The inescapable math of emissions, LNG, and international trade

LNG trade has benefits for Canada and importing countries, but it isn’t a substitute for climate policy

To what extent can increasing Canada’s LNG (liquefied natural gas) exports help Canada achieve its emission targets? 

Short answer: not much. LNG trade has benefits both for Canada and for importing countries, but it isn’t a substitute for climate policy. Yes, using gas to generate electricity produces fewer emissions than using coal, and the idea of selling more gas internationally to avoid reducing emissions domestically may seem appealing. In terms of achieving Canada’s climate goals, however, that appeal is an illusion. 

Despite some recent proposals, LNG exports unambiguously do not provide a credible alternative to climate policy in Canada, for a very practical reason: the math doesn’t work. 

Accounting 101

The most fundamental math problem is an accounting issue. 

The idea of LNG exports as climate policy is premised on (not-yet-finalized) mechanisms for international emissions trading. Article 6.2 of the Paris Agreement could allow for countries to trade emissions reductions, providing an accounting framework for international emissions reductions to contribute to domestic targets. 

Yet other countries are unlikely to give up emissions credits in return for Canadian LNG. One of the reasons they would buy gas is to reduce emissions within their own borders. Other countries, just like Canada, are also signatories to the Paris agreement, and also have emissions obligations. If they trade away credits, it means they don’t get to claim those emissions reductions, and would have to take even more action to reduce other emissions elsewhere in their economy. 

All of this is evidence of a functioning accounting system, not a broken one. If nations exporting and importing LNG could both claim credit for any resulting emissions reductions, that would be double counting. It would undermine transparency and accountability for emissions, not to mention the foundations of international climate negotiations. No country would be solely accountable for any emissions reductions. That’s pretty much the exact opposite of the best way to solve a global collective action problem. 

Not that an alternative accounting system is really on the table, but developing such a system doesn’t offer Canada many advantages either. If an alternative system gave Canada credit for the emissions benefits of LNG consumed elsewhere, it would also put Canada on the hook for emissions used in the manufacturing of products that Canada imports from other countries; in other words, Canadians installing solar panels manufactured in China would be accountable for the emissions produced in making them. Even more: if life-cycle emissions could somehow be tracked, this alternative accounting system would make Canadian oil, for example, less desirable because the higher emissions intensity of Canadian production would accrue to the ultimate consumer of that product.  

Economics 101

The second math problem is an economics issue. 

Let’s go back to the incentives that another country may have for trading its emission reductions to Canada. The only way that would make sense is if Canadian sellers were to offer a price premium. In theory, then, the government of Canada could subsidize LNG production using public dollars in order to facilitate a sale at below-market prices, thus justifying the return of credits. 

That prospect raises the question of value for money. Public dollars have an opportunity cost. Money spent on LNG subsidies comes at the expense of taxpayers: it’s money that governments must either raise from higher taxes or borrowing, or save by cutting services. As economists like to say, there’s no such thing as a free lunch.  

What else could the government use that money for? Indeed, it could well be cheaper to buy international emissions reductions through Article 6 directly, rather than doing so indirectly through LNG sales. 

That’s especially true given that LNG infrastructure is long-lived and comes with transition risk. Countries with net zero targets now comprise more than 90 per cent of the global economy. As a result, long-term demand for fossil fuels is at risk, given the shift toward clean fuel and clean power required to meet those targets. New market analysis, for example, suggests that EU demand for LNG will peak in 2024 (yes, that’s this year). Private investors might be willing to take on that risk. Governments should be wary of socializing transition risk with public dollars, especially if emissions reductions are part of the value proposition: a long-term LNG deal—with prices (and subsidies) locked in for 30 years—might displace coal in the short-term, but replace renewables and batteries in the long-term.  

Accounting 201

That very uncertainty—what alternative will LNG displace—raises another accounting problem. Even if we ignore the challenges with international emissions accounting and the economic risks, demonstrating “additionality” is still a problem. An export subsidy can only be considered to reduce emissions if it can be credibly demonstrated that the switch from coal to gas wouldn’t have happened absent the Canadian subsidy. 

That assumption is suspect

For one, additional LNG imports don’t necessarily translate to retiring coal-generated electricity plans. As electricity demand increases, new power generated via LNG might be in addition to—rather than instead of—existing capacity.

Even if coal plants are retired, Canadian LNG isn’t the only option. If India or Europe or Japan doesn’t import Canadian LNG, they are likely to import it from Australia or the United States or the Middle East. LNG is, afterall, a globally traded commodity. That’s not a desirable outcome from an economic perspective—Canada’s prosperity, after all, is deeply rooted in trade and resource exports—but the emissions math is unforgiving. The true incremental impacts of additional Canadian LNG exports is only the additional adoption that comes from an incremental decrease in LNG price due to an incremental increase in supply.   

In other words, other countries’ decarbonization efforts might well lead to more demand for Canadian LNG and profits for Canadian firms. But any actual reductions aren’t necessarily  additional or incremental for global emissions. As a result, they don’t accrue to Canada’s inventory.  

Measurement 101

The final math problem is a measurement issue. So far, I’ve taken it for granted that exported LNG displacing coal elsewhere in the world can reduce global emissions. That’s not at all certain

Burning gas in power plants isn’t the only source of emissions in the gas life cycle; methane itself is a powerful greenhouse gas. As a result, methane leaks in gas production and transportation—sometimes called upstream, fugitive emissions—can be a significant problem. If unchecked, these lifecycle emissions further undermine the case for international substitution. Official estimates suggest that fugitive methane emissions from Canada’s oil and gas sector made up around eight per cent of the sector’s total emissions in 2021.

Critically, that estimate is almost certainly low. Methane emissions are chronically under-estimated because they have thus far been hard to measure (that may change as methane-measurement satellites come online). Analysis in 2021 suggested that Canada’s true methane leaks could actually be 1.5 times larger.  

Manufacturing and transportation of LNG further exacerbates the problem. LNG is also—in lifecycle terms—more emissions-intensive than gas. Emissions are produced in liquefying gas, but also in transporting LNG. 

Still, lifecycle emissions from Canadian LNG can be addressed, at least in part. Domestic policy could plug those holes and create incentives for emissions reductions. Canada is currently developing more ambitious methane regulations. Other policies, in particular Large Emitting Trading Systems for big emitters, will encourage electrification of LNG facilities. 

Unless the Canadian gas industry addresses these challenges—encouraged to do so by the right public policies—Canadian LNG exports won’t reduce emissions, either domestically or globally. 

Policy 101

That takes us back to where we started: LNG exports aren’t a substitute for domestic emissions reduction policy. Other countries’ efforts—through their own climate policies—might well create an economic opportunity for Canadian LNG. But that opportunity doesn’t diminish Canada’s need to deliver on its own emissions commitments, within the consensus international framework on emissions accounting and accountability. 

Still, Canadian LNG exports—driven by market demand and private investment, rather than public subsidies—could be a complement to strong domestic climate policy. Smart Canadian climate policies can create incentives for decarbonizing LNG supply chains here in Canada, while also making progress toward Canada’s emissions targets. 

Considering how Canadian policy might have implications for global emissions is fair game. It is the scale of global emissions reductions, after all, that will determine the extent of warming the world will face. But proposals for using LNG exports as a way to avoid implementing climate policy here in Canada rely on math that simply doesn’t add up.