Relaxing EPA’s Methane Rule: Should It Stay or Should It Go?

In September 2018, the Trump administration released its proposed revisions to the Environmental Protection Agency’s (EPA’s) 2016 rule limiting methane emissions from new oil and gas operations. In May 2018, we published an analysis of the potential costs and benefits of repealing or modifying this rule as well as highlighted in a blog some of the modifications that the Trump administration might consider making to the rule (based on stakeholder interest) and to its accompanying regulatory impact analysis (RIA).

The Trump administration’s analysis compares the costs and benefits of the revised rule to an updated estimate of the costs and benefits of the original rule issued by the Obama administration. The most important of these updates is a reduction in the number of affected sources, which, other things equal, reduces both the costs and the benefits of the original rule. Compared to this updated estimate, the Trump administration expects its revised rule to result in a present value of cost savings of $484 million, forgone benefits of $54 million, and therefore net benefits of $431 million between 2019 and 2025.

A complication of comparing the Obama and Trump rules is that the original analysis conducted under the Obama administration showed costs and benefits of the rule in the years 2020 and 2025 rather than as a net present value, as was done by the Trump administration. Because both the Obama and the Trump RIAs present results for the most important change—reducing the frequency of leak inspections—in 2020 and 2025, we focus only on this provision in our discussion of the cost savings and forgone benefits estimates.

This provision has two changes. First, the Obama rule required semiannual monitoring and leak repair within 30 days of detection. The Trump administration proposed annual monitoring and leak repair within 60 days of detection. The second change is the treatment of low production wells (wells which generate less than 15 barrels of oil equivalent per day). In the 2015 proposed rule, EPA excluded low production wells from leak monitoring requirements but requested comment on whether to include them in the final rule. In the 2016 final rule, EPA included them and applied the same inspection requirements to all wells, as the agency received evidence that low production wells have the same potential to leak as other wells. This decision generated a lawsuit from the industry charging that they were not given an adequate chance to comment on the change. The Trump administration heard the industry complaints, requiring only biennial (once every other year) monitoring of these low production wells.

According to the Trump analysis, reducing the frequency of inspections generally and for low production wells will reduce costs by $58.5 million in 2020 and $112.5 million in 2025. We estimated in our report, using numbers from the 2016 RIA accompanying the final rule, that reducing the frequency of inspections would reduce costs by $98 million in 2020 and by $200 million in 2025. Adjusting our analysis to 2016$ as well as adjusting for the decrease in number of sources and looser requirements for low production wells, we estimate greater cost savings than the Trump administration estimates: $71 million in 2020 and $144 million in 2025. The components used to calculate these values (the cost per inspection site and the estimate of methane leaking from each site) are usually provided in a technical support document, which is unavailable for the Trump administration’s analysis as of publication of this blog. Therefore, we retain the values from the Obama analysis with the caveat that we are unable to make a judgment about whether the Trump administration’s assumptions are reasonable compared to the Obama administration’s analysis for these components.

Against these cost savings are the forgone benefits from less frequent inspections, i.e., the value of the methane leaks that are not detected. This value includes the market value of the gas plus the social cost of methane (SCM) as a greenhouse gas. (For simplicity, we ignore the market losses for both analyses.) The Trump analysis valued the forgone benefits from emissions reductions at $6.2 million in 2020 and $14 million in 2025, using a domestic SCM. We estimated forgone benefits to be $70 million in 2020 and $166 million in 2025, using a global SCM. But after the adjustments for dollar year and affected sources, these foregone benefits fall to $50 million in 2020 and $119 million in 2025. These values are not enough to reverse the conclusion that the cost savings outweigh the forgone benefits according to the Trump analysis. However, neither the Trump nor the Obama analyses account for the sizable uncertainty in predicting the risk of less frequent inspections.

Amidst the rollbacks of methane regulations, including this one and the Bureau of Land Management’s regulations on all oil and gas wells and related infrastructure on public lands, a number of oil and gas companies have pledged to keep making methane reductions because of climate change concerns irrespective of what the Trump administration does. The companies that belong to the One Future coalition pledge to keep methane leaks from the natural gas value chain to 1 percent of production. Shell Oil has pledged to meet a 0.2 percent goal at its well sites, and Exxon has pledged to phase out its existing gas spewing pneumatic controllers “over a reasonable timeframe,” although implicitly endorsing the Trump plan to inspect sites annually instead of twice annually, per the Obama rule. This behavior and the cost-benefit analysis illustrate the complex forces acting to both support and oppose regulatory rollback.