Achieving climate neutrality and net-zero emissions means Europe must stop burning fossil fuels, including unabated natural gas. Innovation and new lower carbon technologies are unlikely to offer a climate-proof future for the gas industry. This means investments to preserve, upgrade, or expand gas infrastructure are at risk of not recovering their value. This paper proposes a framework for investors to consider the range of transition risks facing the European natural gas industry across its value chain.
Despite the contribution of natural gas to Europe’s carbon emissions, public and private investment in gas infrastructure remains significant. The strong flows of finance are supported, inevitably, by lobbying efforts by the gas industry to ensure its presence in the energy mix, despite the EU and its member states introducing policies for deep decarbonisation.
Systemic climate-related risks to gas assets in Europe are high but often remain undiscussed in the investor community. The global investment community’s increasing endorsement of the TCFD principles, however, presents an opportunity to highlight the risks of investing in gas infrastructure. Assessing climate-related risks associated with natural gas is particularly challenging because gas is used across multiple sectors, and financial returns for network infrastructure are often guaranteed. The recent emergence of ‘alternative’ gases such as hydrogen in policy debates also understates and ignores some of these risks. E3G has therefore developed a framework for articulating climate-related financial risks across the gas value chain
Key points
- Future unabated use of gas is not compatible with the Paris Agreement. It is also not compatible with the EU reaching climate neutrality by mid-century. This means that the business model of existing gas companies, infrastructure, and operations will no longer work in the mid-century.
- Risk to the gas industry is growing from numerous sources. Reductions in the costs of renewables, political and regulatory pressure to reduce gas use more rapidly, and the increasing loss of its social licence to operate are already threatening the industry. As these threats strengthen through greater climate ambition, the case for investment will be further undermined.
- All parts of the gas industry are under threat from climate neutrality. It will undermine the case for new investment in the industry, with network owners and producers most at risk for the transition.
- Understanding the existential and systemic nature of risks facing the gas industry is the next frontier for the management of climate-related risks. The lessons learnt in climate-related risk management that led investors to reduce exposure to coal must be applied to investments in the gas sector.
Read the full briefing, Pathway to a Climate Neutral 2050: Financial Risks for Gas Investments in Europe, here.
