Last December, the European Union’s Energy Council, along with the European Commission, successfully walked the tight rope that is European energy and political reality. They acknowledged that energy security of supply is paramount – and that failing to move forward with implementation of the EU Methane Regulation (EUMR) wasn’t an option.
How did European policy-makers navigate between this Scylla and Charybdis? They acknowledged the need for “pragmatic implementation of the [EUMR] importer requirements” and to “endorse the compliance solutions identified in the Network of Competent Authorities [i.e., European member states]” – including the use of methane performance certificates.
We owe European policy-makers our applause. And we – those fighting for reduced greenhouse gas emissions – would collectively do well to remember that implementation of the EUMR is a political process and anything less than a pragmatic solution may well sink the huge emission reduction possibilities presented by this policy. And while European policy-makers have signaled broad support for a pragmatic compliance approach [for the EUMR], the framework and details for just how this policy will be implemented is still to be determined. A range of options exist. As stakeholders weigh through these, it’s worth keeping in mind the wise counsel of H.L. Mencken:
‘For every complex problem there is an answer that is clear, simple, and wrong.’
As stakeholders look to generate compliance solutions, including the use of methane performance certificates, they should follow the plainly-worded counsel of Europe’s Energy Council of balancing pragmatic solutions with climate goals. NGOs, think tanks, and academic institutions would be wise to not succumb to the siren songs of compliance schemes that may seem more reflective of policy purity or ivory tower conceptions. These stakeholders have a responsibility to the EU to provide solutions for affordable energy for Europeans, while at the same time achieving Europe’s climate agenda.
As it is central to the Energy Council’s statement, it is useful to unpack what pragmatism is. A common definition of pragmatism by a familiar namesake holds:
‘Dealing with the problems that exist in a specific situation in a reasonable and logical way instead of depending on ideas and theories: practical as opposed to idealistic.’
It is easy to approach policy problems with seemingly simple solutions when using the lens of a purity test. All the complications of life and markets and choices fall away when one approaches a policy problem from the privileged position of principle, and principle alone.
Often-times, policy driven by what untested theory falls apart. Life just happens to get in the way. And the problem with such approaches – when we ignore the considerations that policy-makers must make – is that…. This path risks political delays and market confusion and creates pressure for changes to the EUMR – if not outright abandonment of it.
Following are a set of criteria that I would suggest should be considered in weighing the merits of EUMR compliance solutions to meet Europe’s twin goals of energy security of supply and methane emission reductions. As such, the solution set should consist of pragmatic solutions, and not ones that fall pretty to idealism and untested theorizing.
Criteria 1: Emissions Reductions
Acceptance Test: Can a compliance program demonstrate and incentivize emissions reductions?
At the core of the EUMR’s policy objectives are emission reductions. This demand-side regulatory framework incentivizes natural gas producers to initially provide more transparency about their upstream methane emissions and, ultimately, drive down those emissions. And while a methane intensity cap for imported gas has not yet been determined by the European Union, those producers that have lower emissions will be treated more preferentially by European importers and regulators. As such, producers will be incented to continue lowering emissions.
Even within geologically low emission basins, like the Marcellus basin in the northeast of the United States, there will be major market incentives to continue lowering emissions. These incentives will be driven by the compliance solution that is chosen. For example, the natural gas producer, EQT, is largely located in the Marcellus basin and had historically produced natural gas with generally low emissions. EQT did not sit on its low-emission laurels, however. It made the decision to replace approximately 9,000 pneumatic valves across its operations with the intention of further limiting leaks. As a result, EQT estimates that close to a 65 percent emissions reduction has occurred compared to the period before the replacement began.[1] In other words, just because a producer is already a low emissions producer – it does not mean that improvements will not and cannot be made. Emissions reductions – on either a basin or facility level – are not static. In a market-based system where emissions reductions are transparent and incentivized, the uptake of emissions reduction activities must be considered dynamically. The specific compliance solution will drive this adoption.
Criteria 2: Transparency
Acceptance Test: Are the methods, standards, and results of a compliance solution transparent?
Emissions transparency sits at the center of the EUMR. Providing emissions information will allow European LNG importers to make better purchasing decisions, will create a more efficient market, and will facilitate European regulators more effectively implementing and enforcing the regulation. As such, producer-level emissions determinations for gas imported into Europe must maximize transparency. This includes transparency regarding the methodologies for the methods, standards, monitoring, reporting, and verification programs (MRV) that sits behind final emissions reports. It also includes transparency regarding the “tracing” question. Rules or protocols must be transparent to enable scrutiny and allow credible verification of the information or attributes. Registries must adhere to such public protocols and can thus ensure avoidance of double issuance or double counting.
Such transparency allows for review by stakeholders and regulators – ultimately resulting in heightened credibility and acceptance of emissions results.
Criteria 3: Administrative Costs
Acceptance Test: Does a proposed compliance program substantively increase transaction costs?
EUMR compliance solutions should not result in additional and substantive costs. Anticipated programs which require new administrative structures, including additional levels of data review, will necessarily incur additional transaction costs. The result of this would be higher energy prices. This will decrease affordability for every-day Europeans and increase political resistance to the EUMR.
Proposed compliance solutions must be able to spell out, in detail, the administrative structure and program associated with them. Compliance programs that are already operational can readily provide this information. Theoretical or untested programs will only be able to provide speculative cost information – only reinforcing uncertainty. Relying on ideas and theory runs counter to the plain understanding of pragmatism.
Criteria 4: Market Pricing
Acceptance Test: Does an EUMR compliance solution consider market incentives as an emissions reduction driver?
Central to the EUMR are pricing and markets incentives. Simply put, demand for differentiated gas will result in market expansion. This includes both new oil and gas facilities become certified as low emission producers, or current low emission producers improving technologies and practices to further lower their emissions. This market expansion is a result of pricing incentives – either capturing market premiums or securing increased market share (or both). A similar logic will apply to environmental attribute certificates – methane performance certificates – as reporting tools under the EUMR. The European Commission and implementing member states (as represented by the European Network of Competent Authorities) have acknowledged certificates as an implementation solution. As compliance and reporting vehicles, certificates will take on value. As is the case in all other markets, this value will create market incentives for new entrants into the market. In other words, more producers will become certified in order to credibly demonstrate low emission gas production – in order to take advantage of the emergent EUMR market for certificates. Pricing, therefore, plays a central and critical role in not only EUMR compliance, but in incentivizing producers to lowering emissions.
Criteria 5: Transaction Approach
Acceptance Test: Does a compliance solution utilize current commodity trading systems?
A market-based compliance solution should parallel current LNG and gas transaction mechanisms to the degree possible. Minimal new administrative structures will allow this to happen most efficiently. Conversely, new administrative requirements will produce increased or prohibitive transaction costs by forcing new trading systems to be developed. This will result in higher energy prices and engender political and market resistance. Reporting mechanisms should be designed to work within current global LNG and gas trading approaches or be a system that traders are already familiar with. For example, commodity markets are already well-versed in transacting Renewable Energy Certificates (RECs), as well as, in some cases, methane performance certificates. Traders are familiar with transacting these vehicles and, therefore, transactions and implementation costs will be low. Here, too, compliance systems that are already operational can demonstrate these use cases – while theoretical systems can only speculate. Speculation introduces a range of uncertainty. The subsequent result will likely be the rejection of such a speculative system by any risk approval committee with representations from compliance, legal, tax, back-office, mid-office, regulatory and many other key risk functions.
Criteria 6: Tested
Acceptance Test: Has a proposed compliance solution been operationally tested?
European energy policy must address three, sometimes competing, elements: security of supply, cost, and emissions goals. A breakdown in any one of these can result in policy failure, emergent political blowback, or increased energy prices for European families. Given this balancing act – and our collective goal to see the EUMR succeed – this is not the time for policy experimentation. Rather, compliance solutions that have been operationally tested in oil and gas or similar markets should be given preference. Regulators, market participants, and stakeholders can look at historical records to understand how these systems work and can make plans accordingly. This is the essence of the pragmatism that the Energy Council seeks – not theory, but existing, reasonable, and practical solutions.
EUMR implementation details should build from models that have demonstrated viability and acceptance in existing regulatory, commercial and voluntary frameworks. Of course, improvements and innovations will need to take place to comply with the regulation’s directives. But priority should be given to those frameworks that align with existing approaches to methane measurement and reporting, commodity trading, and regulatory compliance. Industry leaders have already demonstrated that substantial emission reductions and emission transparency are achievable. European policymakers can build from those examples. These frameworks can be new – but EUMR implementation should not be a proving ground for untested ideas.
Criteria 7: New markets
Acceptance Test: Does a compliance solution drive methane abatement in other markets?
The LNG and natural gas market is a global market. While the EU is leading the way in formally requiring emissions transparency and, ultimately, reductions for all imported gas, there are other market players that will impact supply and demand of differentiated, or certified, gas. For example, Japan and Korea, through the CLEAN initiative are requesting voluntary emissions reporting data for LNG shipments. These important LNG import markets may well, at some point, follow the lead of the Europeans and implement emission reduction requirements for all imported gas. Similarly, large power users, such as data centers in both the United States and elsewhere, are incented to use low emission gas because of GHG reduction commitments. These other market participants will, over time, significantly increase demand for lower emission natural gas production. This increasing demand, therefore, will incentivize producers to lower their emissions – resulting in new entrants into the certified gas market. Analyses of EUMR compliance solutions and market responses should explicitly acknowledge the global gas market and the concomitant demand-side drivers that will incentivize the production of lower emission gas over time.
Conclusion
The EU Energy Council has given clear guidance to policy-makers and other stakeholders to develop pragmatic compliance solutions to the EUMR. Programs using methane performance certificates are already operational – with independent, third party frameworks, such as MiQ’s, in use today – and can be utilized to fulfill the EUMR’s emission reduction policy objectives, along with the criteria noted above. Utilizing a credible, regionally-constrained book-and-claim system for methane performance certificates will ensure European energy security of supply and lower emissions.
Europe has already seen the negative results of policy-making driven by theory and ideology. The United Kingdom’s Brexit from the European Union was argued to be a win for the UK. Instead, because of a trust in untested theories – this decision is generally considered a disaster.
We’ve seen this before, let’s not do it again. Let’s follow the clear path set by the EU Energy Council to drive down emissions while ensuring secure energy deliveries for EU citizens
[1] https://cdn.prod.website-files.com/6751b0d7add5edb1f0141aef/676186e3a5cb657303ee5cff_Pneumatic-Device-Replacement-FINAL.pdf