Leakage and Welfare under the EU Methane Regulation
An asset-level evaluation for crude oil imports · Working Paper (France d'Agrain)
Abstract
Unilateral environmental policy on a tradable commodity raises the classic concern that emissions are displaced rather than eliminated. From 2030, EU Regulation 2024/1787 will exclude crude oil imports above a maximum methane-intensity threshold, a binary, partial-coverage standard imposed on a globally fungible commodity. Using an asset-level model of global oil trade calibrated to over 14,000 deposits, with endogenous abatement and route-specific transport, I find that the standard cleans the EU import basket but has little effect on the atmosphere, because the methane it could remove leaks back almost entirely, at a rate near 0.98. A Shapley decomposition splits this leakage into two channels of similar size: crude rerouted to unregulated buyers, and high-methane crude refined abroad and returned to the EU as product. The abatement the policy could induce is cheap and welfare-improving on its own, but the reshuffling it sets off turns the net effect negative. The import standard is equivalent to a methane price of barely a dollar a tonne. At that same level of abatement, an explicit content price raises EU welfare where the standard lowers it. The near-complete leakage is robust to oil-market power: it persists when the market equilibrium is re-solved with a strategic cartel of Gulf OPEC producers facing a competitive fringe.
Topics
EU Methane Regulation (EU Regulation 2024/1787) · methane-intensity import standard · carbon and methane leakage · methane abatement economics · crude oil imports and trade · welfare analysis · content-based carbon pricing · energy and environmental economics.