Above: Infrared photo showing methane leakage from a gas processing plant.
barry rabe is a professor of public policy at the University of Michigan and a nonresident senior fellow at the Brookings Institution. This article is a modified version of a post on the Niskanen Center’s blog.
Published August 16, 2021
Economists are famously alleged to disagree about everything (check out Harry Truman’s hoary joke about the one-handed economist). In fact, the opposite is true: they generally agree about much that’s important.
Exhibit One: Economists of every ideological stripe and from every continent have argued for decades that the best way to reduce climate risks is to tax carbon emissions. This would raise the price of energy-intensive goods and services and thereby reduce their demand. Then add complementary policies — combining targeted regulations with focused subsidies for new technology — as needed. But this begs a question that’s gotten relatively little exposure: if taxing carbon emissions makes sense, why not tax the far more potent methane emissions from oil and gas operations for the same reason?
The Story Thus Far
Let’s back up for a moment. The case for a carbon tax is no less compelling today than it was when the idea was broached in 1973 by David Gordon Wilson, a British engineer at MIT. And it’s widely agreed that the administration of such a tax would be comparatively simple since it could be assessed “upstream” at a relatively small number of points of production of fossil fuels and passed along through the price of goods and services using fossil-derived energy. The big hurdle for a carbon tax, pretty much everybody agrees, is the politics.
But other countries have managed to run this political gauntlet. Both Canada and the European Union have made major advances with hybrid systems involving both carbon taxes and a carbon pricing cousin known as cap-and-trade. Europe has upped its game in recent weeks, outlining plans to impose carbon “border tax adjustments” on imports from nations that lack comparable taxes on climate emissions. The United States appears headed toward a suite of regulations and spending programs, sidestepping a domestic carbon tax due to political opposition from both right and left.
However, both the Biden administration and Congress are warming to the idea of placing American-style penalties on carbon-rich imports, a form of climate tariff that promises to be exceedingly complex to manage and likely violates global trade agreements. In short, the United States is attempting to claim global leadership on the climate file while eschewing any explicit form of carbon pricing.
But back to the primary concern here: what about emissions of other greenhouse gases, notably methane? Methane is the most significant of a suite of “short-lived” climate pollutants. One ton of methane has far greater global warming capacity than one ton of carbon dioxide during its first century in the atmosphere. Indeed, over the first 20 years, pound for pound, methane is more than 85 times as potent! While the volume of methane emissions is much smaller than that of carbon, it accounts for about one-quarter of the net human effect on the climate to date. Gilding this poisonous lily, methane also contributes to the formation of a host of toxic chemicals called volatile organic compounds, which, along with causing cancer, can exacerbate ground-level ozone pollution.
Methane escapes into the air from fossil fuel production, agriculture, livestock, landfills and wastewater treatment — although releases from the first of these are the largest source in the United States. Could they be taxed like carbon? Are the politics of methane and carbon different?
Yes, but therein lies the aforementioned story. Methane is the key component of natural gas, so the chemical has considerable value as a fuel. But companies pursuing oil often view gas that escapes as a nuisance, particularly if natural gas prices are low. And state governments have generally allowed them to give short shrift to the leakage, especially in remote areas where drilling is approved before gas capture technology is deployed. If firms cannot easily gather and pipe gas to a buyer, or simply choose to cut corners, they may either flare it (burning off methane but releasing carbon dioxide) or simply vent it directly into the atmosphere.
The United States has always relied on industry measures of how much methane is flared or vented. But a staggering amount of research using increasingly sophisticated technologies to measure and track releases confirms that traditional reporting is biased, routinely underestimating releases by significant amounts. Such discrepancies appear particularly large in the past decade in areas where the all-out pursuit of oil production has transformed associated gas from a bonus resource into an annoyance.
State governments have always played a dominant role in regulating oil and gas production. Those that are home to big oil and gas interests aggressively fought Obama-era efforts to develop industry performance standards under the Clean Air Act, including initiating multistate litigation led by state attorneys general. Trump-era evisceration of the process put the federal methane containment effort back to square one.
No state directly taxes carbon emissions. But nearly all energy-producing states tax the extraction of oil, natural gas and coal. They apply severance taxes, designed to capture part of the public value from the permanent loss of a natural resource. Such taxes routinely have faced brutal opposition from industry at their inception, beginning in the 19th century. Even so, they generally retain bipartisan support and endure over decades, with some of the highest tax rates found in very conservative states that are otherwise tax averse. But note that severance taxes only cover methane that is captured for profit while exempting methane that is flared or merely allowed to leak into the atmosphere.
Containing methane is well within the practical technological frontier. One of the world’s leading oil and gas producers, Norway, has maintained extremely low methane release rates for generations. As incentives, it combines tough regulatory standards with a hefty carbon tax explicitly applied to methane releases and makes sure the taxes aren’t evaded by requiring advanced technology for accurate measurement.
The World Bank has championed the Norway methane model for decades, advising governments around the world to include it in their severance tax or royalty regimes in order to deter both greenhouse and air-quality emissions, and get a little revenue as a bonus. The message has been heard — in some places, anyway. Canada is actively examining ways to phase methane into its expanding carbon-pricing system, complementing a federal regulatory framework that has been phased in over the past five years while the United States has dawdled. In turn, some provinces have adjusted levies on producers to increase funds for long-term remediation of abandoned and orphaned wells, complementing expanded federal funding for these purposes.
There are no takers thus far among American states, as Claire Kaliban, Isabel Englehart and I found in completing a multidecade review of state severance taxes published last year. In fact, many fossil fuel production states responded to growing methane waste concerns decades ago not by deterring emissions but by sheltering producing firms from taxation. Surgical amendments to energy tax laws in many states placed methane off-limits. Those historic protections remain largely operational either as explicit statutory exemptions or as administrative review processes that empower officials to routinely grant tax waivers to aggrieved firms.
Much the same finding applies to royalties paid by producers to private landowners who have authorized drilling on their property. If you capture and use methane commercially, you pay royalties to property owners as well as severance tax to the state government. But if you flare methane, you pay nothing to either party. If you simply vent pure methane, you may violate regulations in some states but are unlikely to pay fines. Plus, venting is harder to detect than flaring, creating a perverse incentive to release pure methane, the greenhouse gas on steroids, rather than burn it off as carbon dioxide and risk visual detection.
With taxation largely off the table politically, most production states have also been quite reluctant to approve regulatory provisions designed to generate more accurate methane release numbers or pursue ways to reduce them.
Waste Not, Heat Not
Even if one dismisses the impact of methane emissions on climate and air quality, flaring and venting represent sheer waste of a valuable energy source. Norway’s revulsion toward that wastefulness was the initial driving force behind its hybrid regulate-and-tax approach, although its subsequent decisions to increase tax rates were linked to climate concerns.
Some American production states have actively considered methane taxation, usually through proposed amendments to established severance taxes. Political pressure to do this has generally not come from climate activists but rather from local natural resource groups, teachers, farmers and ranchers appalled by this waste. And the opprobrium toward methane waste often cuts across partisan lines, quite unlike what we see in discussions of carbon emissions.
The political nerve center of this anti-waste effort has been North Dakota. A boom-and-bust oil producer for generations, North Dakota took a whack at methane waste through its severance tax system during the mid-1980s. But industry opponents managed to water down that reform, rendering it largely meaningless.
The methane issue resurfaced with a vengeance, however, during the shale boom of the past 15 years. The rush to tap into sprawling (and newly profitable) Bakken oil deposits that were protected only with elastic state regulatory restrictions led to surging methane releases. Many remote North Dakota wells have produced increasing amounts of gas, but adequate gas capture and transmission capacity has lagged thanks to the industry’s abiding focus on oil and the state’s reluctance to alienate the suppliers of severance tax funds and royalties, jobs and campaign contributions.
North Dakota has prided itself on emulating Norway in some areas, such as long-term investment of 30 percent of its severance tax revenues through a sovereign wealth fund. But methane is another story entirely. During much of the past decade, the state’s industry-reported methane data indicates that between 10 and 20 percent of produced gas has been lost. And at that rate, it might well have been better from a climate perspective to burn coal rather than relatively clean natural gas to make electricity! Norway, for its part, must also contend with rising gas emissions as production increases, but consistently reports methane releases under 1 percent of produced gas.
On three occasions in the 2010s, North Dakota legislators reintroduced straightforward legislation to end the methane-waste tax exemption. During legislative hearings, no concerns were raised about the technical feasibility of implementing such a tax. But political opposition was fierce, featuring industry threats to move production from the state if methane waste costs were imposed. On all three occasions, the legislature caved, most recently in March 2019. As one veteran Republican legislator explained, “We all knew that it was the right thing to do. But we did not want to take the risk of alienating industry and see drilling shift to another state.”
Much the same story has played out in Wyoming. During three separate legislative sessions in the 2010s, bipartisan coalitions of legislators proposed including methane waste under Wyoming’s long-standing severance taxes. Just as in North Dakota, no claims of technical infeasibility emerged, but industry vowed aggressive litigation and threatened to relocate production. That ended the discussion on each occasion, preserving historic methane tax exemptions.
But the idea is not quite dead, resurfacing earlier this year in, of all places, deep-red Texas. State authorities have struggled with opposition to methane releases since the late 1940s and launched a series of regulatory reforms in the mid-1950s to curb flaring. These largely remain in place but have generally not worked, a reality reflected in methane spikes measured during the past decade in the Permian Basin region. But the state government is reluctant to impose additional constraints on energy producers.
Two proposals were introduced during the current legislative session, one designed to apply existing natural gas severance taxes to released methane and the other proposed a 25 percent tax on the market value of flared gas to discourage waste. Neither received much support.
The exception to the industry-knows-best rule is Alaska. A half-century ago, long before greenhouse gas concerns arose, state officials studied global best practice models for methane. They adopted a rough variant of the Norway model, blending tight regulations with financial penalties (up to “twice the fair market value of the natural gas at the point of waste”) on flared methane. The penalties are not uniformly applied and can be waived when the state negotiates compliance terms with firms. Nonetheless, this policy has endured, and Alaska officials report that it has succeeded in containing flaring to rates similar to Norway.
Alaska, however, stands alone in the United States, which is now the world’s leading producer of oil and natural gas. With taxation largely off the table politically, most production states have also been quite reluctant to approve regulatory provisions designed to generate more accurate methane release numbers or pursue ways to reduce them. This includes glacially slow adoption of low-cost technologies that have been increasingly deployed in Canada. Indeed, Canada has honored its part of a 2016 North American methane reduction agreement, reducing releases while maintaining expanded oil and gas output.
Uncle Sam to the Rescue?
Could Washington manage what the states can’t? The Biden administration has already made use of the Congressional Review Act to begin to restore some of the methane provisions initiated by the Obama administration, even picking up some Republican votes to produce fairly broad victory margins. However, these reflect best practice from a half-decade ago, are only applied to new drilling on private land, and likely face new forms of state resistance. The new Senate reconciliation package linked to climate is much bolder and proposes a national methane fee. This draws from a bill (the Methane Emissions Reduction Act of 2021, or S.645) introduced in March that would place an $1,800 per ton fee on methane released at production and along its supply chain.
The proposed fee would offer the same incentives to reduce methane releases as would a carbon tax for carbon emissions. But it would add two other intriguing benefits. First, the bill outlines a plan to develop a state-of-the-art system to measure methane releases, expressed as a percentage of natural gas production. Second, under this system, firms that take major procedural and technical steps to minimize methane emissions and demonstrate performance excellence through their emission records could “opt out of the fee.” Such firms would also have a leg up in global markets, given the growing demand for “responsibly produced gas” from importing jurisdictions such as the European Union. Some production firms have already taken major steps to reduce releases and would likely welcome public affirmation of their performance versus laggard rivals who would face new tax burdens.
This would represent a variant on Norway’s hybrid model, putting the United States on a more credible path as a responsible producer of natural gas for as long as it continues to play a role as a global energy source. Some portions of the revenue from such a methane fee could be used to deploy modern methane monitoring equipment. The balance could be returned to production states that would like to establish their own tax on this wasteful practice but are politically terrified to act unilaterally for fear of industry retribution.
States could use this revenue to contend with the many challenges they face in being dependent on fossil fuel production and begin to prepare for the inevitable transition to renewables. Funds could even provide an initial down payment on a strategy to address long-ignored clean-ups of “orphan wells.” As with carbon taxes more generally, a methane “fee” (no reason to bait the antitax bear) could be highly complementary to other policies that could further drive down methane releases. Such a fee could establish a model for subsequent application to full carbon impacts of energy production, possibly down the road if we find that a regulate-and-spend approach to climate underperforms.
• • •
While methane emissions punch far above their weight in terms of changing the climate, politics have long deterred serious policy to address them. However, the interest group coalition opposing methane containment shows some fragmentation after decades of unified opposition to any new methane policy and a carbon dioxide-only climate focus will have severe limits. While getting from here to there on methane containment will hardly be easy, it may well remain the lowest hanging fruit on the climate policy tree.