Dr. Sam Cornish
Transition Research Specialist
Despite a flurry of new policies, commitments, funding and tech advancements in the past year, methane emissions are at historic highs. With the gap between ambition and actual performance wider than ever, this is a crucial time for investors to anticipate and address risks and opportunities.
Methane emissions are responsible for around 30% of gross warming since 1750, and deep cuts in these emissions are required to meet the Paris goal of limiting warming to 1.5°C.
The fossil fuel sector is responsible for nearly 40% of anthropogenic (human-made) methane emissions and holds the greatest methane abatement opportunity. This is why we have focused on the oil and gas, and coal mining industries in our recent report, Addressing methane emissions from fossil fuel operations.
As the climate necessity of urgently addressing these emissions has crystallised, regulatory and stakeholder expectations on fossil fuel companies to improve methane performance have grown in tandem.
And here’s the good news – cutting methane emissions can be done at low or even negative costs. The International Energy Agency (IEA) estimates that 40% of fossil methane could be mitigated profitably.
Methane is a product of the fossil fuel industry, otherwise known as natural gas. Allowing it to escape into the atmosphere, or flaring it, represents production inefficiency. Instead, it can be captured and sold, or its energy value can be used in operations.
In a 1.5°C scenario, fossil methane emissions fall 75% by 2030 from today’s levels. In the face of advancing legislation, laggards risk rising costs of emitting, losing access to markets, compliance and litigation risks, and reputational damage. Leaders, on the other hand, will be better positioned to navigate regulatory changes and retain social license to operate in a much-scrutinised sector.
A guide for investors to assess and engage on methane risks
Our methane paper offers a comprehensive overview of climate science, policy and sector-specific abatement strategies to help investors assess risks, safeguard financial value and work towards climate goals. Its main offering is three engagement frameworks, to support investor dialogues with oil and gas companies, coal miners and the broader ecosystem – governments, value chain companies and banks.
Read our report, Addressing methane emissions from fossil fuel operations.
Regulatory pressures are increasing while companies make pledges
Regulations are tightening globally. The US has announced a $900/tonne tax on methane emissions from oil and gas, set to increase over time. The law should effectively penalise a third of all oil and gas methane emissions in the US.
The EU’s new Methane Regulation covers both local and imported fossil fuels, imposing requirements on measurement, reporting and verification (MRV), and methane management approaches. China, the world’s largest methane emitter, also introduced the National Methane Action Plan, which focused on improving data and setting targets for coal mine methane.
We can expect more major producing nations to table new regulations, especially those that are part of the Global Methane Pledge (GMP). The incentive to do so is only increased by importer jurisdictions like the EU extending standards to incoming supply.
COP28 last year saw the formation of the Oil and Gas Decarbonisation Charter (OGDC), with 52 companies aiming for near-zero upstream methane emissions by 2030.
The first Global Stocktake supported the Global Methane Pledge (GMP), aiming for a 30% methane reduction globally by 2030 against 2020 levels. COP28 added five more countries to the GMP and the total now stands at 155.
As we move towards COP29, we can expect more attention on methane, with the spotlight likely to fall on methane from coal, which has received less of a COP focus so far. The scope may also broaden to consider the hard-to-abate sectors such as steel, cement, and aviation, which are currently reliant on fossil fuels but where lifecycle emissions can be reduced today by tackling methane upstream.
Under-preparedness can cost investors
Advancing legislation means companies will need to step up their game or potentially face financial penalties or market exclusion.
These risks are further heightened by the revolution in independent measurement capacity, particularly satellite instruments such as the recently launched MethaneSAT, which monitor methane emissions from space. These tools can aid governments and companies in rapidly addressing major leaks in oil and gas infrastructure.
Many companies may not fully understand the true nature of their methane emissions, as they often rely on production data and estimated emission factors rather than direct empirical measurement. This has led to significant underreporting of fossil methane emissions on both corporate and national levels.
With stakeholders now having access to independent measurement data, it’s becoming harder for companies to overlook methane emissions.
The opportunity is clear – high-quality measurement will support more cost-effective mitigation strategies and help companies avoid growing reputational and regulatory risks.
Tackling methane and carbon dioxide together
The methane agenda currently has significant momentum. Meanwhile, engagement on production – and scope 3 CO2 emissions – has been more difficult in the context of the recent fossil energy crisis and prices spikes, which some producers have responded to by redirecting capex to fossil fuels.
However, it is essential that the two gases are tackled together.
Carbon dioxide is a long-lived gas and any delay in cutting emissions locks in long-term warming until those emissions are removed – by natural or anthropogenic means.
We must be wary then of the narrative that reducing methane can “buy us time”. Relative to a counterfactual in which methane emissions are not reduced, this is true. But the reality is that achieving our climate goals requires deep and urgent cuts in emissions of both gases.
Against this context, there is no real scope for focussing on methane at the expense of CO2. It is a case of “and” rather than “or”. Indeed, decreasing production can play an important role in reducing methane emissions.
Investors who align with this dual approach will be better positioned to safeguard long-term financial value and contribute to a sustainable future.
If you’d like to take part in our working groups and help shape the outputs of our resources, why not get in touch today to learn more about becoming a part of IIGCC?