European Parliament adopts new regulation to reduce global methane emissions from energy sector

Executive summary

As part of the European Green Deal and the EU's Methane Strategy, the European Parliament on 10 April 2024 adopted a regulation (Regulation) to reduce methane emissions in the energy sector, a crucial step in meeting climate goals and improving air quality. The European Commission's website explains that methane is a powerful greenhouse gas and is responsible for approximately one-third of current climate warming. The new Regulation establishes rules for measuring and reducing emissions in the energy sector. It also covers methane emissions linked to oil, gas and coal imported to the EU. The Regulation now has to be adopted by the European Council and be published in the EU Official Journal to enter into force 20 days later.

Detailed discussion

The new rules will be enforced by the Competent Authorities established at a national level and Accredited Verifiers will be responsible for verifying the reported data. Under the new Regulation, the burden of compliance will rest with the "operators," also known as "covered entities" (i.e., energy companies handling oil, gas and coal).

Impacted companies

The methane Regulation will apply to the following types of companies in the EU:

• Oil and fossil gas exploration and production companies

• Fossil gas gathering and processing companies

• Transmission system operators (except metering system)

• Distribution system operators

• Liquified natural gas terminal operators

• Underground storage operators

• Operators of underground and surface coal mines

Scope of the new obligations

1. Measurement, quantification, reporting and verification measures

A compulsory asset-level monitoring, reporting, and verification (MRV) system, drawing from the Oil and Gas Methane Partnership (OGMP) 2.0 standard, will be gradually implemented. To ensure transparency and regulatory compliance, the "operators" will be required to submit periodical reports containing quantification of source-level methane emissions.

Furthermore, covered entities will be required to uphold specific methane mitigation obligations aimed at reducing the overall emission footprint.

2. General methane emissions mitigation obligations

i. Leak and detection compliance measures

Covered entities will be required to submit a methane leak detection and repair (LDAR) program to the relevant national authorities, carry out detection and repair surveys and repair or replace any components found to be leaking methane above certain levels immediately after a leak has been detected or no later than five days after.

ii. Ban on venting and flaring

In consideration of methane's potent greenhouse gas effect, venting (direct release of methane into the atmosphere) and flaring (controlled combustion of methane for disposal) will be prohibited, except in emergencies, malfunctions or specific unavoidable circumstances.

3. Import of oil, gas and coal to the EU

The EU imports a significant portion of its oil, gas and coal. This Regulation will address methane emissions associated with these imports.

Starting in January 2027, new import contracts for oil, gas and coal must adhere to the same MRV standards as those for EU producers. The Regulation will define a methane intensity methodology and establish maximum intensity levels for both new import contracts and EU fossil fuels. As a result, foreign producers will need to implement advanced MRV procedures to ensure compliance, keeping emissions below specified thresholds to avoid penalties and maintain their ability to export to the EU.

To support importers in making informed decisions, under the Regulation, a publicly accessible methane transparency database and methane performance profiles for countries and companies will be quickly established.

Timeline

LDAR measures will become effective six months post-regulation, with reporting duties beginning six months later, escalating over time. The first Competent Authority inspection will occur 21 months after the regulation enters into force. Importers will be required to meet similar MRV requirements as EU entities, or risk losing access to the EU market from 2027 and face significant fines. Six years following the Regulation's start date, stringent methane intensity limits will virtually restrict market entry for high-emitting oil, gas and coal importers.

Implications for businesses

Impacted companies will need to take action to comply with the new EU methane reporting and mitigation requirements, typically involving various corporate departments such as tax, legal and finance. It will be imperative to establish internal methane reporting procedures before the regulation takes effect and to adopt OGMP 2.0 standards without delay. Compliance with the Regulation may require establishing internal cross-functional methane governance structures, developing employee competencies and setting up internal procedures to acquire, store and analyze data for methane reporting. Additionally, EU importers will need to revise contracts based on data collected from exporting partners. In cases of noncompliance, potential risks include financial penalties and losing access to the EU market.

Contact Information

For additional information concerning this Alert, please contact:

Ernst & Young Law Talasiewicz, Zakrzewska i Wspólnicy sp.k., Warsaw

• Kasia Klaczynska Lewis

• Dariusz Kryczka

• Malwina Burzec

• Ewa Waslicka

Ernst & Young GmbH Steuerberatungsgesellschaft, Frankfurt

• Leonie Schiedek

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.