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Insight from Brussels: EU to use market rules and targets to destroy hydrocarbons demand

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Insight from Brussels: EU to use market rules and targets to destroy hydrocarbons demand

How do you destroy enough oil and gas demand to meet your climate goals while protecting jobs, growth and energy security? This is the task the European Commission has set itself in its efforts to ensure the European Union becomes climate-neutral by 2050.

It's an ambitious goal with consequences far beyond the EU's borders. In 2019 the 27 EU countries' imports of natural gas and LNG amounted to about 233 million mt of oil equivalent, while oil and oil products reached about 473 million mtoe, making the bloc the world's largest fossil fuel importer.

The EC is busy working on vast swathes of legislation to change market rules and conditions to further favor renewables and energy efficiency, as well as decarbonized gases such as hydrogen.

The market will have to wait until June 2021 for the detailed proposals, but the EC revealed some of its ideas in the EU methane emissions strategy and EU buildings renovation strategy it published in October.

These included that it plans to explore all options to reduce leaks of methane, a powerful greenhouse gas, including possible binding minimum performance standards for fossil energy used in the EU.

Most leaks happen before the natural gas, LNG and oil reaches the EU, so a new EU policy on methane emissions could have far-reaching impacts on global markets.

"Minimum methane emission standards, targets or other such incentives based on robust scientific analysis can play an effective role to ensure methane emission reductions in the EU and globally," the EC said.

Any such legislation would be based on an impact assessment that would look at the independent verification and compliance checks needed to enforce it, and its potential contribution to cutting global methane emissions.

Enforcement will be a major challenge, as the current satellite data is not precise enough to enable accurate, independent monitoring, according to EU sources.

In the meantime, the EC plans to talk to producer countries – including Russia and the US – about best practices for cutting methane emissions, hoping to leverage the EU's position as a major consumer.

It also hopes to get a UN accord on cutting methane emissions to 2030 at the UN General Assembly in New York in September 2021.

Independent global observatory

The EC has already started work on setting up an independent international methane emissions observatory, working with the United Nations Environmental Program, the Climate and Clean Air Coalition, and the International Energy Agency.

This observatory would collect, reconcile, verify and publish data on global man-made methane emissions, building on existing voluntary initiatives such as the UNEP Oil and Gas Methane Partnership, the EC said.

The initial focus would be on oil and fossil gas sectors, and the EC wants to extend it to coal, waste and agriculture once more reliable monitoring is possible.

The EC also wants this observatory to compile and publish a methane supply index at EU and international level, enabling fossil energy buyers to compare different sources.

The EC would propose using a default value within the EU for fossil energy volumes, including imports, not covered by an "adequate" monitoring, reporting and verification system, in order to encourage accurate measurements.

The EC would use this default value as needed until "a compulsory measurement, reporting and verification framework for all energy-related methane emissions" was implemented.

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Cutting energy use

The EC also set out ideas in its EU buildings renovation strategy on how to cut energy use in the sector by 14% or 53 million mtoe to 321 million mtoe by 2030, compared with 2015.

That drop is more than the total final energy use of the Netherlands in 2018, the EU's sixth largest final energy market that year (excluding the UK). The plans would hit fossil fuel demand hardest as they accounted for 76.5% of heating energy in EU buildings in 2017.

The goal is to decarbonize buildings, exploiting local renewables potential and reducing the EU's dependence on imported fossil fuels, the EC said. The EC is mulling strengthening the EU's 2030 renewables target for heating and cooling in revised legislation next year, to align it with its proposed target for the EU to cut CO2 emissions by at least 55% on 1990 levels by 2030.

Current non-binding renewables target encourages EU countries to increase the share of renewables in their heating and cooling sectors by 1.3% a year.

The EC had originally proposed a binding 1%/year share increase for the 2018 update to the EU renewable energy directive, but national governments rejected this.

The EC is also looking at requiring buildings to use at least a certain minimum level of renewables, and promoting using decarbonized gases.

It has estimated renewables and waste heat will have to account for 38-42% of EU energy use in buildings by 2030 to meet the 55% CO2 cut goal.

Offshore, mobility strategies

The EC's fight against fossil fuels continued in November with the publication of the EU offshore renewable energy strategy, which targets a fivefold increase in offshore wind to 60 GW by 2030, rising to 300 GW by 2050. Developing large-scale offshore wind could improve the economics for green hydrogen, enabling it to displace natural gas.

In December the EC plans to publish an EU sustainable, smart mobility strategy, aiming to reduce and displace the liquid fossil fuels so prevalent in the transport sector.

Whether the EC's ideas are implemented in the end depends on the European Parliament and the EU's 27 national governments, who will decide on the formal legislative proposals. But the strategies give a flavor of what the EC might propose, giving the market time to prepare for various outcomes.