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Methane Charges: The Inflation Reduction Act’s Stick Hidden In The Carrots – Climate Change


In Short

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

  1. The methane charge is one of the few provisions of the
    Inflation Reduction Act to impose a negative financial consequence
    for greenhouse gas emissions.

  2. 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.”

  3. The exemption from the charge for methane emissions in
    compliance with federal standards means that finalizing the 2021
    proposed methane rule will be critical.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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