Pennsylvania: The Keystone State for an Emissions-Differentiated Gas Market

Pennsylvania and its surrounding states are a microcosm of methane market dynamics and have the potential to spur wider market differentiation.

A nascent market for low-leakage gas

Significant advances in methane emissions measurement and monitoring have brought greater visibility to oil and gas methane emissions in recent years.  Now, as more data becomes available, accelerating emission reductions increasingly hinges on strengthening incentives among buyers and sellers along the supply chain to factor methane leakage into their market decisions.

Thanks to advances in voluntary emissions reporting, independent certification standards like MiQ, and demand-side policies, especially the EU methane regulations, a market for differentiated gas is starting to emerge. Yet the supply of demonstrably low-leakage gas is far outstripping demand. Leading corporate buyers can seize the opportunity to substantially reduce their emissions footprints by purchasing low-leakage gas with limited supply constraints.

Pennsylvania and its surrounding states are a microcosm of these dynamics and have the potential to spur wider market differentiation. Home to extensive low-methane gas supply and numerous would-be buyers across sectors, the “Pennsylvania Plus” (Penn+) region has the potential to become a hub for differentiated gas. But this can only happen if buyers are well-informed about the opportunity, can credibly and confidently report the emissions benefit of purchasing low-methane leakage gas, and can pull this emissions-reduction lever at a comparatively low cost. Overcoming these barriers — whether perceived or real — is eminently achievable in the near term.

An enabling ecosystem for differentiated gas markets

A healthy differentiated gas market requires a) sufficient supply and demand for differentiated gas, b) a well-developed regional gas market, and c) a regulatory environment that supports reducing methane leakage. With the exception of demand for low-methane leakage gas today, the Penn+ region has all of these ingredients.

Beginning with low-methane leakage gas supply, this region, which encompasses both the Marcellus and Utica basins, represents nearly one-third of US gas production and one-fifth of US gas consumption. Additionally, half the gas produced is already certified below 0.2 percent methane intensity through MiQ.

The region’s gas market is well developed. It has extensive pipeline connectivity and storage, enabling supply to meet demand across the region and throughout the year. There is also sufficient flexibility and liquidity to support transparent contracting and pricing. The Penn+ region overlaps with PJM — one of the largest wholesale power markets in the world — and NYISO, another large market, with gas often setting the market-clearing price.

The Penn+ region’s regulatory environment not only supports the functioning of gas and power markets, but it also includes broader incentives for climate action. For example, some of the region’s subnational governments have plans that include emissions reduction targets, providing incentives for operators to cut emissions across their supply chains. Additionally, many states in the region are part of the Regional Greenhouse Gas Initiative (RGGI), a market-based program to reduce power plant emissions using a cap-and-trade system. RGGI sets a precedent for the development of other climate-differentiated markets in the region. Though not currently part of RGGI, Pennsylvania is considering a state-specific alternative.

Finally, there is a diversity of potential buyers. Power sector utilities are often the first type of customer that comes to mind, but the region also possesses a wide array of industrial buyers — including steel, glass, and chemicals and oil refining plants alongside emerging demand from data centers. The existing liquefied natural gas (LNG) terminal at Cove Point is an international outlet for gas, which ties Penn+ directly to import requirements under the EU methane regulations, and other initiatives like the Coalition for LNG Emission Abatement towards Net-zero (CLEAN).

How to Spur Buyer Demand

If reducing methane leakage is a win-win-win for energy efficiency, energy security and the climate, why have buyers not taken advantage of this big opportunity? The first obstacle is awareness. Many buyers are not sufficiently informed of the impact methane leakage has on their supply-chain emissions and still may not have heard of emissions-differentiated gas. Even when buyers are cognizant of the opportunity in theory, putting it into practice raises additional uncertainties — including how to credibly report the benefit of purchasing low-methane leakage gas to their end users and in disclosures. Finally, cost is often cited as a barrier. Any price above the lowest cost source of gas can be seen as too expensive, especially if benefits cannot be clearly reported.

Luckily, each of these barriers can be overcome in the near term. Awareness among buyers on the importance of methane leakage in supply chains, like chemicals and power supply, has accelerated in recent years as more information becomes available. As their understanding has grown, buyers are demonstrating the ways in which differentiated gas can be accounted for in Scope 3 inventories and annual reporting. For example, Bloom Energy was able to quantify the difference in emissions from its differentiated-gas purchases compared to the national average using the MiQ-Highwood Index. Finally, the cost premium for differentiated gas is minimal — and cutting methane waste is one of the most cost-effective forms of emissions abatement available across the board.

Now is the time to act

Certified supply already exists in the Penn+ region, and costs are low, especially relative to the climate benefit. Now is the time for gas buyers to prioritize low-leakage gas and help catalyze methane mitigation across the supply chain. They can take a combination of the following actions:

1. Committing to only purchasing low-methane leakage gas by no later than 2030.
2. Piloting transactions of low-methane leakage gas in the next 12 months.
3. Engaging with supply-chain stakeholders to identify key barriers to purchasing low-methane leakage gas and co-develop effective solutions.
4. Advocating for the inclusion of methane leak reduction targets and accurate differentiated claims mechanisms across standards, organizational goals, and other accountability systems.

Direct gas buyers are not the only ones who can act. All companies producing or selling goods and services can cut their embodied methane emissions. They, too, should seize this opportunity to minimize their overall climate risks, especially as Scope 3 reporting gains momentum. As buyer adoption grows, regional gas suppliers that have not yet certified their production will have even more of a reason to get on board and demonstrate their methane performance. Complementing evolving regulations with a strong differentiated gas market can provide a win-win solution for gas producers, gas consumers, communities, and the climate.

RMI is currently working with gas buyers and producers to achieve these goals. Any private or public organization interested in discussing how differentiated gas markets can be leveraged to achieve emissions reduction goals can reach out to Joe Fallurin (jfallurin@rmi.org) to discuss potential collaboration opportunities.

This article was made possible with support from Bloomberg Philanthropies. The article reflects the views of the authors and not necessarily those of the supporting organizations.