Blog Post

The Agency vs. the Industry: Who’s Got It Right on Methane?

Aug 25, 2015 | Alan J. Krupnick

Last week, the US Environmental Protection Agency (EPA) issued its proposed rules for reducing methane from new and modified oil and natural gas wells, processes, pipelines, and storage facilities. The agency’s goal is to cut emissions of methane, a greenhouse gas, from the oil and gas sector by 40 to 45 percent from 2012 levels by 2025. These rules, however, were attacked out of the gate by the American Petroleum Institute (API). The charges: they are duplicative of ongoing industry practices, costly, and unnecessary.

Below I offer some perspectives on these charges, and provide further discussion in the paragraphs that follow.

  • First, despite industry claims about the rule not being needed, the social benefits justify the costs. Not only are greenhouse gases being reduced, but so are other hazardous air pollutants.
  • Second, costs to the industry may well be lower than predicted, largely because EPA has allowed for much cost-saving flexibility. Nevertheless, even though the industry has done a good job voluntarily bringing down its levels of methane emissions, there is more to do. The job may be bigger than anticipated from EPA’s greenhouse gas inventories.
  • Finally, both the industry and the agency should be thinking ahead to the possibilities of a variety of trading or “bubble” programs, when methane monitoring technology improves.

The top-level question that should be asked is whether these rules offer society greater benefits than costs. According to EPA’s regulatory impact assessment (RIA), net benefits are positive. Note that I restricted my purview to the New Source Performance Standard (NSPS) rules. The RIA counts the benefits of methane reduction from reducing greenhouse gas emissions (valued at around $45 per ton based on the potency of methane as a greenhouse gas relative to carbon dioxide (CO2, termed CO2e) and the administration’s social cost of carbon), subtracts out the engineering costs of the rules over an estimate of what the industry would otherwise be doing, and adds the value of any natural gas the industry would capture that would otherwise have leaked away. Overall and on a per ton basis, according to the RIA, the rules cost $40 per ton whereas the benefits are a bit higher, so net benefits are around $8 per ton of CO2e emissions. Excluded from the calculation are the reductions of emissions of volatile organic compounds, which could fairly be allocated some of the costs of the rule. These are also important because these reductions would help lower the costs of meeting ozone standards. Also not counted are ancillary benefits from reducing hazardous air pollutants. So, the rules benefit society.

How about impacts on the oil and gas sector? The industry argument is that voluntary reductions in methane are working very well already, so it makes no sense to regulate these emissions. Methane emissions do seem to be on a downward trend and the industry is to be applauded for that. However, there is increasing concern that EPA inventories consistently underestimate overall methane emissions; so the job is larger than we thought. Further, because the current program is voluntary, it is likely that not everyone is doing all they can to reduce methane—if they’re doing anything at all that fails their own benefit-cost test.

Remember that EPA’s proposed rules are only for new and modified wells and infrastructure, and will not require firms to retrofit existing wells and equipment, which would be more costly. Think about what it costs to build a new house according to a new plumbing code versus retrofitting an existing house for the new code. Even so, if companies are trying to reduce methane from new wells already, surely much of these costs attributed to the new regulation will be expended even without regulation; EPA’s cost estimate may be too high.

How large the costs to the industry would be is also partly dependent on the extent to which EPA’s regulations are technology specific. In general, NSPS regulations are performance based, so this means the industry would have flexibility in responding and much of what they would already want to do would meet the standard. The following passage from the proposed rule is a great example of how open EPA is to this:

“To encourage companies to continue such good corporate policies and encourage advancement in the technology and practices, we solicit comment on criteria we can use to determine whether and under what conditions well sites operating under corporate fugitive monitoring programs can be deemed to be meeting the equivalent of the NSPS standards for well site fugitive emissions such that we can define those regimes as constituting alternative methods of compliance or otherwise provide appropriate regulatory streamlining” (p. 119).

Other requirements are more directive but seem to have some give:

“For subcategory 2 wells, we are proposing an operational standard that requires routing of the flowback into well completion vessels and commencing operation of a separator unless it is technically infeasible for the separator to function. Once the separator can function, recovered gas must be captured and directed to a completion combustion device unless combustion creates a fire or safety hazard or can damage tundra, permafrost or waterways” (p. 103).

Doubtlessly a close reading would find some very specific requirements. Even so, how well EPA captured what the best companies are already doing would determine the degree of added costs for others. If EPA did a good job, the added costs of regulation would be small (or even zero) for companies taking their volunteerism seriously. And, in this case, the real issue becomes how to bring other companies along, the usual way being with regulation.

Finally, if the goal is that standards should be more flexible and lower costs, both API and EPA are overlooking opportunities. They should be thinking about regulations that allow companies to look across their wells or pipelines or processing plants; remember EPA’s bubble policies of many years ago and the One Future plan being offered by some companies in the value chain. Much better would be for companies to look across the entire natural gas and oil sector, including the production, processing, transmission, and distribution subsectors. Each of these subsectors (for the gas value chain) emits significant methane emissions, and likely features significant heterogeneity in costs. An intermediate approach might be to permit trading across companies in the same part of the value chain. Technological development and lower costs of methane monitoring would facilitate any trading plan. These approaches should at least be part of the conversation.