Policy: Methane Waste-Emissions Charge

With over a third of all industrial methane emissions in the United States, the energy sector is the largest industrial emitter in this country. Section 60113(c) of The Inflation Reduction Act of 2022 aims to reduce fugitive methane emissions from the oil and gas industry by introducing the first federal greenhouse gas tax in US history. The methane fee is designed to encourage natural gas producers to reduce emissions by utilizing better equipment, improving monitoring capabilities, and plugging up leaking wells. Over a 20 year period, methane has 80 times the heat-trapping capacity as carbon dioxide. Cutting methane emissions from lost gas, therefore, is the “low hanging fruit” of climate action; relative to other abatement measures, addressing “lost gas” emissions is cheap, effective and technologically feasible. The fee is emblematic of a prudent, market-based policy that can achieve significant environmental and economic gains; economist Levi Marks found that “pricing methane emissions would generate substantial net social benefits…a relatively modest emissions tax equivalent to a $5 carbon price would decrease emissions by 60%, achieving about $1.8 billion annually in avoided cli-mate damages at a net cost of about $50 million per year." This essay discusses the background and benefits of the methane fee, the avenues to strengthen its impact, and the potential roadblocks it may face in the future.

In the vacuum of robust regulations, oil and gas facilities spew out 32% of total methane emissions annually. During drilling, production, processing, and transporting operations, producers may deliberately vent or flare gas for economic, safety, or operational reasons. Because of equipment failures and/or operational mistakes, there are also unintentional leaks across the supply chain. These fugitive emissions are troubling, not least because they are detrimental to human and environmental health, but also because they are wasteful. According to the Environmental Defense Fund, economically speaking, over $30 billion of global gas supply is lost annually. These losses also represent a needless loss of lucrative, nonrenewable resources. From a regulatory standpoint, much of this is overlooked due to the fact that “wasted gas” statutes were written before the advent of directional drilling techniques. And, despite the fact that Congress has power to regulate hydraulic fracturing production under the Commerce Clause of the U.S. Constitution, states have retained primacy in industry regulations.

Oil and Gas flaring

With regard to monitoring, firms self-report on a voluntary basis, and there is no federal source on state-by-state methane emissions. Emissions are also colorless, odorless, and leaked and vented across long supply chains. Given that emissions are often too cryptic to measure directly, the EPA uses formula-based engineering methods that rely on component-level factors to estimate GHG inventories. Because of operational abnormalities, though, emissions are approximately 60% higher than the EPA’s Greenhouse Gas Reporting Initiative projections. Albeit the urgency of the methane problem, regulations and oversight have been historically lax.

Methane emissions from the oil and gas sector are also high due to a lack of economic incentives. Methane emissions are an example of externalities, or external effects of a transaction that are not reflected in market prices. In the case of negative externalities, the optimal price for producers is incongruous with the optimal price for society, thereby generating a market failure. Methane has a high social cost, meaning that there is a significant amount of harm inflicted upon society with a marginal increase in emissions. According to the Interagency Working Group on the Social Cost of Greenhouse Gases, each ton of methane leaked can trap enough heat to cause $1,500 worth of damage to crops, worker productivity, property, and societies when disasters trigger mass migration. Unsurprisingly, then, a study by Resources for the Future found that the private incentive for oil and gas facilities to trap methane measures up to only 1/10th of its social costs. The result of the under-regulation of the industry, and the resulting external costs to society, is that methane emissions are rising precipitously and shutting the window of opportunity to address climate change.

Source: Environmental Protection Agency

The methane fee included in the IRA aims to reduce atmospheric methane concentrations by forcing polluters to pay the cost of fugitive emissions. The IRA relies on the Clean Air Act’s regulatory scheme to target facilities under subpart W of part 98 of title 40 of the Code of Federal Regulations. The Methane Emissions Reduction Program creates a price for each ton of methane emitted above a waste emissions threshold. The fee, which starts at $900 per metric ton of methane, increasing to $1,500 after two years, applies to facilities that have annual reported methane emissions exceeding facilities that must have annual reported methane emissions exceeding 25,000 metric tons of carbon dioxide equivalent. The fee takes effect in 2023 and applies only to methane leakage in excess of 0.2 percent for oil and gas production, 0.11 percent for natural gas transmission, and 0.05 percent for other oil and natural gas systems. In economic terms, the fee will redress environmental externalities by forcing firms to select leakage rates that set the marginal cost of keeping one unit of gas equal to the commodity value of that unit of gas, plus the avoided emissions tax. The fee will hold polluters accountable for their emissions, and internalize the external social and environmental costs of needless methane emissions.

While the fee is a significant step toward meeting U.S. climate goals, there are several caveats that could undermine its efficacy. Marginal wells, or those that produce less than 15 barrels of oil equivalent per day, are exempted from the fee. Yet, these wells are not marginal as their name suggests. A study published by Nature Communications found that “low-producing oil and gas wells are responsible for approximately half of the methane emitted from all well sites in the United States while accounting for only 6% of the nation’s oil and gas production.” It is clear that the methane fee could have much more impact.

To give the fee real teeth, the EPA should lower its emissions threshold for reporting and impose more accurate measurement protocols. In terms of thresholds, a study by Resources for the Future explained, “Regulation may be warranted if small, marginal wells are at least as likely to be super-emitters as larger wells, since one could expect regulation of such wells to yield larger benefits." To illustrate, Colorado already has methane emissions protocols that address low-producing wells. In 2019, Colorado’s Air Quality Control Committee banned routine flaring, required valve retrofitting, and ordered semiannual leak detection for facilities of all sizes. Since then, Colorado emissions have remained fairly consistent, despite increases in oil and natural gas production. The EPA should look to Colorado if it seeks to meaningfully reduce emissions from facilities of all sizes.

With regard to measurements, the EPA ought to replace the engineering-approach with empirical, measurement-based data that accurately catalogs methane emissions from leaks, vents and flares. One way to achieve this is by increasing the deployment of continuous emission monitoring systems, which provide the necessary high resolution data to accurately quantify emissions. Innovative technologies, like satellite, aerial and ground sensors, have great potential for measuring methane leaks. Federal agencies, such as NASA, NOAA, the Department of Energy, and the Environmental Protection Agency should work in concert with the private sector to encourage the research and development of improved monitoring technologies. Even if such technologies are currently cost-prohibitive for some firms, “intermittent sampling by sensors mounted on aircraft or ground vehicles may be feasible today or in the very near future." Because emissions tend to be underestimated, another strategy would be to multiply the emissions factors by a factor greater than one to increase accuracy. The confluence of these recommendations could yield much greater reductions for the proposed methane fee.

While the scope of the fee has been disappointing for staunch environmentalists, implementing penalties and increased regulations will not come without scrutiny from state governments and industry leaders. Production states like Texas vehemently opposed Obama era efforts to expand regulatory oversight over methane, arguing that policies would be better formulated under local conditions. If history precedes itself, oil rich states will sue the EPA and hinder any further regulations on methane. Likewise, industry groups are already protesting the EPA’s increased purview over natural gas production. Operators contend that smaller wells emit negligible emissions; even if they did, they argue, such facilities lack the resources to monitor their wells appropriately.

When considering the cost-effectiveness and environmental efficiency of methane mitigation, however, it is clear that omitting marginal wells from the methane fee is inappropriate. Despite pushback, oil and gas companies should welcome stricter methane regulations. In terms of cost-effectiveness, the International Energy Agency estimates that ¾ of total methane emissions from oil and gas operations are avoidable with available technologies; moreover, since the captured gas can be sold, an estimated 40% of total emissions could be avoided at no net cost. Last, although marginal well operators may claim that they lack the resources, research has found that three-quarters of marginal wells are “owned by large companies who operate over a hundred different facilities each and have ample resources (average revenue of $335M in 2019) to avoid needless pollution." There is no reason that certain emissions should go untaxed.

In terms of environmental efficiency, reducing methane emissions is of utmost importance if the U.S. is to hamper the rate of climate change. Methane reductions can produce results in our lifetimes, and is the single most impactful and cost-effective strategy to limit the earth to 1.5˚C of warming. The policy is expected to yield many environmental benefits; an analysis from Energy Innovation found that by 2050, the fee will have prevented 172 million metric tons of carbon dioxide equivalent annually, equal to the annual emissions from more than 36 million gasoline-powered vehicles. In monetary terms, the value of avoided future climate damages squares up to approximately $1.77 billion per year. Enforcing and expanding methane regulations clearly represents the best opportunity for climate change mitigation.

The short-term potency of methane, in tandem with its low-cost abatement measures, render methane mitigation a “low-hanging fruit” on the climate action tree. Within the oil and gas sector, the technology to reduce emissions is already readily available, and mitigation models show that doing so is cost-effective and environmentally efficient. The federal government is well-advised in its decision to tax prodigal methane emissions, however, further actions are needed to increase the efficacy of the proposed policy. In order to bear the full fruit of the methane fee, the Environmental Protection Agency should expand its scope of regulation to include marginal wells. Moreover, the federal government and its agencies, such as the National Aeronautic Space Administration, the National Oceanic and Atmospheric Administration, the Department of Energy, and the Environmental Protection Agency should work in concert with the private sector to encourage, develop and improve monitoring capabilities and technologies. With an increased purview of the oil and gas industry, as well as the mechanisms to internalize emissions costs, the US will be well positioned to decrease emissions and stabilize the climate.