Wood MacKenzie: Global LNG market could split if carbon tax imposed on imports

“If the EU decides to apply these levies, then this will push European gas prices up but also bifurcate the global LNG market, creating a two-tier LNG market,” said Massimo Di Odoardo, Vice President of Gas & LNG Research at Wood Mackenzie. “If taxes were limited to the EU, or even extended to Japan and South Korea, trade flows would likely be optimised elsewhere to mitigate the impact.”

LNG emissions under the microscope

The report states that the environmental credentials of LNG are under increasing scrutiny. Despite emitting about half the carbon dioxide (CO₂) of coal when combusted, the LNG value chain remains highly carbon intensive and plagued by methane losses.

However, it adds that while LNG players are actively working to reduce the greenhouse gas (GHG) footprint of their projects, the reluctance from buyers to pay a premium for lower-emission LNG has so far curbed sellers’ appetite to commit to major investment to reduce carbon intensity.

US LNG one of worst performers

The report adds that not all LNG projects are equal. Measured in kilograms of carbon dioxide equivalent (kg/CO₂e), methane accounts for 5% to 15% of overall carbon intensity in LNG projects outside the US. But for LNG projects in the US, methane can account for as much as 25% to 40%. This largely due to higher levels of methane losses caused by extensive use of pneumatic devices and compressors associated with shale gas production.

“With a range of 800 to 1400 kg CO₂ equivalent per tonne (CO₂e/t) of LNG, the US has some of the world’s highest-emitting projects, with upstream reservoir type and pipeline distance to LNG plants adding to their high methane intensity,” Di Odoardo continued.

He added that’s projects with the lowest carbon emissions will gain from an import tax on emissions and targeting premium markets will boost trading profitability. However, proximity to premium markets will be key, with Qatar and Mozambique requiring high carbon prices to be lured away from proximate markets in emerging Asia, which are unlikely to introduce an import tax on emissions.

High carbon taxes needed to decarbonise LNG

The report‘s analysis concludes that a tax on methane emissions of US$2800 per tonne (t/CH₄), equivalent to US$100/t CO₂e, will be effective in achieving its goal. Methane reduction remains the low-hanging fruit in emissions, with progress being made in different countries, supported by tightening domestic methane regulations.

“A methane import tax will help provide additional economic incentives while limiting LNG price upside. In this scenario, exporting countries will also be encouraged to introduce domestic levies and retain taxed revenues,” continued added Di Odoardo.

However, Wood Mackenzie concludes that when it comes to overall carbon emissions, taxes imposed only in Europe will not achieve the required goal of large-scale decarbonisation of LNG projects globally and a bifurcate LNG market would be instead the most likely outcome.

“If there is to be any material impact, a carbon price closer to US$200/t CO₂e will be required for LNG imports,” concluded Di Odoardo. “Additionally, this would have to be introduced on a global level for it to be truly effective in reducing carbon intensity and that is unlikely to happen. For now, all eyes will be on Europe to see what it does next.”

Read the article online at: https://www.lngindustry.com/special-reports/21032024/wood-mackenzie-global-lng-market-could-split-if-carbon-tax-imposed-on-imports/