SINGAPORE Australia's rising liquefied natural gas (LNG) exports may make for bluer skies over Chinese power plants, but back home LNG producers will pump out more carbon emissions than the coal sector.
Natural gas is the cleanest of the fossil fuels when it is burned, so energy-hungry Asian nations are snapping up stakes in LNG projects as they look to guarantee fuel supplies to meet fast-growing energy needs while weaning economies off coal and cutting emissions.
But pumping, processing and chilling the gas for transport sends more CO2 per tonne into the atmosphere in Australia than the country's coal production.
If LNG project operators are forced to pay for the full cost of those emissions under Australia's proposed carbon pricing scheme, they could face a CO2 bill equivalent to about 3 percent of LNG sales revenues. That would eat into their profit margins.
"LNG is cleaner but it's not clean," said John Connor, chief executive of the Climate Institute, an independent climate change think tank in Australia.
"It's got a role to play in the transition to cleaner fuels. But the champions of LNG are kidding themselves if they think they can wash their hands of any responsibility for emissions."
For LNG to be chilled and piped onto ships, all but a fraction of the CO2 must be stripped out and is usually vented into the atmosphere.
Australia is the world's fastest-growing LNG producer and has nearly A$200 billion ($216 billion) of projects under construction or in the pipeline, with global energy giants Chevron, Shell, Inpex and Woodside Petroleum keen to cash in on the growing appetite for energy in Asia, led by China. Australia is already China's biggest LNG supplier.
Just nine of those projects would add around 50 million tonnes per year (tpy) of emissions to the 8.4 million tpy the sector already produces, according to Reuters calculations based on data in the reports of operating companies and stakeholders.
The total is equivalent to more than ten percent of Australia's estimated total 2010 greenhouse emissions of 543 million tonnes. Total LNG emissions would be twice the 27 million tpy produced by the coal sector -- and Australia is the world's largest coal exporter. The jump in emissions could undermine government efforts to cut the nation's carbon pollution by 2020.
The latest government projections show that Australia's booming economy is on track to pump 24 percent more emissions in 2020 than it did in 2000, well above the target 5 percent cut.
For policy makers in Canberra, LNG emissions pose an additional headache as the government tries to introduce a controversial carbon pricing scheme.
Australia's projects are already among the world's most expensive per tonne of LNG produced and costs are soaring as more projects go ahead.
Developers fear a carbon cost would make their LNG exports less competitive than gas from producers paying no carbon cost.
Canberra is expected to unveil an interim carbon price of between A$15 and A$30 per tonne of emissions in the next few months for a scheme that would start in July next year.
If producers have to pay the full carbon price per tonne of LNG, the two projects already in production emitting 8.4 million tpy of CO2 per year could face an additional cost of about A$125 million to A$250 million.
Deutsche Bank estimates that Australia's annual LNG exports are currently worth around A$8.5 billion, so the $250 million cost would be 2.9 percent of LNG sales revenue.
But Australia's boom in LNG projects is helping fire economic growth, so Canberra is unlikely to risk that through imposing the full carbon cost.
Under the planned scheme, some polluting firms that export their products would likely be compensated for any loss of competitiveness by receiving free permits, cutting CO2 costs.
A previous scheme which the government failed to pass envisaged LNG paying only 50 percent of CO2 costs, and gave the industry other sweeteners.
Even a carbon price of $35 a tonne would have only a marginal impact on the sector's profitability if firms were given 60 percent of pollution permits for free, Macquarie Research said in a note written in March.
The Australian Petroleum Production & Exploration Association (APPEA) says LNG projects should be exempt from any carbon price because it would penalize production of a fuel cleaner than coal.
The association, the industry's main body, says it is an irony that LNG's emission-intensive production in Australia should be taxed, when the wider global benefits of displacing dirtier coal in Chinese or Indian power plants should be lauded.
LNG is cleaner than coal over its full life cycle - counting emissions from producing, processing, transporting and burning.
Studies by Carnegie Mellon University, Australia's state-backed research body the CSIRO, consultancy WorleyParsons and others, show that LNG releases about 40 percent fewer greenhouse gas emissions than black coal.
Under a global carbon pricing scheme, its lower lifecycle emissions would give LNG a competitive edge over coal.
"Aggressive global action on climate change will clearly be good for LNG," said Tim Jordan, a carbon analyst for Deutsche Bank in Sydney. "If it's a cleaner fuel than coal over its life cycle, then a carbon price applied globally, whether direct or implicit, will be a positive for it."
But Australia's quandary in how to price carbon emissions under a domestic rather than global scheme is illustrative of how difficult it is for governments to exact a fair cost on national soil for cross-border energy flows.
"The global climate policy framework makes countries responsible for emissions within their borders," said Jordan. "If an LNG project emits carbon in Australia, then Australia is responsible for that carbon - end of story."
($1 = 0.926 Australian Dollars)
(Editing by Simon Webb)