Inflation Reduction Act Adds First-time Charge for Methane Emissions for the Oil and Gas Sector

On August 16, President Biden signed the Inflation Reduction Act (the “IRA”) into law. While much of the focus on the IRA’s climate change-related provisions has been on tax incentives for clean energy and carbon capture, the bill also establishes a program to reduce methane emissions from the oil and gas sector. The IRA’s Methane Emission Reduction Program imposes a first-time federal fee on methane emissions. In general, covered facilities that emit 25,000 metric tons carbon dioxide equivalent (“CO2e”) or more per year will be required to pay for “excess” methane emissions, with the fee starting at $900 per metric ton in 2024, and increasing to $1,500 per metric ton by 2026. The Congressional Budget Office estimates that the methane fee will generate gross revenue of approximately $1.1 billion in fiscal year 2026, peaking at approximately $1.9 billion in fiscal year 2028.

The Methane Emission Reduction Program builds on the Environmental Protection Agency’s (“EPA”) existing Greenhouse Gas Reporting Program (“GHGRP”).¹ Approximately 8,000 petroleum and natural gas facilities are required to report their annual emissions under the GHGRP; however, the IRA excludes certain facilities covered by the GHGRP including local natural gas distribution facilities. The following facilities covered by the GHGRP are subject to the IRA’s methane fee:

• offshore petroleum and natural gas production;
• onshore petroleum and natural gas production;
• onshore natural gas processing;
• onshore natural gas transmission compression;
• underground natural gas storage;
• liquefied natural gas storage;
• liquefied natural gas import and export equipment;
• onshore petroleum and natural gas gathering and boosting; and
• onshore natural gas transmission pipelines.

The calculation of the methane fee is determined by (1) the facility’s reported emissions under the GHGRP, and (2) an emissions threshold that varies by facility type:

• for offshore and onshore petroleum and natural gas production facilities, the fee applies to the number of reported tons of methane that exceed (i) 0.2% of the natural gas sent to sale from the facility, or (ii) if the facility sent no natural gas to sale, 10 million metric tons of methane per 1 million barrels of oil sent to sale from the facility;
• for nonproduction petroleum and natural gas facilities, such as gathering and boosting facilities, the fee applies to methane emissions that exceed 0.05% of the natural gas sent for sale from or through the facility; and
• for natural gas transmission facilities, the fee applies to methane emissions that exceed 0.11% of the natural gas sent for sale from or through the facility.

Facilities under common ownership or control may net emissions to account for facility emissions that are below the applicable thresholds within and across applicable segments.

In addition, the IRA provides a conditional exemption for facilities that are subject to, and in compliance with, applicable methane regulations. While, to date, no such regulations have been finalized, the EPA proposed applicable standards in November 2021, “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. 5, 2021). The IRA allows for an exemption from the emissions fee if future, final EPA regulations addressing methane emissions (1) are in effect in all states, and (2) would “result in equivalent or greater emissions reductions as would be achieved” by the November 2021 proposed rule.

Finally, the IRA includes supplemental appropriations of $850 million to EPA to provide grants, rebates, loans and other assistance to facilities subject to the methane charge for a range of objectives, including “improving and deploying industrial equipment and processes” that reduce methane emission, and $700 million for “marginal conventional wells” for the same purposes.

For further information on the major changes made by the IRA to the tax credits available to clean energy technologies see our client alert here.

¹40 C.F.R. Part 98. Subpart W.