Monday, the US Court of Appeals for the District of Columbia vacated the Trump administration’s recent decision to delay the Environmental Protection Agency’s (EPA’s) rule limiting methane emissions from the oil and gas industry, the largest source of methane emissions in the United States. The rule, which was finalized in June 2016 under the Obama administration, would reduce methane emissions from new oil and gas sources as well as emissions of volatile organic compounds (VOCs), which are a precursor to ozone.
Assuming this rule goes into effect, is this a good or bad thing for the nation? People clearly care about the rule—EPA received over 900,000 comments on it when it was proposed, most in support. But these responses are a poor gauge of the true costs and benefits of the rule. To get a better sense of those, we can first look to the benefit–cost analysis that was issued with the rule. It stated that significant climate, air quality, and public health benefits would occur, with climate benefits alone estimated to be $690 million in 2025 (calculated by multiplying the estimated methane reductions by the social cost of methane, which was estimated by EPA to be $1,500 per ton). In contrast, industry’s compliance costs (net of the value of the methane captured and sold) would be about $520 million, with net benefits to society of $170 million.
Are there factors either included in or missing from EPA’s analysis that would dramatically change this conclusion? The answer is yes. A failure to account for a few things bias the net benefits downward—including the air quality and health benefits from reduced VOC emissions and ozone, as well as the likelihood that innovation in leak detection and repair would lead to either greater methane capture (hence more benefits and greater gas recovery and sales) or cheaper mitigation approaches, or both. On the other side, the key issue is the estimated social cost of methane used in EPA’s analysis. The Trump administration reportedly wants to use an estimate that would count the benefits of less global warming only to the United States, rather than to the world—an approach that would dramatically cut the rule’s estimated methane reduction benefits. There are other uncertainties that could cut either way, such as the future price of natural gas. The higher the price, the greater the value of the methane captured and the greater the net benefits of the rule.
Another way of thinking about whether society would be better off is to examine the problems that industry has with the regulation, expressed during both its proposed stage (when industry could comment on it as part of the standard notice-and-comment rulemaking process) and, more recently, in letters to the Trump administration arguing that the rule should be repealed or reconsidered.
In general, industry has taken issue with the need for federal regulation of methane emissions given existing state and voluntary measures. Industry is correct that EPA’s estimates of methane emissions show them falling over time (which would be mostly due to voluntary efforts). Industry has some interest in capturing and selling the gas, of course, but that has always been the case. One could argue that awareness of leaks has recently mushroomed, accounting for more methane captured. But one cannot expect industry to incur large mitigation costs in response to global warming concerns. Industry is also correct that some states are already engaged in methane mitigation, but only a handful. Additionally, industry has argued that the price of natural gas used by EPA in its analysis ($4/Mcf) was too high. However, it is the future price that matters, and forecasts by the US Energy Information Administration project that the price will rise from its current level of $3/Mcf to over $4 by 2020 and further after that, which suggests that the price EPA used is reasonable, if conservative.
After the comment period, EPA made a handful of changes to the final rule in response to industry comments. But from the industry perspective, EPA did not go far enough to alter the major technological requirements for mitigating methane leaks. These are requirements related to centrifugal compressors, pneumatic controllers, and pneumatic pumps. Additionally, in the proposed rule, EPA had exempted “low-production wells” from the regulation of fugitive (i.e., leaked) emissions—but the agency decided to include such wells in the final rule, as they represent about 43 percent of all oil wells and 30 percent of all gas wells in the United States. Industry was very dissatisfied with the final rule and, along with a group of states, sued after the rule went into effect last August.
Once the Trump administration came into office, industry requested reconsideration of some provisions in the final rule on grounds of excessive costs (for instance, related to specific requirements for pneumatic pumps, professional engineer certification, and what industry considers excessive paperwork). It should be noted that EPA’s cost estimates included these requirements. This April, EPA granted that petition.
Additional industry comments were sent to EPA in May 2017. Most important among these, industry reiterated its concerns about the stringent technological requirements, the monitoring requirements being out of step with emerging state practices, and the lack of exemptions for low-production wells. To the latter concern, industry said that as wells decline in production and revenue, the cost-effectiveness of the rule declines as well—and that these low producers have a particular cost-effectiveness issue. This claim rests on a clear link between production volume and the probability and size of leaks. Considering that what are called super-emitting sources are a major part of the fugitive methane story (i.e., only a small fraction of sources make up the bulk of methane emissions), the difficulties of predicting such infrequent events and collecting reliable data make such a link challenging to prove. Nevertheless, it is worth noting that Colorado provides relief to small producers from its methane regulations.
It is perhaps not surprising that there will be much contention around any relatively new emerging regulatory issue (such as this one) where information and technology are rapidly evolving and that involves both conflict between federal and state governments as well as climate change. Given the vast scientific consensus on the importance of methane in global warming, and EPA’s mandate to regulate it, regulation of new sources in the oil and gas sector is clearly needed and will very likely result in net benefits. Whether EPA could modify the regulations to improve their cost-effectiveness while providing greater flexibility to industry, all without compromising the reductions in methane emissions, is an open question for the administration to consider if it chooses to begin another regulatory process.