Carrot or stick? The key to unlocking LNG decarbonisation

Abstract

Liquefied natural gas’ (LNG’s) environmental credentials are under fierce scrutiny. Despite emitting half of the CO₂ emitted by coal when burnt, critics point out that producing and shipping LNG to market is carbon intensive. Australia is home to some of the most emission-intensive projects in the world. Some LNG players have been proactive in looking at options to reduce the carbon footprint of their LNG projects, including detecting and reducing methane leakages, electrifying part of the liquefaction process and considering carbon capture and sequestration. However, progress has been slow. Buyers have so far shown little appetite to pay a premium for lower carbon emission LNG, limiting sellers’ resolution to commit to investments to reduce LNG’s carbon intensity. Could new regulation establish the foundations to create a premium market for low-carbon LNG? Much will depend upon the eventual level of taxation/penalties implemented and whether those will provide enough economic incentives to invest in reducing carbon emissions. The EU has reached an agreement to regulate methane emissions. Could LNG be added to its Carbon Border Adjustment Mechanism effectively resulting in an import tax at EU emissiosn trading system carbon prices? Would other LNG markets follow? In this paper, Wood Mackenzie will review the carbon intensity of LNG projects. We analyse the range of investments that could reduce carbon intensity to assess whether players have sufficient incentives to decarbonise different parts of the LNG value chain. Finally, we consider whether upcoming legislation will kickstart a premium market for low-carbon LNG and the implications this would have.