Differentiated Gas: Accounting Clarity & Framework Integration

Context

A functional market for differentiated gas requires common agreement and clarity around how to account for its qualities & attributes. A commonly agreed-upon ledger for differentiated gas would function as a record that a given unit of low-emission gas was produced, sold, and then “retired” once it’s claimed. The power sector solved a version of this problem through Renewable Energy Certificates (RECs): after signing a purchase agreement, buyers get a certificate with time-matching and other attributes. Differentiated gas has no equivalent framework, so companies struggle to get credit for lower-emission gas in their greenhouse-gas inventories (and Scope 2 accounting rules don’t currently recognize market based mechanisms).

Underneath the accounting problem sits a difficult physical reality: gas from thousands of wells gets commingled in the pipelines that move them across the country, so a “clean” molecule produced at a low-emissions wellhead is indistinguishable from the rest of the market by the time it reaches a customer.

Industry Observations & Insights

1. Uncertainty around accounting and reporting frameworks

We don't have a ledger based system or other type of accounting that actually says “I just produced or purchased one unit of DNG and I just used it over here and that certificate expired” (or however you want to call it). That's one of the things that you see within Europe, whether it's CBAM or Emissions Trading System (ETS) schemes or other things, they have a certification process behind it. That's very common in the power industry. We buy our purchase agreements, you get a REC or an EAC that has time matching and other things like that. There needs to be the administration system set up that actually backs that and allows these transactions to actually go through with more transparency.

There is a growing amount of interest, especially with advances in AI and the data center load projections, but what they don't have is the clarity to make credible reporting claims in their emissions inventories. What is required is some form of accounting guidance so that companies (whether it's a tech firm or an industrial buyer) know how to make Scope 3 claims. And that's everything from: understanding how methane fits in, taking into consideration things like global warming potential, to knowing how to report a lower leakage gas purchase relative to a higher leakage gas purchase, it's questions around how you could use a certificate versus direct tracing approaches

2. Confirming & measuring additionality

"I think there's still uncertainty around: what are you buying, what are you paying for? If you source some lower emission natural gas: is there actually any additionality there, or are you just buying gas that would have gone somewhere else – so what's the impact? Maybe there's no impact, or you would have to have everyone switch to that to have an impact. Different buyers have taken different approaches to this. [Some buyers] have said that they're explicitly paying a premium for differentiated natural gas to sort of compensate companies from what they've already done. As opposed to something forward looking; e.g. 'this is to help you finance/capitalize more mitigation for methane.' It would be helpful to have more clarity around what you're actually enabling by buying gas that is lower emissions."

"What if the buyer says “I don't just want a low emission rate: I want a low emission rate that I caused, an additional improvement that I caused?” How do you confirm that, measure that, account for that?"

3. Complexity burden for supporting multiple accounting frameworks

"If there’s a market mechanism that deviates significantly from what [the EU is] going to come up with in the next couple of years, that’s going to become challenging for companies because they’ll have to maintain two different sets of books on addressing carbon intensity of natural gas."

4. Tracing requirements can't be met

"Some people are looking for that specific molecule that you just produced to end up at their plant (or wherever they may be). And it’s near impossible to do molecule tracing. That is one of the key items right now that's impeding our ability with sales: you can have the cleanest molecule coming out of the ground that you process, but then once you transmit it across those long-haul pipe lines you lose track of it. And that's one thing that particularly the EU is looking for when they actually start to progress their methane regulations"

Vectors for progress

1. “Book and Claim” accounting decouples the underlying environmental attributes from the physical gas being delivered (similar to how RECs function) ¹. A proposed evolution towards a “constrained book and claim” model would start at a simpler level of granularity (e.g. the country level) and tighten the scope to the basin level over time.
2. “Trace and Claim” attempts to follow the actual low-GHG molecules along their commercial path. This presents significant practical challenges, but some industry experts suggest that the technical challenge may be tractible with recent advances and that the tracing question is, for all practical purposes, already solved by modern modeling and what’s needed is a mechanism for putting that information to use.