The Inflation Reduction Act (IRA) offers tax credits to advance clean-energy initiatives and reduce greenhouse gas (GHG) emissions. While there are incentives for everything from carbon capture through electric vehicles to renewable energy and hydrogen production, there are some penalties. The federal government’s first-ever greenhouse gas (GHG) emission fee is part of the new law’s Methane Emissions Reduction Program (MERP). Today, we’ll discuss these efforts to reduce methane emissions, how the new charge will function and may change over time, and other implications of the IRA.
Previous attempts
In 2016, the U.S. Environmental Protection Agency (EPA) used New Source Performance Standards (NSPS) to limit methane emissions from new oil and natural gas facilities, including production, processing, transportation, and storage. The EPA estimated the rules would reduce methane emissions by 11 million metric tons of CO2 equivalent by 2025. EPA regulations relating to existing facilities’ pollution were in the works when President Trump took office in 2017 and halted them. They were finally revoked in 2020 as part of the Trump administration’s review. President Biden reverted the approach to methane regulations to its original course. That same year, Congress passed a resolution reaffirming the NSPS regulations, and the EPA subsequently announced plans to establish rules for existing facilities in November 2021. However, that proposal has not been finalized, and meanwhile, the IRA has been passed.
IRA’s Methane Emissions Reduction Program
MERP’s key element is the methane emissions charge, which the EPA can collect from certain oil and natural gas entities. The methane charge applies to oil and gas facilities with annual methane emissions of at least 25,000 metric tons of CO2 equivalent. Based on this criteria, EPA’s GHG Reporting Program requires about 8,000 facilities to report their GHG emissions annually along with GHG emission source, fuel, and other data. Under the IRA, facilities are charged based on their GHGRP emissions, as described above, as well as an emissions threshold that varies by facility type and as described below:
- Facilities that produce oil and natural gas must limit methane emissions to 0.2% of the natural gas they sell.
- Facilities that gather and boost natural gas must pay a charge if their methane emissions exceed 0.05% of the natural gas they sell.
- A charge applies to methane emissions that exceed 0.11% of the natural gas sent for sale in transmission facilities.
While natural gas distribution facilities are not subject to the new methane charge, it is essential to note that these facilities were responsible for 13 million metric tons of CO2 equivalent of emissions in 2019 and would have ranked as the third largest emitters, according to the EPA.
Starting at $900 per metric ton (MT) in 2024 and rising to $1,200/MT in 2025 and $1,500/MT in 2026, the methane emissions charge will be applied based on 2024 emissions data starting in 2025, with the first revenue appearing in 2026. Only facilities meeting the criteria noted above will be subject to the charge. According to Congressional Budget Office (CBO) estimates, in 2026, 1.3 million MT of methane will be subject to the fee, resulting in $1.1 billion in gross revenue. The Congressional Research Service (CRS) says that gross revenue from the methane emissions levy will peak at about $1.9 billion in FY2028, as shown in Exhibit I, before dropping as methane emissions decrease.
Exhibit I: Estimated gross revenue from MERP as estimated by the Congressional Research Service.
There is a way to avoid IRA’s methane charge, but it requires cooperation with the EPA. In case all states comply with future EPA methane emissions regulations and achieve equivalent or higher emissions reduction than that achieved by the EPA’s proposed rule of November 2021, the IRA allows for an exemption from the emissions charge. Although IRA regulations are strict, a waiver would be granted if new EPA rules are also equally or more severe. The methane charge will return if the new regulations no longer apply to a covered facility, such as with a policy change under a future administration.
Incentives, improvements, and energy transition
Facilities may want to upgrade their equipment and operations to reduce methane emissions to avoid the charge by meeting the required emission level. Because natural gas prices have been so high in recent months, oil and gas producers can either sell the natural gas they capture or keep from leaking. Capture systems can often be economical if such sales offset emissions reductions.
The $850 million allocated to the EPA in the IRA for reducing methane emissions includes providing grants to facilities subject to the methane charge for various purposes, including “improving and deploying industrial equipment and processes.” Furthermore, the cost would be reduced by the $700 million allocated to conventional marginal wells to achieve the same goals because those marginal wells account for a disproportionately large share of emissions.
Conceptually, the IRA’s MERP should help oil & gas operators cut emissions and improve the environmental and sustainability competitiveness of the natural gas value chain in the U.S. However, ADI’s research shows that a number of oil & gas operators in the upstream and midstream sector are likely to comply easily with the threshold values set by the IRA and EPA.
The EPA’s process and methodology to identify emitting sites, emission factors used to compute emissions, and threshold values have historically been far too accommodating on methane emissions. That, coupled with the significant progress a number of oil & gas operators have made in the past couple of years, is collectively unlikely to subject a number of facilities across the oil & gas value chain to the IRA’s methane emission penalties.
In comparison, the voluntary commitments made by oil & gas operators, LNG buyers’ demand for certified and responsibly-sourced natural gas, and regulations already in place in some states may be larger drivers for driving methane fugitive emissions down. According to the Colorado Oil & Gas Association, methane emissions in Colorado’s Front Range have dropped by 72 percent since 2015. According to data from the U.S. Energy Information Administration, this development has occurred concurrently with an increase in oil production of roughly one-third. Even so, the IRA MERP may further accelerate innovation in developing new technologies, equipment, and tools that will help operators cut methane emissions.
At ADI Analytics, we follow energy policies carefully. Consider subscribing to our newsletter to stay up to date with the latest industry insights.
-Manuel Diaz