Methane Charges: The Inflation Reduction Act's Stick Hidden in the Carrots
The Situation: The Inflation Reduction Act ("IRA") imposes a charge on excess methane emissions from designated petroleum and natural gas facilities beginning January 1, 2024.
The Result: This first-ever federal charge, fee, or tax on greenhouse gas emissions will require calculation of baseline and excess methane emissions to identify emissions subject to the charge and analysis of whether any exemptions from the charge apply.
Looking Ahead: Future U.S. Environmental Protection Agency ("EPA") rulemakings on measuring methane emissions for baseline calculations, and on methane emissions limitations that may create a safe harbor from the charge for facilities that comply, will be critical to determining the financial impact of the charge.
Although the IRA, signed into law on August 16, 2022, primarily attempts to address climate change by creating a variety of tax incentives and funding mechanisms to encourage actions that reduce greenhouse gas emissions, there is one provision aimed at reducing methane emissions that takes an alternative approach by creating the federal government's first-ever charge, fee, or tax on greenhouse gas emissions. The IRA imposes the charge on certain natural gas and petroleum facilities for methane emissions occurring after January 1, 2024.
The IRA methane charge applies to petroleum and natural gas facilities already subject to greenhouse gas emission reporting under the existing EPA reporting regulations as defined in 40 C.F.R. Part 98, Subpart W. These facilities include offshore petroleum and natural gas production; onshore petroleum and natural gas production, gathering, and boosting; onshore natural gas processing, transmission compression, and transmission pipeline; underground natural gas storage; and LNG storage and import and export equipment. Natural gas distribution facilities and "other oil and gas combustion facilities" as defined in Subpart W are included in the reporting requirements but exempt from the methane charge. Facilities subject to reporting under other Subparts of the reporting rules, such as emissions from petroleum refineries, are not subject to the methane charge.
The charge applies only to applicable facilities that report more than 25,000 metric tons of carbon dioxide equivalent per year on their greenhouse gas emission reporting forms. The IRA requires that EPA revise Subpart W within two years to ensure that reported emissions "are based on empirical data," "accurately reflect the total methane emissions and waste emissions," and allow the submission of "empirical emissions data" to support the calculation of emission charges.
The first step in calculating the methane charge is to determine the applicable threshold below which the charge does not apply. The threshold varies based on the type of facility. For example, the threshold for methane emissions from onshore and offshore petroleum and natural gas production is an amount that exceeds 0.20% of the natural gas sent to sale from the facility or 10 metric tons of methane per million barrels of oil sent to sale from the facility if it sent no natural gas to sale. For nonproduction petroleum and natural gas systems, the threshold is 0.05% of the natural gas sent to sale from or through the facility. Finally, for onshore natural gas transmission compression or transmission pipeline or underground natural gas storage, the charge applies to methane emissions that exceed 0.11% of the natural gas sent to sale from or through the facility.
The second step is to compare the reported greenhouse gas emissions to the thresholds. If the reported emissions are greater than the threshold, then a charge must be paid for excess emissions. The IRA, however, allows for the "netting" of emissions among all facilities under common ownership or control. In other words, no charge will be required as long as all reported emissions for all facilities owned or operated by the same entity are under the aggregate threshold for all of those facilities, even if reported emissions at some individual facilities exceed the applicable threshold.
Once reported emissions in excess of applicable thresholds have been identified, the charge can be calculated. For emissions in calendar year 2024, the charge is $900 per metric ton. In 2025, the charge increases to $1,200 per metric ton. After January 1, 2026, the charge will be $1,500 per metric ton.
There are three exemptions in the IRA from the methane charge. The first is if the excess emissions are caused by "unreasonable delay" (as determined by EPA) in environmental permitting of gathering or transmission infrastructure "necessary for offtake of increased volume as a result of methane emissions mitigation implementation."
The second exemption from the methane charge is if the facility is in compliance with methane emission standards established by EPA under Section 111(b) or (d) of the Clean Air Act that are in effect in all states and such regulations achieve equivalent or greater emissions reductions compared to those set forth in the methane emission standards proposed by EPA in 2021. This exemption appears predicated on EPA promptly finalizing these methane emission standards in a manner that achieves equivalent or greater emissions reductions as the proposed rule.
According to EPA's regulatory agenda, EPA plans to issue a supplemental notice of proposed rulemaking in October 2022 and finalize a rule in May 2023. For this exemption to apply, there is limited time for this rulemaking schedule to slip, as final rules would need to be in place by January 1, 2024, when excess methane emissions will become subject to the charges. Such tight timing, however, does not take into account the amount of time that may be provided or needed to come into compliance with new standards. This will likely result in a period of time where the methane emissions charges are levied without the ability to rely on this second exemption.
The final exemption is for plugged wells. Under the IRA, the methane charge will not apply to any well that has been permanently shut in and plugged in the prior year in accordance with applicable closure requirements, as determined by EPA. How EPA will determine if a well is permanently plugged if state standards are followed is currently unclear.
In addition to the methane charge program—and in keeping with the more affirmative financial incentives in other IRA sections—the IRA includes $850 million in funding for grants, rebates, contracts, loans, and other EPA implementation efforts. These funds can be used for activities such as financial assistance to facilities to prepare and submit greenhouse gas reports, methane emissions monitoring, and financial and technical assistance to reduce methane emissions from petroleum and natural gas systems. The IRA provides an additional $700 million in funding for these activities at marginal conventional wells. The funding is available until September 30, 2028.
In preparation for the imposition of the methane charge for emissions after January 1, 2024, EPA has a number of rulemaking activities in front of it. First, the methane emission rule proposed in 2021 will need to be finalized to provide the safe harbor for exemption from the charge. In addition, EPA will need to revisit the greenhouse gas reporting rules for petroleum and natural gas systems to make sure they are based on "empirical data." EPA may also provide additional regulations or guidance regarding the unreasonable permitting delay and plugged well exemptions.
Facilities potentially subject to the charge may want to consider developing a preliminary compliance strategy by: (i) determining if they are likely to be above the IRA methane emissions thresholds based on prior greenhouse gas emissions reports; (ii) analyzing opportunities for netting of emissions across multiple facilities under common ownership or control; and (iii) considering methane emissions mitigation strategies as warranted. Such facilities should also closely monitor EPA's further methane emission standards rulemaking.
Three Key Takeaways
- The methane charge is one of the few provisions of the Inflation Reduction Act to impose a negative financial consequence for greenhouse gas emissions.
- Measuring methane emissions will be key, and the U.S. EPA has two years to revisit its regulations for measuring methane emissions from petroleum and natural gas facilities to make sure they are based on "empirical data."
- The exemption from the charge for methane emissions in compliance with federal standards means that finalizing the 2021 proposed methane rule will be critical.
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