Credibility Gap for Carbon-Neutral LNG

Companies looking to safeguard the role of gas in the energy transition are turning to carbon-neutral liquefied natural gas (LNG). This fast-growing market allows buyers and sellers to counterbalance greenhouse gas emissions from each LNG cargo through carbon offsets. But carbon-neutral LNG trade still lacks transparency and consistency, and it is a peripheral solution to emissions from the LNG industry.

The appeal of carbon-neutral LNG is clear. These deals allow sellers and buyers to offset the emissions of a cargo of LNG by financing projects that remove equivalent emissions elsewhere. Projects that qualify for carbon credits range from afforestation and reforestation programs to new wind farms. The cost of carbon offsets can be shared between LNG sellers and buyers and between cargo buyers and end users of gas, such as utilities and industrial players. The scope of offsets also varies. Some carbon-neutral LNG deals cover full life-cycle emissions from wellhead to combustion by end users, while others cover only “well to tank” emissions in the production to delivery phases. (The term carbon-neutral LNG is a misnomer, since offsets can cover greenhouse gases such as methane and nitrous oxide, not just carbon dioxide.)

The first carbon-neutral LNG cargoes were traded in 2019, but already about 35 have been sold (not all deals are public, and details on some transactions are scarce). Northeast Asia is the primary destination for these cargoes, and the customers include some of the world’s largest LNG buyers. Most deals to date have been single-cargo transactions, but last July Shell signed the first term contract for carbon-neutral LNG, a five-year deal with PetroChina. Sellers led the way in establishing this market, but there is significant interest from gas buyers—in part because end users want options to help meet their climate commitments. In March 2021, 15 Japanese companies formed a carbon-neutral LNG buyers alliance to promote these deals and contribute to Japan’s 2050 net-zero goal.

Four Big Challenges and a Progress Report

Despite this momentum, there is skepticism over carbon-neutral LNG. There are at least four major concerns: the scale of emissions per cargo that need to be offset, the quality of emissions accounting, the effectiveness of carbon offsets, and the ultimate environmental benefit of these transactions. Each issue creates a credibility challenge.

First, there is only so much that LNG players can do to offset a carbon-intensive industry. A commonly cited estimate of life-cycle emissions for an average LNG cargo—including upstream production, liquefaction, shipping, regasification, and combustion—is 250,000 tons of CO2 equivalent. Downstream gas combustion probably accounts for 70 to 75 percent of per-cargo emissions, but there is much wider variation in emissions intensity for the wellhead to delivery segment. Permian Basin gas that is liquefied at a Gulf Coast facility and shipped to Northeast Asia has a different emissions profile than LNG exported from Qatar or Russia. Regardless of the exact emissions profile of each cargo, it is no small task to counterbalance emissions on this scale. Companies may have to plant 240,000 trees to offset the emissions from a single LNG cargo—so nature-based offsets for all cargoes traded globally in 2020 could require planting up to 1.5 billion trees each year.

A second concern is the quality of greenhouse gas emissions accounting. Particularly when the first carbon-neutral LNG cargoes were offered, there was little transparency about how emissions were calculated. Using generic emissions estimates is inadequate. Without detailed measurement, reporting, and verification (MRV) for supply chains specific to individual cargoes, there is no way to calculate the exact offsets required. Last November, an industry association took an important step toward standardizing emissions accounting for carbon-neutral LNG cargoes, including recommended practices for MRV and carbon offsets. A few LNG players have published a detailed methodology to provide greenhouse gas emissions statements for delivered cargoes, and one U.S. LNG exporter published a life-cycle analysis of LNG cargoes specific to its supply chain. These greenhouse gas emissions frameworks, if adopted widely, will give a more accurate picture of the impact of a particular cargo, including its methane intensity.

A third challenge is the quality of carbon offsets that underpin this trade. With more companies adopting net-zero emissions targets, the market for fossil fuel carbon offsets (including oil as well as gas) has developed quickly. But there is great skepticism over the consistency and quality of carbon offsets. Problems include the often murky distinction between carbon reductions or avoidance versus actual carbon removal, potential conflicts of interest among third-party verification agencies, and lack of governance of carbon markets to ensure consistency. As the scale of this trade grows, so will the scrutiny. The industry will have to do a better job of verifying the quality of carbon offsets. So far, the cost of carbon offsets has been quite low, at around 40 to 50 cents per million British thermal units (MMBtu), relative to current Northeast Asia spot LNG prices of about $32/MMBtu. In theory, as the market deepens and transparency improves, the price will rise to better reflect the true cost of offsetting each cargo’s emissions. The price of carbon offsets is something of a double-edged sword. More expensive offsets will impose additional costs on price-sensitive buyers. That will drive up absolute costs and could erode interest when spot LNG prices are high, although the marginal cost of offsets will fall when LNG prices are elevated.

Finally, the LNG industry has to be more forthright about the ultimate impact of carbon-neutral LNG. Buyers sometimes portray carbon-neutral LNG as a means to cut their emissions or meet net-zero targets, when these claims are not supported by the underlying carbon accounting. In a quest for consistency, the International Group of Liquefied Natural Gas Importers (GIIGNL) suggests that cargoes should not be labeled as carbon-neutral LNG unless they cover the Scope 3 emissions generated by end users. Perhaps wary of the carbon neutrality label, some players seem to prefer the terms “green LNG” or “carbon offset LNG.”

Peripheral Solution for Gas Emissions

Ultimately, there are no shortcuts to cutting emissions in the LNG sector. There is a growing consensus that it will be hard to build new large-scale liquefaction projects without lowering their emissions intensity. New greenfield projects will probably need to incorporate energy efficient equipment, facilities that use clean electricity, and carbon capture and storage units. These changes cost money, and it is not clear that operators will retrofit brownfield facilities to lower their carbon footprint. But if investors and regulators push gas companies to cut their emissions intensity, these are the types of investments that will move the needle.

Carbon-neutral LNG will continue to grow, since many companies are willing to shoulder an additional cost to help reduce their environmental footprint. But at best, it will play a secondary role in addressing global emissions from the LNG industry and will not contribute much to decarbonization efforts. GIIGNL suggests that the LNG sector use offsets only “to compensate for residual emissions that cannot be reduced.” After the initial rush into carbon-neutral LNG, the industry is now making commendable efforts to improve emissions accounting. But companies have more work to do in monitoring the carbon credits that underpin carbon-neutral LNG trade, and they should avoid overstating its environmental benefits.

Ben Cahill is a senior fellow in the Energy Security and Climate Change Program at the Center for Strategic and International Studies in Washington, D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Ben Cahill
Senior Fellow, Energy Security and Climate Change Program