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Transparency will be key to growth of carbon-neutral LNG market, study finds

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Transparency will be key to growth of carbon-neutral LNG market, study finds

SNL Image

An LNG tanker moored to a jetty.
Source: Felix Cesare/Getty Creative via Getty Images

The budding trade of carbon-neutral LNG cargoes could play an important part in determining the role of the fuel in the energy transition, but improved transparency about climate-warming emissions by LNG buyers and sellers will be a key component of developing a "robust and trusted" market, according to a new study out of Columbia University's Center on Global Energy Policy.

The concept of carbon-neutral LNG involves accounting for emissions of greenhouse gases throughout the natural gas supply chain that are associated with a cargo. Customers can then offset lifecycle emissions by purchasing carbon credits, which support projects like reforestation that absorb equivalent emissions from the atmosphere.

Carbon-neutral LNG cargoes themselves do not lower emissions, and the offsets need to be paired with deep emissions reductions for the fossil fuel to meet rising energy demand without jeopardizing global, national and corporate goals for mitigating climate change, according to the July 8 study by Erin Blanton, a senior research scholar at the Center on Global Energy Policy, and Samer Mosis, the head of global LNG analytics at S&P Global Platts.

But the process behind such cargoes could help foster emissions reductions by offering a clearer picture of the emissions profile of LNG at a time when exporters are competing to meet growing demand for cleaner supplies.

"[The cargoes] are sort of the first tool that you can use," Blanton said in an interview. "If you are building [carbon capture and storage], or if you are figuring out where your methane leaks are or putting in your new valves and compressors all of those things take time. But where the offsets come in is as a bridge to do that, as well as knowing that it is very hard along the value chain to eliminate all the emissions."

New process

To date, carbon-neutral LNG has represented a tiny portion of the overall LNG market, with just 14 such cargoes agreed to or delivered from the time Royal Dutch Shell PLC announced the first deals in 2019. All the cargoes were bought by Asian buyers, except two that Shell purchased for delivery to Europe, including one sold by Cheniere Energy Inc.

Part of the explanation for the small proportion of European buyers could be stronger regulations over emissions in Europe's power and industrial sectors. These reduce the incentives for consumers to pursue additional voluntary carbon pricing or offsetting, according to the study. In Asia, many countries see LNG imports as a way to displace dirtier-burning coal in the power sector but have yet to see their emissions reduction targets translate into carbon-pricing mechanisms that are as mature as those in Europe, making carbon-neutral LNG supplies attractive.

"If we are really moving toward a net-zero future, the demand for offsets is going to be pretty enormous," Blanton said. "Offset prices could become pretty steep. And in that case, then you really see that the focus has to go on reducing the emissions of the value chain itself."

Recommendations

The study offered a series of recommended steps to promote the development of the carbon-neutral LNG market. One would have an independent third-party organization setting global standards for the accounting of LNG emissions and offsets. The authors pointed to work underway by the International Group of Liquefied Natural Gas Importers on a reporting verification framework that could be adopted across the industry. It is scheduled to be released before the 26th U.N. Climate Change Conference in November.

For LNG companies, it is important that they account for greenhouse gases beyond carbon dioxide by using a CO2-equivalent approach and that they are transparent about their calculations by making them publicly available, the authors said.

"Most importantly, if done transparently and uniformly, it will help alleviate fears of greenwashing — that cargoes are being marketed as environmentally friendly when they are not, either due to poor carbon credit quality or erroneous [greenhouse gas] measurement and accounting," the authors said.

The study also said buyers and sellers must disclose cost premiums associated with purchasing carbon-neutral LNG cargoes, including the cost of offsetting emissions and who bears what portion of these costs. Parties involved in these trades might find it beneficial to keep such data confidential, but failing to disclose it "prevents the market from evaluating necessary data points, which could help spur future deals," the authors wrote.

Policymakers can help by supporting research and development of emissions monitoring along the LNG supply chain and pushing for disclosure of emissions calculations and offsets, the authors said. Policymakers could also create tax incentives for sellers producing carbon-neutral LNG and for buyers. They could set low-carbon fuel standards within their countries and apply carbon-intensity requirements on energy imports to spur suppliers to focus on reducing the carbon intensity of exports.

Cheniere, the top LNG exporter in the U.S., has launched a series of climate initiatives focused on measuring the emissions associated with the LNG it exports from wellhead to delivery point. Executives said in a recent interview that Cheniere wants to establish a baseline for lifecycle emissions and that the company views offsets as secondary to mitigation efforts. Blanton described Cheniere's efforts as an important step in the right direction for U.S. LNG.

The study also identified estimates from the U.K.'s Department of Business, Energy, and Industrial Strategy, which have been used in some of the 14 carbon-neutral LNG trades, as a good starting point for the industry to use until better measurements become available. These estimate well-to-tank emissions at about 0.88 tonnes of CO2e per tonne of LNG with another 2.76 tonnes of CO2e associated with downstream combustion.

"The carbon-neutral LNG market is in its infancy, and its success will likely require a foundation for globally understood and adopted standards using the best practices available for emissions estimates and offsets," the authors wrote. "As long as the industry is willing to be adaptive to benchmarks as they are updated and are held to a high level of transparency, the market should improve in both accuracy and efficiency over time."

S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.