New methane tax more a regulation aimed at curbing emissions than a revenue raiser
Energize Weekly, September 14, 2022
A methane tax in the Inflation Reduction Act will likely serve more as a regulation than a revenue raiser, spurring oil and gas operations to cut down on fugitive emissions to save dollars, according to an analysis by industry consultant Enverus.
The tax will also target private operators, who have not been as much a focus of emission reduction programs as publicly traded companies.
The tax covers oil and gas operations – including production, transmission, processing, storage and gathering – that emit more than 25,000 metric tons of carbon dioxide equivalent (CO2e) annually.
These facilities have to report their emissions to the federal Environmental Protection Agency (EPA) annually.
In 2020, 2,377 facilities met this criterion, collectively reporting 316 million metric tons CO2e emissions, including 81.8 million tons of carbon equivalent methane.
“The methane charge proposal has received considerable attention from Members [of Congress] and a range of stakeholders,” the Congressional Research Service said in an August report on the legislation. “For example, some groups have raised concerns about economic impacts resulting from the methane charge, including impacts on natural gas prices.”
Methane – the largest component of natural gas – is a highly potent greenhouse gas with 30 times the heat-trapping effectiveness over 100 years as carbon dioxide. The tax would be imposed any fugitive emission above 0.2 percent of the natural gas sold.
Oil and gas operators would pay $900 per ton of methane emitted in 2024, increasing to $1,200 per ton in 2025 and $1,500 per ton in 2026.
If steps to reduce methane emissions are not taken before 2024, the financial impact of the methane tax on the U.S. upstream and midstream sectors will be about $1.2 billion annually, increasing to $2 billion annually once the maximum rate activates, Enverus projects.
Still, the broader impact will be in changing company behavior rather than raising revenue.
“We see it as a form of regulation rather than taxation,” Nick Volkmer, Enverus vice president for environment, social responsibility and corporate government (ESG) analysis, said in an interview. “The impact is going to be an operation changing rather than an ongoing revenue stream.”
The majority of methane emissions – 56 percent – come from pneumatic controllers, devices using methane to open and close valves or turn equipment on and off, Volkmer said.
“For companies outside the 0.2 percent threshold, the easiest thing they can do is replace pneumatic controllers,” Volkmer said. “The cost of replacing pneumatic controllers is equal to the cost of one year’s tax.”
The Congressional Budget Office projects the estimated gross revenue from the methane charge peaking in fiscal year 2028 at just under $1.9 billion and then declining to $667 million by fiscal year 2031 as emissions decline.
Volkmer said that 70 percent of the annual gas sales fall below the 0.2 percent threshold and would not be subject to the tax, and of remaining 30 percent of sales, private operators account for more than half.
“There’s been more pressure on public companies on ESG and emissions, and public companies have been more focused on emission reduction initiatives,” Volkmer said.
“The private companies tend to own the older, lower-producing assets, which tend to have higher emissions per unit of production,” Volkmer said. The tax is going to be a prod to those private companies. “That 30 percent is going to come down over the next three years.”
One of the big issues is how methane reporting is going to evolve. Companies are now using a variety of techniques to report their greenhouse gas emissions to the EPA, but with a tax now involved, reporting will have to become more uniform, Volkmer said.
“We are going to see a mix of more standardized reporting and more verification,” Volkmer said.
In addition to the methane tax, the new law creates the Methane Emissions Reduction Program to provide $850 million in incentives for the oil and gas industry to monitor and reduce their methane emissions and another $700 million incentives specifically for owners and operators of old, conventional wells.