What is the future of gas trade in Europe?

What is the future of gas trade in Europe?

Building on recent work in the area, Frontier Economics held a round table session of senior experts last month in Brussels, on the topic of the ‘future of gas trade in Europe’. But what does the future hold for gas trade in Europe?

The gas sector must provide an important contribution to decarbonising the European economy

The incoming European Commission plans to ensure the EU is legally bound to achieve climate neutrality by 2050. The focus of decarbonisation efforts so far has been on the electricity sector, but the heating, transport and industrial sectors now need to step up their efforts. Many participants agreed that the gas sector can contribute to these efforts:

  • First, by shifting from natural gas to renewable and low-carbon gases in industry, buildings and in (particularly heavy duty) transport.
  • Second, by coupling the existing gas transportation, distribution and storage systems to the electricity system using Power-to-Gas technologies to absorb surplus electricity generated from renewable electricity and as a means of seasonal storage and transportation of renewable and low-carbon energy.

New policies will be needed to ensure this happens

Many participants agreed that certain actions entailed limited ‘regret’, notably:

  • funding for research, development and demonstration (RD&D) projects for low-carbon gases
  • facilitating the development of a standardised market in Guarantees of Origin (GoOs), also covering non-renewable (but still low-carbon) gases
  • the need to harness the power of market price signals wherever possible, to avoid repeating mistakes perceived to have been made while renewables in the electricity market were being promoted

However, the discussion in other areas was less conclusive:

  • how best to incentivise decarbonisation – whether through carbon pricing (including the extension of the existing EU Emissions Trading Scheme to sectors not currently covered, such as buildings and transport) or through subsidy schemes, or whether indeed RD&D funding would be sufficient for now
  • the right balance between action at Member State level versus at EU-level
  • how to ensure potential negative distributional effects on energy consumers are effectively managed

EU energy policy needs to factor in the rest of the world

The focus of attention so far has been on the production of low carbon and renewable gas within Europe, largely ignoring the potential alternative of producing and transporting gases from regions such as North Africa or the Middle East or further afield. Production of gases could take place at lower costs due to more favourable local conditions for electricity generation from renewable energy. Countries outside the EU will continue to develop their own technological solutions.

During discussions at our event, participants agreed that those looking to export to the EU, however, need clarity on both the level of demand for gases from the EU and the sorts of gases that will be accepted. For example, would hydrogen produced from nuclear power or using carbon capture and storage (CCS) technologies be acceptable? Even within Europe, there is no clarity on such issues.

Once there is clarity at a political level, policies need to be put in place to:

  • extend any EU GoO scheme abroad or ensure that schemes are compatible internationally
  • ensure a level playing field between EU and foreign producers

Many participants noted the latter issue would be particularly thorny. The incoming Commission will propose a so-called carbon border tax adjustment to ensure importers face the same carbon price signal as domestic producers within the EU. Getting the design of such a mechanism right will not be an easy task. Agricultural subsidies complicate the picture for trade in biomethane. The World Trade Organisation (WTO) has considered few examples of restrictions on imports on environmental grounds and its dispute settlement mechanism is currently stuck.

There remain many open avenues of fruitful discussion on the issue. And other countries are likely look closely at the EU’s actions in this space before deciding on their own decarbonisation policies.

Frontier regularly advises clients on energy issues, and has been at the forefront of the debate on issues related to the future role of the gas system.

For more information, please contact media@frontier-economics.com or call +44 (0) 20 7031 7000