Climate Change > Speaking Sustainability > The Inflation Reduction Act Applies the Polluter Pays Principal: Carbon Tax Will Accelerate Reduction of Methane Emissions
19 Sep '22

The Inflation Reduction Act (“IRA”) includes a variety of incentives, including tax credits and grants, for US industries to reduce greenhouse gas (“GHG”) emissions. The IRA also includes a significant “disincentive” for emitting methane from certain oil and gas facilities, namely the Methane Emissions Reduction Program which includes a methane waste emissions charge (“methane fee”) that will become effective January 1, 2024.  The 2021 Global Methane Assessment recognized that, as described by the Institute for Governance and Sustainable Development, “aggressively cutting methane emissions is the fastest and most effective way to reduce the rate of warming and keep the global average temperature from breaching the 1.5°C barrier above preindustrial levels.”

The methane fee will apply to specific petroleum and natural gas facilities that currently are required to report methane and other GHG emissions to the Environmental Protection Agency’s Greenhouse Gas Reporting Program (“GHGRP”). The GHGRP—codified at 40 C.F.R. Part 98 Subpart W—defines which facilities the methane fee will apply. Those facilities include (1) offshore petroleum and natural gas production facilities, (2) onshore petroleum and natural gas production facilities, (3) onshore natural gas processing facilities, (4) onshore natural gas transmission compression facilities, (5) underground natural gas storage facilities, (6) liquefied natural gas storage facilities, (7) liquefied natural gas import and export equipment facilities, (8) onshore petroleum and natural gas gathering and boosting facilities, and (9) onshore natural gas transmission pipelines.

The methane fee essentially is a “carbon tax” that the United States is applying to methane emissions. The legislation builds upon prior federal regulation of methane emissions set by EPA’s methane New Source Performance Standards (“NSPS”) and proposed regulations. The current methane NSPS aim to control methane emissions from new or updated facilities associated with production, processing, transmission, and storage of oil and natural gas.

The new fees apply to a facility’s emissions in exceedance of 25,000 metric tons carbon dioxide equivalent (“CO2e”). The fees for these emissions will begin at $900 per metric ton of methane emitted in 2024 and will increase to $1,200 in 2025, and $1,500 in 2026. To calculate methane waste emissions, facilities will apply applicable emissions thresholds. For petroleum and natural gas production facilities, the threshold is emissions exceeding 0.2% of the natural gas sent to sale from the facility. If a petroleum and natural gas production facility emits more than 0.2% of the amount of natural gas the facility sends for sale in 2024, the facility will be charged a fee of $900 per metric ton of methane emitted above that threshold. This fee will increase in subsequent years, and the same type of calculations would apply to nonproduction facilities (which have a threshold of methane emissions exceeding 0.05% of the natural gas sent for sale from the facility) and natural gas transmission facilities (which have a threshold of methane emissions exceeding 0.11% of the natural gas sent for sale from the facility).

A Congressional Research Service report estimates that 2,172 facilities will be subject to the methane fee. In a hat tip to the impacted industry, the IRA also authorizes EPA to appropriate $850 million in grants to facilities subject to the fee to meet a range of objectives, including “improving and deploying industrial equipment and processes” that reduce methane emissions, which may reduce emissions from a facility below the threshold. The methane fee ultimately may be waived for a facility if (1) EPA adopts its proposed rule for Standards of Performance for New, Reconstructed, and Modified Sources and Emissions Guidelines for Existing Sources: Oil and Natural Gas Sector Climate Review, 86 Fed. Reg. 63110 (Nov. 15, 2021), or other regulations that will result in equivalent or greater emissions reductions, and  (2) such regulations are then adopted in the implementation plans of the states where those facilities sit.  If EPA’s regulations and the applicable state implementation plans are not in effect by January 1, 2024, the source category facilities in those states will be subject to the methane fee. In the meantime, facilities that anticipate being subject to the methane fee may wish to accelerate action to reduce methane waste emissions below their respective threshold level and avoid the fee altogether.