefore, methane must be evaluated
lies on the implementation of a methane border levy.
in terms of its short-term climate impact.
Though legal feasibility is taken into account in this pro-
Altogether, methane is responsible for one fourth of
posal, it is beyond the scope of this study to carry out a
the greenhouse effect and the second biggest con-
legal analysis.
tributor to global warming (Environmental Defense
Forum Ökologisch-Soziale Marktwirtschaft e.V. • Green Budget GermanyA methane pricing model for the EU gas market • Page 7 of 21
Fund 2019). Newest data shows that some forms of
The countries from which gas is supplied to individual
natural gas, e.g., fracking gas, have an even higher cli-
EU Member States vary. Germany is supplied mostly
mate impact than lignite coal (Howarth 2019;
with gas from Norway, Russia and the Netherlands
EnergyWatchGroup 2019).
(BDEW 2020; BDEW 2021; BMWi 2021a). Southern
European countries like Spain, Italy and France simi-
2.2 Natural gas consumption and larly receive a high share of pipeline gas from Norway
and Russia, but are also dependent on LNG imports
imports in the EU
from Africa and the Middle East. LNG imports from
The global gas demand in 2019 was 4.000 billion cu- Russia and the USA into the EU increased heavily in the
bic metres (bcm) and is expected to increase to last five years as well (BP 2021).
4.300 bcm in 2025 (Enervis 2021). Every year, coun- 81.4 bcm of natural gas was imported into the EU in the
tries in the European Union consume around 400 bil- form of LNG in 2020. The largest recipients were Spain
lion cubic metres of natural gas (DIW 2020). Germany (20.9 bcm), France (19.6 bcm) and Italy (12.1 bcm) (BP
(86.5 bcm), Italy (67.7 bcm) and France (40.7 bcm) had 2021).
the highest natural gas consumption in 2020 (BP 2021).
Until 2025, the consumption of natural gas in the EU is As indicated in Figure 4, the power and building sec-
forecasted to decrease by 3%. By then, the EU´s share tor as well as the industrial heating sector are the
of the global natural gas demand will be at 9% (Enervis most common sectors where natural gas is used in the
2021). EU. Buildings and power are both responsible for about
More than 85% of the natural gas consumed in the EU one third of the EU natural gas consumption each. In-
are imported from countries outside the European Un- dustrial heating and other applications make up the
ion. Only 15% are produced inside the EU (Eurostat last third. The respective shares of the sectors are ex-
2020b; Eurostat 2020c). pected to remain almost the same until 2025 (Enervis
2021).
The share of natural gas imports will increase in the
coming years. European gas production is likely to de-
Figure 4: EU natural gas uses in 2019
crease. The Netherlands terminated gas production on
Other
the Groningen gas field and will decrease small field 9%
production by 90% until 2040. Additionally, one of the Power
European gas suppliers, the UK, left the EU. Some Eu- 31%
ropean countries like France and Spain are in a regasi-
fication process and will therefore be even more de-
Buildings
pendent on LNG imports, despite the expected gen- 36%
eral decrease in natural gas consumption (Enervis
2021).
Russia and Norway are the most important natural gas Industry
suppliers of the EU. They produce more than half of the 24%
EU´s natural gas imports (see Figure 3). Russia ac- Source : Own depiction based on (Enervis 2021; IEA 2020b)
counts for 41% of the EU´s natural gas supply, while
Norway accounts for 21%. Other notable exporters into
the EU are Qatar and Algeria with 6% each and Nigeria 2.3 Countries of origin and
with 4% (Eurostat 2020b; Eurostat 2020c). methane intensities
Figure 3: EU natural gas import structure 2019 Methane leaks and methane slip in any form are a major
problem for the climate. Methane leaks describe the
EU
Production escape of methane along the supply chain of natural
Other 15% gas, methane slip refers to the escape of methane dur-
US3% ing the combustion process (FÖS 2021; IEA 2021).
2% Russia
UK Methane emissions occur during the extraction, pro-
2% 41%
Nigeria duction and processing, transport, distribution, and
4%
Qatar storage, as well as the combustion of natural gas
6% (Deutsche Umwelthilfe 2020). It escapes from pipe-
Algeria lines or drill holes. It also enters the atmosphere during
6%
the process of combustion or is discharged, for exam-
Norway
21% ple during repairs to long-distance gas pipelines
Source: Own depiction based on (Enervis 2021; Eurostat 2020c;
(DVGW-Forschungsstelle am Engler-Bunte-Institut
Eurostat 2020b) des KIT/Fraunhofer ISI 2018).
Forum Ökologisch-Soziale Marktwirtschaft e.V. • Green Budget GermanyA methane pricing model for the gas industry in the EU • Page 8 of 21
Country specific methane intensity of natural gas is Other sources provide similar results and reinforce the
very uncertain in the majority of countries, especially uncertainty in defining methane leakage rates – espe-
in China, Russia and countries from the Middle East cially if methane emissions are considered that occur
and Africa (IASS 2016). Most of the time, methane in- during the processing and gas transportation. Esti-
tensity data rely on simple estimates and not on actual mates on the methane loss rate of natural gas originat-
measurements. ing from Russia differ by a factor of 10 for the year 2012.
Furthermore, information from national authorities on In detail, the estimates for leakage rates from pipelines
methane emissions cannot always be relied upon. In- in Russia range between 0.39% and 3.08% (BGR
dependent measurement in the USA corrected the 2020; DBI 2016), while for pipelines in Norway, they
data of the Environmental Protection Agency upwards range between 0.00% and 0.07% (BGR 2020).
by 60% (Alvarez u. a. 2018; Howarth 2015). According to satellite data, the methane leakages in
Table 1 shows estimates for the upstream methane in- Russia increased by 40% in 2020 (European Space
tensity ranges for gas in the seven major supply coun- Agency 2021). One reason for the increase could be
tries for the EU. Due to low data quality of methane cutbacks in repairs and inspections due to reduced de-
emission levels, there is high uncertainty about the pre- mand and cost pressure caused by the Covid-19 pan-
sented methane intensity ranges. demic (Climate Home News 2021). Those increases are
another reason to consider the presented assumed
Table 1: Assumed upstream methan intensity methane intensity ranges for gas (Table 1) as conserva-
ranges for gas tive.
Country Central Lower Upper
of origin Estimate Bound Bound For a specific assessment of the climate impact of me-
Estimate Estimate thane, knowledge about the actual number of emis-
Russia 1.3 % 0.0 % 2.5 % sions is decisive.
Norway 0.01 % 0.01 % 0.01 % It is highly necessary to improve the accuracy of
Algeria 1.6 % 0.0 % 3.2 % measuring methane emissions to ensure better esti-
Qatar 0.3 % 0.0 % 0.6 % mations of methane leakage rates. The EU Methane
Nigeria 1.2 % 0.0 % 2.5 % Strategy includes legislation for mandatory measure-
UK 0.2 % 0.1 % 0.3 % ment, reporting and verification of energy-related me-
USA 2.2 % 1.8 % 2.5 % thane emissions (European Commission 2020). Im-
Source: Own depiction based on (Alvarez u. a. 2018; Enervis 2021; IEA proving those measurements is a first step in effectively
2020c) reducing methane emissions – though there exist other
measurements, which are even more cost efficient (see
The assumed upstream methane intensity ranges for chapter 4.2.1).
gas in Table 1 are based on expert judgment provided Additionally, incentives to reduce methane emissions
by EDF for a study by (Enervis 2021). They developed in the countries of origin of natural gas are needed.
the distinct methane emissions intensity ranges to Natural gas in the EU is almost entirely imported (85%)
reflect data quality and existing uncertainties. The and therefore extracted and processed ouside the EU.
central baseline methane emission intensities are Therefore, a serious effort to address methane emis-
based on the IEA Methane Tracker database for up- sions from natural gas requires regulation of gas that
stream emissions attributed to gas production in each comes from ouside the EU’s borders. We therefore
country (IEA 2020c) – except for the USA. Here, the propose to implement a methane border levy for natu-
presented data are based on estimates from (Alvarez ral gas imports into the EU.
u. a. 2018). The presented data for upstream emissions
does not include methane emissions arising during
processing and transportation. The upper and lower
bound emission intensities represent the uncertainty in
emission intensities (Enervis 2021).
Algeria, Nigeria, USA and Russia, are estimated to have
a high methane intensity (Enervis 2021; IEA 2020c).
Especially those high estimates need to be viewed with
caution, because the upper and lower bounds show a
high uncertainty. The United Kingdom, Norway, and
Qatar are characterized by very low methane intensi-
ties with lower uncertainties (Enervis 2021; IEA
2020c).
Forum Ökologisch-Soziale Marktwirtschaft e.V. • Green Budget GermanyA methane pricing model for the EU gas market • Page 9 of 21
3 Design of a methane border levy The Commission selected this option of reproducing
the EU-ETS for imports as most promising option for a
for natural gas imports into the carbon border mechanism. The advantage of this op-
EU tion is that it builds on the framework of the EU-ETS.
Furthermore, it is easier to implement under EU law
The methane border levy for natural gas imports into
than a tax and more feasible to administer (ERCST
the EU sets incentives for producers and traders of gas
2021).
to implement measures to reduce the loss of natural
gas over the whole supply chain and avoid methane However, the current CBAM proposal may need to be
leaks. The EU, as one of the world’s largest gas markets, adapted to be in compliance with the World Trade Or-
could thus take on a global pioneering role and inspire ganization (WTO) law.
other markets to take ambitious action. Further, a me- Two aspects might make it difficult to include me-
thane border levy would be an important step for the thane emissions of the gas industry in the proposed
internalization of the climate damage costs of natu- CBAM.
ral gas production and transmission. 1. First, the political feasibility of including methane
There are several options to implement a methane bor- in the EU-ETS, which is prerequisite to including it
der levy for natural gas imports to the EU. The three in the CBAM, might be complex. Until today, the in-
main options are discussed in the following section: a clusion of methane emissions arising from the gas
replication of the European Emissions Trading Sys- industry in the EU-ETS has not been considered se-
tem (EU-ETS) for imports including natural gas im- riously.
ports (like the Carbon Border Adjustment Mechanism 2. Second, the main objective of the CBAM pro-
(CBAM) proposal by the European Commission), a posal differs from the main objective of a methane
consumption duty and an import tax. border levy for natural gas imports into the EU. The
Each option has its strengths and weaknesses. We will main goal of the proposed CBAM is to ensure that
discuss their relative implications along the criteria of: ambitious climate policy in the EU does not lead to
1. legal feasibility, carbon leakage (European Comission 2021, p.2).
The main goal of a methane boarder levy would not
2. administrative and political feasibility, and
be to avoid relocation of oil and gas production and
3. climate impact. its associated methane emissions outside the EU,
but to incentivize foreign trade partners and im-
porters to adopt measures to reduce methane
3.1 Replication of the EU-ETS for
emissions in the countries of origin of natural gas.
imports: CBAM Proposal The danger of resettlement of industry due to me-
The European Commission proposes a replication of thane regulation concerning natural gas is less ob-
vious than it is the case for carbon leakage and dif-
the EU-ETS for imports by introducing CBAM-allow-
ferent from manufacturing industry’s leakage con-
ances that mirror the price of the EU-ETS (European
Comission 2021). cerns.
Importers would have to purchase a quantity of CBAM Therefore, it might be legally difficult to include me-
thane emissions into the current CBAM proposal.
allowances sufficient to cover the embodied emissions
in the goods they import. The CBAM would start with
an implementation phase from 2023 to 2025. It Table 2: Evaluation of replication of EU-ETS
would be fully operational from 2026 (European Legal feasibility Administra- Climate impact
Comission 2021). tive and polit-
ical feasibility
During the implementation phase, the European Com-
mission proposes to include a limited number of emis- ▪ WTO compli- ▪ Relatively ▪ The inclu-
sion-intensitive sectors, i.e. cement, iron and steel, al- ance to be dis- easy to im- sion of me-
uminium, fertilizers and electricity, and only CO2, N2O cussed plement thane
und PFC-emissions (European Comission 2021). ▪ Less obvious ▪ Current would cre-
ate a rele-
However, the gas sector and methane emissions could danger of me- window of
thane emissions oppor- vant price
still be integrated in the actual proposal or added in a
being shifted tunity signal for
second step. importers
outside the EU ▪ The inclu-
To do so, methane emissions would first need to be might make me- of natural
sion into
included in the EU-ETS, as the Commission proposes thane not suita- gas
EU-ETS
that emissions that are covered by the CBAM should ble for CBAM might be
correspond to those covered by the EU-ETS proposal complex
(European Comission 2021). Source: own depiction
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3.2 Excise duty 3.3 Import tax
A second option would be a duty levied on the con- A third option would be a methane tax on imported
sumption of natural gas in the EU, regardless of natural gas, which is paid by the importer when natural
whether it is extracted inside the EU or abroad. The gas enters the EU. To introduce an import tax would
duty would be based on the quantity of the natural very likely require unanimous vote in the Council. If
gas produced or imported multiplied by a methane the Council would first unanimously exercise the so-
intensity factor. The methane intensity factor could be called passerelle clause, a majority vote in the legisla-
a default value for natural gas in the initial phase. tive procedure would be sufficient (ERCST 2020;
It should be administratively easy to implement a con- Stiftung Umweltenergierecht 2021a). The unanimous
sumption duty as it could be built on existing tax infra- vote might, however, be quite possible because mainly
structure. Regarding legal feasibility, the adoption of imports would be affected. Potential conflicts with
tax provisions would require unanimity in the Council. WTO law can be avoided if the import tax is designed
judiciously, as elaborated in chapter 4.
A second option would be a duty levied on the con-
sumption of natural gas in the EU, regardless of In order to implement an import tax on natural gas im-
whether it is extracted inside the EU or abroad. The ports into the EU, an internal EU methane pricing
duty would be based on the quantity of the natural must be created as well in order to ensure equal treat-
gas produced or imported multiplied by a methane ment under WTO law .
intensity factor. The methane intensity factor could be The import tax would reflect the price of methane in
a default value for natural gas in the initial phase. the EU combined with a methane intensity factor,
According to ERCST (2020) it may be easy to imple- which could be a default value for natural gas.
ment a border levy as consumption duty as it could be Like the replication of the EU-ETS, this option has the
built on existing customs infrastructure. Furthermore, advantage that the price signal reaches the natural
it may be adopted with a qualified majority voting un- gas importers directly.
der Article 192 of the Treaty on the Functioning of the
European Union (ERCST 2020). Otherwise, an unani- Table 4: Evaluation of import tax
mouse vote in the Council would be necessary.
Legal feasibility Administrative Climate impact
A consumption duty would not actually represent a and political
“border adjustment”, but would be levied on the con- feasibility
sumer – similar to the excise duty on alcohol and energy
▪ Unanimous ▪ The imple- ▪ Price signal
sources (FÖS 2020). On the one hand, this might re- vote re- mententa- reaches the
duce the risk of conflicts with WTO law (SWP 2020). quired, but tion of an EU natural gas
On the other hand, the price signal reaches the con- achievable methane importers di-
sumer and not the producer or importers of natural gas. ▪ Conflicts price is nec- rectly
As the main objective of the methane border levy for with WTO essary
natural gas imports into the EU is to incentivize foreign law can be
trade partners and importers to adopt measures to re- avoided
duce methane emissions, it is important that the price Source: own depiction
signal reaches the actors that can actually avoid me-
thane emissions. Taking into account the strengths and weaknesses out-
lined above, we propose to introduce a methane im-
port tax. This option ensures that the price signal
Table 3: Evaluation of an excise duty
reaches the importers of natural gas, who can decide to
Legal feasibility Administrative Climate impact import natural gas from those countries where the nat-
and political
ural gas has lower methane intensities. As this would be
feasibility
a new instrument, it can be created in line with WTO
▪ Low risk of ▪ Easy to im- ▪ Price signal law.
conflicts with plement does not
However, this option also comes with its own difficulties
WTO law ▪ Politically reach im-
and open questions. The next chapter tries to find an-
▪ Unanimous feasible porters of
natural gas swers to these questions and presents how the import
vote
tax could be implemented in practice.
required
Source: own depiction
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4 Implementation of an EU import The precondition for adequate measurement of me-
thane intensities along the entire supply chain would
tax for natural gas imports be an established methane measurement, reporting
and verification (MRV) framework in all countries ex-
4.1 Practical concerns porting to the EU.
Therefore, we propose to refer to a default value dur-
ing the implementation phase of the methane import
4.1.1 Implementation of a methane price for tax. It should be proposed that the MRV framework
natural gas inside the EU must be effectively established within a certain
To introduce a methane import tax in the EU, a me- timeframe – e.g., three years after the implementation
thane price must also be implemented within the of the import tax – so that the use of the default value is
EU. Otherwise, the import tax would not be in line with no longer necessary.
WTO law as the exporters of gas from countries outside The default value could be based on:
the EU would be discriminated against traders of gas ▪ average methane emissions,
inside the EU. It is important that the price level of the
▪ methane emissions in best practice examples or
methane price within the EU and the price level of the
methane import tax are equal (regarding the same ▪ methane emissions in worst practice examples.
amount of emissions).
The methane price within the EU could be paid by the Figure 5: Possible default values for methane
distributor of gas, parallel to those actors who pay en- intensities
ergy taxes. It would be important that methane emis-
sions arising during the whole supply chain of produc-
tion, transport and consumption are considered. Im- default value
ports must be excluded as methane emissions arising
from imports are covered by the import tax.
The question remains how the separation between gas
average worst
produced within the EU and imported gas is possible at best practice
methane practice
example
the point of distribution. A possibility might be to use emissions example
Guarantees of Origin, which are standardized through
the European Energy Certificate System. If a separa- Source: own depiction
tion proves to be infeasible in practice, the methane
price within the EU could include imports – which The default value is more or less stringent depending
would mean that gas produced within the EU and im- on the point of reference (ERCST 2020):
ported gas are taxed at the same point (similar to en-
▪ Referring to methane emissions in best practice
ergy taxes). In this case, the instrument would be similar
examples would put the default value on a low level
in design to a consumption tax (e.g as an excise duty).
and would be less stringent. Importers would in
Thereby it would be crucial that the distributor has an
most cases pay for lower methane emissions than
obligation to prove evidence of the origin of gas to
their imported gas actually produces. This would
enable a differentiation between the methane intensi-
mean that they have less incentives to lower me-
ties of gas imported from distinct countries.
thane intensities.
▪ Referring to methane emissions of worst practice
4.1.2 Determination of covered methane examples, by contrast, would be highly effective in
emissions incentivizing measures for the abatement of me-
The methane emissions footprint of the natural gas im- thane emissions. However, this option would be po-
ported into the EU could either be calculated on a tentially WTO-illegal as the assumption of worst
product level or estimated referring to a default value. performance would not represent real methane in-
tensities of the included gas imports and could cre-
Calculating the methane intensity of imported natural
ate a significant trade barrier for natural gas from
gas on a product level would require disclosure of all
some countries (ERCST 2020).
imported gas quantities, preferably with third-party
verification. The specific determination of imported We suggest using a default value based on average
methane emissions would offer incentives for abate- methane emissions – in order to avoid the extremes
ment measures where they are needed the most. This between most and least stringency. However, import-
would make this approach very effective environ- ers should have the opportunity to prove that their
mentally, but it would involve significant administra- natural gas imports are less methane intensive than
tive efforts (ERCST 2020). the average.
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Another question is whether the default value refers to: After the implementation phase where the default
▪ the EU average methane emissions, value is used, the MRV framework required of import-
ers should be in line with the established EU frame-
▪ the average outside the EU, or
work. The EU measurements should be expanded also
▪ the average in certain gas exporting countries. to countries outside the EU, requiring gas companies
Also in this case, the default value is more or less strin- importing to the EU to use the OGMP 2.0 reporting
gent depending on the chosen option: and measurement to reduce uncertainties about me-
▪ As the average methane intensities in countries thane intensities.The recently founded International
outside the EU are generally higher than those in- Methane Emissions Observatory (IMEO), a collabora-
side the EU (see IEA 2020c), referring to EU aver- tion of UNEP and the European Commission, might
age methane emissions would be less stringent serve as a facilitator. However, it must be considered
than referring to average emissions outside the EU. carefully which requirements are politically and legally
In general, importers would pay for less methane adequate for countries outside the EU. For gas compa-
emissions than their imported gas actually causes. nies outside the EU, the EU measurements could pre-
sent a high administrative and economic burden.
▪ Referring to the average methane emissions out-
side the EU would therefore represent the more
stringent default value and the environmentally 4.1.4 Legal and political feasibility
more effective option. However, like the option re-
The presented design of a methane import tax for nat-
ferring to methane emissions of worst practice ex-
ural gas imports into the EU takes the current WTO law
amples, this could lead to difficulties with the WTO
into account. Proposing to implement also a methane
law.
price for natural gas inside the EU assures that export-
To realize a smooth implementation of the methane ers of gas from countries outside the EU are not dis-
tax in line with WTO law, we therefore propose to criminated against (ERCST 2020). Exporters from out-
choose the default value referring to EU average me- side the EU are even better off than EU producers due
thane emissions. to the default value being based on average EU me-
thane emissions, as gas sector methane intensities are
4.1.3 Data/ measurement likely higher in countries outside the EU according to
the IEA methane tracker . Furthermore, it gives non-EU
The availability of reliable data is a key factor in estab- gas exporters the possibility to prove lower methane in-
lishing reasonable methane prices. During the imple- tensities. Therefore, we conclude that the implementa-
mentation phase, the possibility of verifying lower me- tion of the proposed methane import tax is probably
thane intensities than the EU average provides incen- compliant with WTO rules. However, a final review
tives to expand and improve data collection. would have to be carried out by a legal expert.
The EU Commission is planning to propose corre- The political feasibility of introducing a methane
sponding legislation for the quantification and report- price for natural gas inside the EU is difficult to esti-
ing standards of methane emissions. They will be based mate. It would require a unanimous vote in the Euro-
on the OMGP 2.0 standard, which was developed by pean Council. But as in many European countries the
the voluntary initiative Oil and Gas Methane Partner- extraction of natural gas plays no significant role, the
ship (OGMP). This standard requires companies to in- unanimous vote could be achievable. Some European
corporate emission estimates, which are based on countries already have an extraction fee on natural gas
measurement – instead of using emission factors for – for example several federal states in Germany 1 (see
simplification (European Commission 2020; Enervis Bundesverband Erdgas, Erdöl und Geoenergie e.V.
2021). 2020).
The default value of methane emissions in the EU The unanimous vote concerning the methane import
should be in line with the OMGP 2.0 standard as well tax probably would be relatively easy to achieve, be-
and should capture all sources of methane emissions cause mainly imports would be affected.
(leaks, venting, flaring, etc.). For comparison reasons, it
To ensure WTO-compatibility, exemptions for gas im-
would make sense to use methane emissions per unit
ports from countries with equivalent methane pricing
of gas imported as metric (Environmental Defense
systems are also crucial. If importers provide proof for
Fund/Florence School of Regulation 2021).
any methane price paid abroad, this should be priced in
the methane import tax levied (BMWi 2021b).
1
Though in ints current form the extraction fee In Germany
does not have an environmental incentive effect.
Forum Ökologisch-Soziale Marktwirtschaft e.V. • Green Budget GermanyA methane pricing model for the EU gas market • Page 13 of 21
4.2 Price level with a price between around 500 and 700 €/t CH4,
which is the equivalent to a relatively low price between
To determine an appropriate price level for the pro- around 17 and 23 €/t CO2eq assuming a GWP100 (30)
posed methane price inside the EU and the proposed for methane, there is a high probability that a relevant
methane import tax, the approach of abatement costs amount of emissions would be reduced.2 We therefore
and the approach of the climate damage costs repre- propose to start with a methane import tax between
sent useful frameworks. The abatement costs are the 500 and 700 € per leaked ton of CH4.
costs incurred to reduce a given amount of methane
compared to a reference scenario. The climate damage
costs, by contrast, represent the estimated costs for so- 4.2.2 Climate damage costs
ciety caused by methane emissions and the resulting To ensure that the entire damage of methane emis-
climate change. sions is internalized, the import tax should increase to
the full climate damage costs of methane emissions.
4.2.1 Abatement costs The German Federal Environment Agency (UBA) reg-
ularly determines the current state of research on the
The methane price needs to be higher than the abate-
scope of external costs in its methodological conven-
ment costs to incentivize actual abatement (Enervis
tion for estimating environmental costs. In 2012, UBA
2021). According to (IEA 2020b) 40% of the methane
recommended a cost rate for external climate damage
emissions from gas production (i.e. upstream emissions)
costs of 80 €2010/tCO2eq (UBA 2012). Due to more re-
could be reduced without any net costs.
cent research results on advancing climate change, this
A literature review by the United Nations Environment value has been revised upwards significantly. In the
Programme/Climate & Clean Air Coalition (2021) Methodological Convention 3.1 from 2020, UBA rec-
shows that there is great divergence in the estimated ommends an average value of climate damage costs of
average abatement costs in existing studies. They differ 195 €2020/tCO2eq, which increases over time - up to
from around 1.950 €/t CH4 (for the mitigation of 85% 250 €2050/tCO2eq in 2050 (UBA 2020).
of the total abatement potential) (United States
The case of Norway shows that this price level is not un-
Environmental Protection Agency 2019) over 850 €/t
realistic – the mandatory greenhouse gas tax assessed
CH4 (Harmsen et al. 2019) to a negative net cost of
on the volume of gas flared in Norway is about 80 €/t
around 595 €/t CH4 (Höglund-Isaksson et al. 2020).
CO2eq. However, the government plans to increase the
Focusing on the abatement potential of low-cost mandatory greenhouse gas tax up to 200 €/t CO2eq
measures with costs of less than around 510 €/t CH4, until 2030 (Helgesen 2021).
one analysis estimates that up to 80% of the methane
To estimate the climate damage costs of methane, the
emissions from the oil and gas sector could be avoided
period under consideration is decisive as the GWP of
(Höglund-Isaksson et al. 2020) while two other studies
methane decreases over time after emission (see
state that up to 60% could be avoided (IEA 2020c;
Chapter 2.1). In its Methodological Convention, UBA
United States Environmental Protection Agency 2019).
recommends using a GWP100 of 28. Due to the latest
However, (Harmsen et al. 2019) estimates that with this
report published by the IPCC this year (IPCC 2021),
price only 36% of the methane emissions would be re-
this value must be updated to a GWP100 of 30. This
duced. This shows that huge differences exist also in
would correspond to climate damage costs of methane
the examination of the abatement costs of low-cost
of 5.850 €2020/t CH4, which increases over time up to
measures.
7.500 €2050/t CH4.
There are also regional differences in abatement costs.
Taking into account the extremely high short-term cli-
In North America, most mitigation options are relatively
mate impact of methane, it could also be calculated
cheap. However, in Russia, other former Soviet states
with the GWP20 of 83. Using the GWP20 would lead to
and the Middle East, the situation is more uncertain
an increase of the climate damage costs between
and the compared literature comes to different con-
16.185 €2020/t CH4 and 20.750 €2050/t CH4.
clusions regarding the low-cost effects (United
Nations Environment Programme/Climate & Clean Air
Coalition 2021).
Though there is high uncertainty on how high the
abatement costs really are, the literature shows that
2
Assuming a GWP20(83), the price would be around 6 and 8
€/t CO2eq. Referring to the GWP100, we choose a
conservative cost approach here.
Forum Ökologisch-Soziale Marktwirtschaft e.V. • Green Budget GermanyA methane pricing model for the gas industry in the EU • Page 14 of 21
Figure 6: Climate damage costs calculated with ter 2.3, methane emissions occur during the whole sup-
GWP100 and GWP20 ply chain of natural gas – as well as during the combus-
tion of natural gas.
In some countries, e.g. the USA and Netherlands, exist-
25.000
ing data shows that most of the methane emissions oc-
20.000
cur at the upstream level (IASS 2016). Upstream me-
in €/t CH4
15.000 thane emissions can be defined as emissions from ex-
10.000 traction, gathering, boosting, and processing.3
5.000 In the USA, the share of upstream emissions is around
75% (IASS 2016). But covering only emissions from
0
2020 2050 production and processing of natural gas (upstream
emissions) by the methane import tax would exclude
GWP100 GWP20
emissions during transmission, distribution, and stor-
age.
Source: own depiction
In other countries, most methane emissions take place
at later stages in the transmission – especially in Russia
4.3 Geographic scope and included due to long transportation distances and poor mainte-
emissions nance of infrastructure. According to existing data, al-
most 70% of methane leakages in Russia occur during
the transport and storage phase (IASS 2016). However,
4.3.1 Geographic scope as already pointed out in chapter 2.3, existing data
Another crucial choice to make is the geographic need to be viewed with caution.4 As Russia is the big-
scope of the methane import tax: should it apply to all gest importer of natural gas to the EU, emissions from
foreign countries, specific trade partners only or ex- transport and storage as well as upstream emissions
clude certain countries based on specified criteria? should be covered by the scope of the methane import
tax.
Theoretically, the import tax could only apply to eco-
nomic actors from states which export natural gas to
Europe. As pointed out in chapter 2.2, the number of One difficulty in including methane emissions from the
exporting states is limited. The great majority of natural total supply chain lies in the fact that typically, those
gas consumed in the EU comes from seven countries: entities responsible for upstream emissions are not
Russia, Norway, Algeria, Qatar, Nigeria, UK, and the those responsible for transmission emissions. This
USA. means that both entities must be included in the de-
In practice, limiting the import tax to a certain number sign of the import methane tax, which might be an ad-
of states would be legally problematic under the ministrative challenge especially at the start of the tax
Most-Favoured-Nation (MFN) principle contained in system (Environmental Defense Fund/Florence
the WTO treaties. This principle prohibits any discrimi- School of Regulation 2021).
nation against any WTO member country. Therefore, Therefore, a possible option would be to cover only up-
there would be a need to justify the measure legally re- stream methane emissions during the implementa-
ferring to exceptions contained in GATT Article XX tion phase of the methane import tax and to broaden
(ERCST 2020). The implementation of the import tax the emissions scope in a second phase when meas-
would therefore be legally most feasible if all coun- urements are improved and more widespread.
tries are included.
4.4 Use of revenues
4.3.2 Emissions covered by the tax
In the first years after the implementation of the me-
Another crucial decision is which emissions are cov-
thane import tax, the revenues are expected to be ra-
ered by the methane import tax. As discussed in Chap-
ther low due to the relatively high default value and a
3
This refers to the definition of the Oil and Gas Climate Initi- general must be used with caution. Nevertheless, this
ative (OGCI). data shows clear differences between the main ori-
4
Distinct estimation procedures and reporting units might gins of methane emissions in certain countries.
cause variability between the national data. Further-
more, as stressed in chapter 2.3, the available data in
Forum Ökologisch-Soziale Marktwirtschaft e.V. • Green Budget GermanyA methane pricing model for the EU gas market • Page 15 of 21
relatively low price level. However, the revenues will in- for instance, refer to revenue return as a decisive pre-
crease with an increasing price level and when the de- condition for accepting the EU CBAM (Germanwatch
fault value goes down or is replaced by actual intensity 2021). In the context of the proposed methane import
factors. tax, there are two main options for a potential design:
The use of revenues must be designed carefully – it 1. Support for climate transition in low- and middle-
must be in line with the expectations of member states income countries through investments in existing
and trading partners at the same time and be compliant climate funds or
with WTO law (ERCST 2020; Germanwatch 2021; 2. Creating a new investments fund for methane
Zachmann/McWilliams 2020). transition in trade partner countries, which are di-
In order to ensure WTO compliance, the total use of rectly impacted by the methane import tax.
revenues should be tied to the purpose of financing cli-
mate policy measures within the EU and outside the
The first option would benefit low- and middle-income
EU (SWP 2021).
countries without them being necessarily directly af-
To ensure the cooperation and support of all EU mem- fected by the methane import tax. Though the focus of
ber states, at least a small share of revenues should existing climate funds does not lie on the mitigation of
benefit the EU budget (ERCST 2020). One possibility methane emissions, using the revenues for existing
would be to use 15% of revenues, which represent the funds would enable investments in climate change
current share of EU natural gas production, for the EU mitigation measures.
budget. This share should be spent on measures to re-
Examples of existing funds, which could be used, are
duce greenhouse gas (GHG) emissions (or methane
the Adaptation Fund, the Special Climate Change
emissions only) in the EU. Other uses, such as the fi-
Fund or the Green Climate Fund, from which benefit
nancing of the national recovery plans implemented to
developing countries (ERCST 2020). The advantage of
tackle the effect of the COVID-19 pandemic, should
this option would be the possibility to use existing in-
not be included as this would not be in compliance with
frastructure due to existing funds.
WTO law (Stiftung Umweltenergierecht 2021b; SWP
2021). The second option, by contrast, would benefit those
trade partner countries who are affected most by the
In order to finance relevant measures, the revenues
new import tax. A new fund would be created to fi-
could go to an EU GHG- (or methane)-reduction
nance methane mitigation projects in these coun-
fund, which especially supports countries with high
tries. The fund could grant access to low-interest loans,
methane emissions and low economic abilities to fi-
grants and research and development support.
nance appropriate mitigation measures. Thereby, the
revenues could either go to existing funds like the EU The disadvantage of this option clearly is the higher
Modernisation Fund, which is dedicated to fund pro- administrative effort – as the whole infrastructure
grammes to support low-income EU Member States in around the new fund would have to be implemented.
their transition to climate neutrality (European However, it would directly enhance measures to re-
Commission 2021b), or to newly established funds duce methane – in those countries, where the need to
that focus on methane reductions in the EU directly. take action is very high.
In the EU, there is high potential to lower methane Table 5 shows that both options would be good
emissions arising from the gas sector. A joint measure- choices, which would enhance the fairness and posi-
ment campaign by the “Deutsche Umwelthilfe (DUH)” tive climate impact of the proposed methane import
and Clean Air Taskforce showed significant methane tax, and that both could be combined. Table 5: Compa-
emissions along natural gas infrastructure in Ger- rison of two options to return revenues
many. Other publications show similar results for Hun-
gary and Italy (Deutsche Umwelthilfe 2021). Table 5: Comparison of two options to return
To guarantee that the administration of the tax does revenues
not create further costs for the EU, another small share Option 1: Investing Option 2: Creating
of the revenues should be spent on administrative ef- in existing climate a new investments
forts (ERCST 2020). funds fund for methane
transition
Fairness Socially fair, as low- Fair as those coun-
The rest of revenues should be returned to economic
and middle-income tries, which pay the
actors in countries outside the EU. During the discus- countries, which are highest import
sion about the proposed CBAM, it became clear that generally most af- taxes, will benefit
this aspect is crucial for international acceptance. fected by the conse- from the revenues
Some non-European countries like Ukraine and India, quences of climate
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