REPORT ON EXTENSION OF PROVISIONS UNDER THE REGULATION ON METHANE EMISSIONS IN THE ENERGY SECTOR OUTSIDE EU BORDERS

EXECUTIVE SUMMARY

Considering the power of methane as a greenhouse gas, its emissions pose a major threat to the environment. The European Commission has published a proposal for Regulation aiming to regulate and reduce methane emissions (the ‘proposal for Methane Regulation’). It envisaged three types of measures: Measurement, Reporting and Verification (MRV); Leak Detection and Repair (LDAR); and a Ban on Routine Venting and Flaring (BRVF). Since a fair share of overall methane emissions occur outside of EU borders, to ensure the Proposal’s effectiveness, non-EU operators should also be obliged to comply with the limitations stated therein. This report, therefore, aims to analyse the legal feasibility of applying the Methane Emissions Proposal’s standards and requirements to operators outside the EU.

To pursue the aim of this report, different measures were analysed:

Option 1: Legal and regulatory measures

The jurisprudence of the Court of Justice of the EU (CJEU) has already clarified EU jurisdiction to request compliance with EU climate legislation to aircraft operators established outside the EU for flights departing from and arriving at EU airports. This jurisprudence stated that such legislation does not breach the sovereignty principle since those aircrafts are physically in the territory of one of the Member States of the EU and are thus subject to the unlimited jurisdiction of the EU. This criterion of having a sufficient link with the Member State or EU territory concerned is known as the principle of territorial link. This conclusion is applicable to a measure proposing the extension of the provisions under the proposal for Methane Regulation as well as to a measure based on a new provision establishing a methane emissions standard. In both cases the sufficient territorial link principle is fulfilled because the gas is sold and consumed in EU territory.

Similarly, the World Trade Organisation’s (WTO) rules are not an obstacle for the application of the measures proposed in the Methane Regulation proposal to operators outside the EU. Under the WTO rules, the establishment of trade restrictions or conditions imposed on operators outside the EU introducing products into the EU market should not be discriminatory or a disguised restriction of international trade. The proposal for Methane Regulation that is equally applicable to operators inside the EU and operators outside the EU introducing a product in the EU, respects these principles.

The current proposal for Methane Regulation establishes an information duty on methane emissions for importers of fossil fuels from outside of the EU, but does not require MRV, LDAR and BRVF. Drawing inspiration from other European regulations, this document concludes that extending these measures to operators outside the EU would require amending Article 1(3) of the proposal for Methane Regulation. Enforcement of these measures would, however, require additional measures.

The second option would be to introduce a new provision in the proposal for Methane Regulation establishing a cap on methane emissions. We suggested adding a new paragraph under Article 13 to the proposal for Methane Regulation, which would allow emissions of up to 0.20 % for domestic and imported gas sold and consumed in the EU.

Concerning the enforcement of MRV requirements and in particular the verification of the emission, we analysed different ways through which the extension of the Methane Regulation proposal’s measures to operators outside the EU could be enforced. While the International Methane Emissions Observatory (IMEO) is proposed by the Commission as the body responsible for the verification of methane emissions, its link to the OGMP 2.0 and its member companies and countries raise the question of its independence as a verification body.

Another option draws inspiration from the Official Controls Regulation, which grants the Commission competence to act as an independent verifier of compliance with EU requirements by third countries who establish systems of control and enforcement of private operators.

Enforcement of the MRV, LDAR and BRVF measures through inspections and controls could be inspired by the EU Timber Regulation’s due diligence. While possible, this due diligence system raises some challenges, namely, variations in rigour of reports, difficulties in validating information and lack of clarity regarding the obligations of operators and competent authorities.

Finally, verification, inspections and controls through Voluntary Partnership Agreements (VPAs) was considered as a system for developing enforcement actions. Agreements with key countries exporting methane emitting oil and gas to the EU would define the responsibilities of the exporting country to enforce obligations for measuring, verifying and reporting methane emissions and to establish and develop a solid national system to ensure implementation compliance and control. Based on such a solid system and once compliance is verified, the competent authorities will grant a licence to export. For these purposes, establishing a parallel with the VPAs under the Forest Law Enforcement, Governance and Trade Regulation (FLEGT) pointed to the conclusion that this would be a plausible option.

Option 2: Contractual measures

This option encompasses complementary contracts in which the operator, as a contracting party, would be based outside of the EU. It is argued that while the proposal for Methane Regulation would be the legal basis for the extension of the obligations to operators outside the EU, the operational contracts would further define the process and requirements of the parties giving it more legal certainty. Similar systems are seen, for instance, under the Basel Convention and the Waste Shipment Regulation. While a possible option, it should be noted that gas contracts are tendentially long-term, which entails that the complementary contracts should be binding between the parties for shorter periods.

Concerning penalties, it was concluded that these would need to be adjusted to the specific nature of the gas contracts. Fines and payments were deemed more adequate than seizure of the gas. Moreover, it would also be useful to introduce provisions on financial securities in the proposal for Methane Regulation, aiming to complement and ease the imposition of fines. It was noted, however, that adoption of these rules is challenging given their nature.

Enforcement measures

The penalties contained in the proposal for Methane Regulation were discussed in order to explore the extent to which they would be effective in promoting emission reduction. It was concluded that the penalty system established by the proposal for Methane Regulation is quite complete and linked to the actual damage caused to the environment, but could be complemented with more precise types of sanctions to quantify it and adjust the penalty. The system under the EU Timber Regulation was identified as being challenging, as it is difficult to quantify the concrete impact caused by methane emissions in the environment. A more suitable system would be linked to a cap of the methane emissions which would enable quantifying the fine in relation to the amount of excess. This is the system in force under the CO₂ emission performance standards for cars and vans Regulation. Moreover, it was suggested that, similar to the system under the F-Gas Regulation, a 200 % reduction on the allocated quota for the period subsequent to the registered overflow would be imposed.

Seizure of goods and withdrawal of the licence to trade were also analysed as penalty measures. It was concluded that these options could affect energy security and would also affect the relationship with the few traders of gas, given the current circumstances where Russia is already excluded.

Penalties listed under the new re-cast Environmental Crime Directive were considered for these purposes. While some of the provisions contained therein were not applicable due to the nature of the trade activity and of the emissions (namely: imprisonment; obligation to reinstate the environment within a given time period; temporary or permanent exclusions from access to public funding, including tender procedures, grants and concessions), some of the additional options mentioned in this new law were considered suitable ((criminal and administrative) fines; disqualification from directing establishments used for committing the offence; national or EU-wide publication of the judicial decision relating to the conviction or any sanctions or measures applied; and obligation of companies to install due diligence schemes for enhancing compliance with environmental standards).

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