Natural gas flares as oil is pumped in the Bakken shale formation
Beginning in 2024, the law imposes a charge of $900 a tonne of methane emitted by oil and gas companies from wells, pipelines, LNG terminals and other facilities, rising to $1,500 a tonne after two years © Jim West/Alamy

The landmark climate law signed by US president Joe Biden last month contains billions of dollars of financial carrots to reward investment in clean energy. The lone stick has been less heralded: a first-of-its kind fee on leaks of methane from the oil and gas sector.

Methane traps 80 times more heat in the atmosphere than carbon dioxide over a 20-year period, making it a driver of climate change. In the US, the energy sector is the single largest source of methane emissions.

The fee established by the Inflation Reduction Act marks the US’s first nationwide price on a greenhouse gas, as efforts to tax CO₂ fizzle. Oil lobbies were quick to condemn it.

“Fundamentally, we don’t think the government should raise taxes, particularly in the middle of a recession. And in the middle of a global energy crisis,” said Frank Macchiarola, senior vice-president at the American Petroleum Institute.

Bar chart of Ranked by emissions, 2020 showing Top 10 methane emitters in US oil and gas industry

Beginning in 2024, the law imposes a charge of $900 a tonne of methane emitted by oil and gas companies from wells, pipelines, liquefied natural gas terminals and other facilities. After two years the fee rises to $1,500 a tonne.

The fee has the potential to cut total US methane pollution by nearly a fifth at the end of the decade as compared to 2020 levels, according to a University of Maryland study released this week. The US under the Biden administration has committed to a 30 per cent reduction by 2030.

“Having this sort of Congressional law is the gold standard for emissions reduction,” said Nathan Hultman, director of the University of Maryland’s Center for Global Sustainability and a former policy adviser in the Biden administration and that of Barack Obama.

The Congressional Budget Office estimates the fees will bring in revenues of more than $6bn by the end of the decade. Yet the breadth of the fee programme falls short of many environmentalists’ goals. Exemptions were carved out during months of negotiations between Senator Joe Manchin, the conservative Democrat representing West Virginia, which is a big hydrocarbon producer; and Delaware’s Tom Carper, chair of the Senate Environment and Public Works committee.

Tom Carper
US senator Tom Carper called the methane fee the result of a ‘compromise’ © Greg Nash/The Hill/Bloomberg

The smallest producers — those estimated to emit less than the CO₂ equivalent of 25,000 tonnes of a year — will be exempted from the fee. That could exclude as much as 60 per cent of industry emissions, according to a report by the Congressional Research Service.

Another clause exempts operators that are deemed to already be in compliance with parallel regulations that are pending from the Environmental Protection Agency. The bill also grants emitters more than $1.5bn to help clean up, effectively subsidising laggards.

“Joe Manchin and I are practical politicians,” Carper told the Financial Times.

“I wanted to make sure at the end of the day that we addressed a source of greenhouse gas emissions 80 times more potent than CO₂,” he said. “He wanted to make sure that we didn’t needlessly put out of business those who are interested in doing the right thing — committed to doing right — and we came to this compromise.”

Analysts said that the fee’s cost to producers would be limited. A study by S&P Global Commodities found it would add about 50 cents to the $45-a-barrel oil price that many US producers need to break even.

Shell, the UK-based oil major with assets in the US, said it supported the fee approach “because it incentivises industry to do more. Lawmakers listened carefully in crafting a bill that is not duplicative of current or potential future regulations but could lead to meaningful methane emissions reductions not covered by current laws.”

However, Lee Fuller at the Independent Petroleum Association of America, which represents big and small oil and gas producers, said the administration was going after them while turning a blind eye to emissions from agriculture, another significant source of methane.

“This is really just targeting our industry for purposes of targeting our industry — as a way to try to further argue that oil and natural gas is a bad product,” he said.

Bar chart of Per cent of total showing The energy sector is the biggest contributor to US methane emissions

The smallest producers cautiously welcomed the exemption for emissions below 25,000 tonnes CO₂ equivalent, but fretted over a lack of detail as to how the cut-off would be defined and calculated.

“We understood clearly from Senator Manchin that he made it clear that he wanted the smaller producers to be exempt,” said Nick Powell, chief executive of Kansas-based Colt Energy and head of the National Stripper Well Association. “So the question gets to be . . . what do we have to do to prove that we’re exempt?”

The amount of emissions will also depend on how the EPA interprets the law and how the fee meshes with other regulations. Hultman at the University of Maryland estimated methane leaks could decline in a range of 6 per cent to 19 per cent by the end of the decade as a result of the legislation.

Environmentalists said the fee draws a line under years of regulatory chop and change as different presidential administrations imposed and then tore up methane rules. Rules brought in under Obama were torn up by Donald Trump before being reinstated.

A recent Supreme Court ruling curbing the ability of the EPA to limit carbon emissions from power plants also underlined the vulnerability of regulations to judicial review.

“It ultimately does no good for society or for business to have policies that radically yin and yang back and forth,” said Mark Brownstein, senior vice-president of energy at the Environmental Defense Fund. “If there was any doubt in the mind of folks in industry, if there was any doubt in the mind of jurists down the line, it is clear now Congress has spoken.”

Climate Capital

Where climate change meets business, markets and politics. Explore the FT’s coverage here.

Are you curious about the FT’s environmental sustainability commitments? Find out more about our science-based targets here

Copyright The Financial Times Limited 2022. All rights reserved.
Reuse this content (opens in new window) CommentsJump to comments section

Follow the topics in this article