The main challenges in setting prices for methane emissions in the EU energy sector

A study from the Ecologic Institute analyzes the possibilities of introducing a price system for methane emissions from the energy sector in the EU from 2030. Two main approaches are considered: the expansion of the Emissions Trading System (ETS) and the introduction of a tradable emission standard (EPS) with a bonus-malus system. The analysis takes into account the link with the new methane regulation in the EU and assesses the political, technical and legal feasibility of both approaches, while also addressing issues of monitoring, measurement accuracy and compatibility with WTO rules. The study recommends expanding the ETS as the most promising option.

The pricing of methane emissions in the EU energy sector presents several challenges that need to be carefully considered.

• Ensuring reliable and accurate monitoring, reporting and verification (MRV): Methane leaks, as well as incomplete methane combustion and venting, cannot be quantified with the same level of reliability and precision as CO2 emissions from fossil fuel combustion. CO2 emissions are easily calculated as a function of fossil fuels consumed and their carbon content. On the contrary, methane leaks often need to be estimated based on non-continuous measurements or calculation methods with varying degrees of accuracy. While the implementation of the EU Methane Regulation and technological developments will substantially increase the accuracy and quantity of available data on methane emissions from the energy sector, the MRV of methane emissions is likely to continue to be less accurate than the GHG emission standards currently covered by the EU ETS. As an accurate MRV is crucial for the integrity of the EU ETS system as a whole, it may be challenging to maintain the credibility of the ETS price and the functioning of the emission allowance market while integrating methane emissions on par with existing emission sources. This can be seen as a threat to the integrity and functionality of the tool.
• Determination of the limit for the uncertain total volume of emissions: There is currently considerable uncertainty about the total volume of methane emissions from the energy sector. At least for some major sources of methane emissions and countries, data from Member States' greenhouse gas inventories are not reliable.
• Solving stochastic events with extremely high emissions: Individual events with exceptionally high emissions can cause significant methane emissions. These events are usually associated with accidents, sudden consequences of insufficient maintenance and abnormal process conditions. Acts of war or terrorism can also cause them. Therefore, events with extremely high emissions are impossible to predict and difficult to measure. As discussed in previous research, such stochastic fluctuations can lead to complications within a decreasing overall limit.
• International coverage and compatibility with WTO rules: As the EU imports most of the fossil fuels it consumes, mitigating methane emissions from imported fuels is more important than the domestic effects of methane pricing. There are solutions for covering imports with the price of emissions, either by expanding the CBAM mechanism or by including traded volumes in the scope of the system of bonuses and malus within the EPS. In both cases, however, it is necessary to demonstrate political feasibility and acceptability on the part of the main trading partners. Although there are reasons to be optimistic about the compatibility of CBAM with WTO rules, only a WTO decision can provide certainty.
• Political acceptability and cost sharing: The introduction of methane emissions pricing may lead to an increase in energy prices for consumers, which could provoke a public backlash. At the same time, it is necessary to consider a fair distribution of costs between producers and consumers.

In addition to these challenges, it is also necessary to consider the administrative and technical aspects of the implementation of the methane emissions pricing system, as well as its impact on the competitiveness of European businesses. Spring