An EU Carbon Tax Will Upend The Global LNG Market

The global LNG market could face a sea change in prices and trade flows later this decade if the European Union includes LNG in its carbon border tax.

The EU’s Carbon Border Adjustment Mechanism (CBAM), commonly known as the “carbon border tax,” was launched on October 1 in the first transitional phase for imports of several carbon-intensive groups of products into the European Union.      

The first phase of the EU’s carbon import pricing legislation will not impose levies on the products-such will apply from 2026. However, importers of iron and steel, cement, aluminum, fertilizer, hydrogen, and electricity into the EU will be asked-as of now-to report on the volume of their imports and the greenhouse gas (GHG) emissions embedded during their production, although they will not be paying any financial adjustment at this stage.  

LNG is currently left out of the carbon border tax, so imports are not being additionally taxed right now.

But, the EU has extended its Emission Trading Scheme (ETS) to shipping, which means that LNG cargoes into Europe will be subject to a carbon tax from 2024.

“For now, the first draft only refers to new LNG import contracts, but a methane tax on all LNG imports exceeding defined limits cannot be ruled out,” Wood Mackenzie analysts wrote in a report this week.

The EU could go further and include LNG in CBAM, setting an import duty at prevailing carbon prices in ETS, WoodMac noted. Related: Why Do we Still Have Investor-Owned Utilities?

If the bloc were to include LNG in the carbon border tax mechanism, the LNG market would be split into two and become a two-tier market of premium prices in Europe and lower prices in emerging Asian markets, the energy consultancy says in its analysis.

Now, there is a big ‘if’ in these assumptions. The EU, which currently relies a lot on LNG imports for its natural gas supply – Russian pipeline gas being mostly out of the picture – could still need relatively high LNG volumes after 2026 and may not opt for an LNG import duty that is sure to upend global markets.

It remains to be seen how Europe will juggle its emission reduction targets with energy security.

“If the EU decides to apply these levies, then this will push European gas prices up but also bifurcate the global LNG market, creating a two-tier LNG market,” said Massimo Di Odoardo, Vice President of Gas & LNG Research at Wood Mackenzie.

This may not play to Europe’s advantage because LNG exporters with the lowest emissions will benefit the most, but market proximity will be key, including for one of the top exporters, Qatar, which is planning a massive expansion in its export capacity by the end of the decade.

According to WoodMac, Qatar and Mozambique, for example, will require high carbon prices in Europe that could lure them away from closer markets in emerging Asia, which are unlikely to introduce an import tax on emissions and which-unlike Europe-are only set to see their demand for LNG rise in the coming years.  

On the other hand, the U.S. has some of the world’s highest-emitting LNG projects, with upstream reservoir type and pipeline distance to LNG plants adding to their high methane intensity, per WoodMac’s estimates.

U.S. LNG projects will likely be motivated to act to reduce emissions.

However, the scale and extent of future emissions taxes on LNG imports will be critical to reduce emissions in the LNG industry at scale, according to Wood Mackenzie.

If only Europe imposed taxes, it would not achieve the required goal of large-scale decarbonization of LNG projects globally, the constancy notes. The most likely result will be a bifurcate LNG market instead.

“If there is to be any material impact, a carbon price closer to US$200/t CO2e will be required for LNG imports,” Di Odoardo said.  

“Additionally, this would have to be introduced on a global level for it to be truly effective in reducing carbon intensity and that is unlikely to happen. For now, all eyes will be on Europe to see what it does next.”

By Tsvetana Paraskova for

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An EU Carbon Tax Will Upend The Global LNG Market