To what extent can increasing Canada鈥檚 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鈥檛 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鈥檚 climate goals, however, that appeal is an illusion.
Despite , LNG exports unambiguously do not provide a credible in Canada, for a very practical reason: the math doesn鈥檛 work.听
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. 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.听
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鈥檛 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鈥檚 pretty much the exact opposite of the best way to solve a global collective action problem.
Not that an is really on the table, but developing such a system doesn鈥檛 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.听聽
Economics 101
The second math problem is an economics issue.
Let鈥檚 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鈥檚 money that governments must either raise from higher taxes or borrowing, or save by cutting services. As economists like to say, there鈥檚 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 directly, rather than doing so indirectly through LNG sales.听
That鈥檚 especially true given that LNG infrastructure is long-lived and comes with Countries with net zero targets now comprise 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 , for example, suggests that EU demand for LNG will peak in 2024 (yes, that鈥檚 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鈥攚ith prices (and subsidies) locked in for 30 years鈥攎ight displace coal in the short-term, but replace renewables and batteries in the long-term.听聽
Accounting 201
That very uncertainty鈥攚hat alternative will LNG displace鈥攔aises another accounting problem. Even if we ignore the challenges with international emissions accounting and the economic risks, demonstrating 鈥渁dditionality鈥 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鈥檛 have happened absent the Canadian subsidy.
That assumption .听
For one, additional LNG imports don鈥檛 necessarily translate to retiring coal-generated electricity plans. As electricity demand increases, new power generated via LNG might be in addition to鈥攔ather than instead of鈥攅xisting capacity.
Even if coal plants are retired, Canadian LNG isn鈥檛 the only option. If India or Europe or Japan doesn鈥檛 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鈥檚 not a desirable outcome from an economic perspective鈥擟anada鈥檚 prosperity, after all, is deeply rooted in trade and resource exports鈥攂ut 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鈥 decarbonization efforts might well lead to more demand for Canadian LNG and profits for Canadian firms. But any actual reductions aren鈥檛 necessarily additional or incremental for global emissions. As a result, they don鈥檛 accrue to Canada鈥檚 inventory.
Measurement 101
The final math problem is a measurement issue. So far, I鈥檝e taken it for granted that exported LNG displacing coal elsewhere in the world can reduce global emissions. That鈥檚 .听
Burning gas in power plants isn鈥檛 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鈥攕ometimes called upstream, fugitive emissions鈥攃an be a . If unchecked, these lifecycle emissions further undermine the case for international substitution. Official estimates suggest that fugitive methane emissions from Canada鈥檚 oil and gas sector made up 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 come online). suggested that Canada鈥檚 true methane leaks could actually be 1.5 times larger.听聽
Manufacturing and transportation of LNG further exacerbates the problem. LNG is also鈥攊n lifecycle terms鈥 than gas. Emissions are produced in liquefying gas, but also in transporting LNG.听
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 . Other policies, in particular for big emitters, will encourage electrification of LNG facilities.听
Unless the Canadian gas industry addresses these challenges鈥攅ncouraged to do so by the right public policies鈥擟anadian LNG exports won鈥檛 reduce emissions, either domestically or globally.
Policy 101
That takes us back to where we started: LNG exports aren鈥檛 a substitute for domestic emissions reduction policy. Other countries鈥 efforts鈥攖hrough their own climate policies鈥攎ight well create an economic opportunity for Canadian LNG. But that opportunity doesn鈥檛 diminish Canada鈥檚 need to deliver on its own emissions commitments, within the consensus international framework on emissions accounting and accountability.
Still, Canadian LNG exports鈥攄riven by market demand and private investment, rather than public subsidies鈥攃ould 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鈥檚 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鈥檛 add up.
