Introduction

On August 16, 2022, President Biden signed H.R. 5376 (P.L. 117-169), a budget reconciliation measure commonly referred to as the "Inflation Reduction Act of 2022" (IRA). Among other provisions, IRA includes a charge on methane emissions from selected entities in the oil and gas industry. This emissions charge is nearly identical to the methane emissions charge¹ in the House version of H.R. 5376, often referred to as the Build Back Better Act, which passed the House on November 19, 2021.

The methane emissions charge applies only to methane emissions from specific types of facilities that are required to report their greenhouse gas (GHG) emissions to the Environmental Protection Agency's (EPA's) Greenhouse Gas Emissions Reporting Program (GHGRP). The charge starts at $900 per metric ton of methane, increasing to $1,500 after two years, which equates to $36 and $60 per metric ton of carbon dioxide equivalent, respectively. This charge is the first time the federal government has directly imposed a charge, fee, or tax on GHG emissions.²

Since its inclusion in the House-passed H.R. 5376, the methane charge has received considerable attention from Members and a range of stakeholders.³ For example, some groups have raised concerns about economic impacts resulting from the methane charge, including impacts on natural gas prices.⁴ Some policymakers are concerned about the charge in the context of EPA's proposed regulations to address methane emissions from the same categories of new and existing facilities that are subject to the methane charge.⁵

This report discusses the scope and applicability of the IRA methane charge. The first section of this report provides background about methane emissions in the United States. The second section discusses the scope and applicability of the methane charge and its rate structure. The last section includes selected factors that may play a role in affecting the scope of the charge and its potential impacts.

U.S. Methane Emissions and Sources

Methane (or CH₄) is the primary component of natural gas, which can be used as either a fuel or as a feedstock for the chemical industry.⁶ Natural gas is generally produced from geologic formations in the ground through drilling and extraction activities by the oil and gas industry. As natural gas travels through the interconnected systems of exploration, production, processing, storage (sometimes), and transmission, that deliver natural gas from the wellhead to the consumer, methane emissions are released into the atmosphere in a variety of ways, including

• intentional venting from equipment (e.g., pneumatic devices);⁷
• unintentional equipment leaks, worker error, or malfunctions;
• routine maintenance of equipment; and
• flaring (burning) of excess natural gas at a petroleum production site, which can result in both uncombusted methane and carbon dioxide (CO₂) emissions.

Methane is a potent GHG. When averaged over a 100-year time period—the time period often used in annual GHG inventories—methane's global warming potential (GWP) is 25 times greater than that of an equivalent mass of CO₂.⁸ Over a 20-year time period, methane's GWP is 72 times greater than that of CO₂.⁹ Due to methane's shorter-term climate impacts, scientists contend that "methane mitigation [is] one of the best opportunities for reducing near term [global] warming."¹⁰

As illustrated in Figure 1, methane emissions in the United States accounted for 10% of total GHG emissions in 2019 (the most recent year of comprehensive GHG data).¹¹ The figure identifies the range of sources that produced these methane emissions. Methane emissions from enteric fermentation (e.g., in livestock)¹² accounted for the largest amount, followed by emissions from natural gas systems. If EPA's estimates of methane emissions from natural gas and petroleum systems were grouped together, they would account for the largest source of methane emissions, approximately 3% of total U.S. GHG emissions in EPA's inventory.

Figure 1. U.S. Total GHG Emissions by Gas and Sources of Methane Emissions 2019 Emission Estimates from EPA Inventory

Source: Prepared by CRS; emissions data from EPA, Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990–2019, 2021, Table ES-2, https://www.epa.gov/ghgemissions/inventory-us-greenhouse-gas-emissions-and-sinks-1990-2019.

EPA produces the GHG emissions estimates in its annual inventories using commonly accepted emission factors and activity levels to calculate aggregate estimates for all source categories. In recent years, the emission estimates for the natural gas and petroleum system categories have received scrutiny from a range of stakeholders. Some have put forth competing—and sometimes conflicting—estimates.¹³

Inflation Reduction Act Methane Emissions Charge

Scope and Applicability

The IRA methane charge applies to methane emissions from specific types of facilities in the petroleum and natural gas industry that, under current regulations, are required to report their GHG emissions, including methane, to EPA's GHGRP. Since 2011, EPA's GHGRP has collected annual emissions data from nearly 8,000 large industrial facilities and other sources in the United States.¹⁴ The GHGRP requirements are codified in 40 C.F.R. Part 98. Subpart W includes the detailed requirements for petroleum and natural gas facilities.

The IRA methane charge applies only to a subset of the petroleum and natural gas system facilities that are required to report GHG emissions in Part 98, Subpart W. The facilities subject to the charge include the following industry operations:

• 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;¹⁵ and
• onshore natural gas transmission pipelines.

Figure 2 illustrates the petroleum and natural gas system entities that are required to report their GHG emissions in EPA's GHGRP. The entities with red labels are subject to Subpart W reporting requirements. Not all of the entities that report emissions under Subpart W are subject to the methane charge. Two facility categories that report emissions under Subpart W are not subject to the methane charge: (1) natural gas distribution facilities and (2) facilities EPA describes as "other oil and gas combustion facilities."¹⁶

Figure 2. Petroleum and Gas Entities Subject to EPA's GHG Emission Reporting Program

Source: Reproduced from EPA, "GHGRP and the Oil and Gas Industry," https://www.epa.gov/ghgreporting/ghgrp-and-oil-and-gas-industry. Note: RY refers to reporting year for EPA's GHGRP.

The reporting requirements in Subpart W apply to facilities that emit 25,000 metric tons of CO₂ equivalent (mtCO₂e) or more per year.¹⁷ The House-passed Build Back Better Act would have directed EPA to revise that threshold (within two years) to 10,000 mtCO₂e. This change would have increased the number of facilities subject to EPA's reporting requirements. The methane emissions charge in IRA only applies to facilities that emit 25,000 mtCO₂e or more per year, regardless of any subsequent changes to the scope of EPA's reporting requirements.

Table 1 identifies the number of petroleum and natural gas facilities by category that reported their GHG emissions to EPA in 2019 pursuant to the regulations in 40 C.F.R. Part 98, Subpart W.¹⁸ The table also indicates the total methane emissions for each facility category. In 2019, reported methane emissions from facilities that are subject to the methane charge totaled 78 million mtCO₂e (MMTCO₂e). In 2019, onshore production (44.2 MMTCO₂e) and onshore gathering and boosting (21.9 MMTCO₂e) accounted for 84% of these reported emissions.

As discussed above, natural gas distribution facilities, which report emissions under Subpart W, are not subject to the charge. According to EPA reporting data, 162 natural gas distribution facilities emitted approximately 13 MMTCO₂e of methane in 2019.¹⁹ As indicated in Table 1, if these facilities were subject to the charge, this group would rank third in methane emissions.²⁰

EPA's GHGRP covers a subset of U.S. methane emissions from petroleum and natural gas systems. It is uncertain what percentage of total emissions from this sector the reporting program covers. When EPA issued its final rule promulgating the Subpart W reporting regulations in 2010,²¹ the agency estimated that the 25,000 mtCO₂e reporting threshold would cover 85% of the methane emissions from the reporting categories. In the 2010 rule, EPA also estimated that decreasing the reporting threshold to 10,000 mtCO₂e would increase the emissions coverage to 91%.²² These estimates appear to be out of date. EPA stated in 2019 that the agency "does not have an exact estimate of what percent of U.S. emissions are covered under petroleum and natural gas systems at this time.… EPA will continue to analyze the emissions from reports as well as linking the information to the US GHG Inventory to identify what fraction of emissions from petroleum and natural gas systems are covered by the GHGRP."²³

As a point of reference, Table 2 lists the methane emission estimates from EPA's emission inventory for the petroleum and natural gas system activities that match the applicability of the IRA methane charge.²⁴ As the inventory estimates are intended to capture all of the methane emission in petroleum and natural gas systems, the inventory estimates are higher. As mentioned above, some have argued that EPA's inventory estimates of methane emissions from these systems have underestimated the magnitude of emissions. For example, a 2018 study estimated that methane emissions in these sectors are 60% higher than the estimates in EPA's inventory.²⁵

In IRA, the scope of emissions subject to the charge is based on (1) the facility's reported emissions under EPA's GHGRP, as described above, and (2) an emissions threshold that varies by facility type.

• For petroleum and natural gas production facilities, the charge applies only to the number of reported tons of methane that exceed 0.2% of the natural gas sent to sale from such a facility.
• For nonproduction facilities, such as gathering and boosting facilities, the charge applies to methane emissions that exceed 0.05% of the natural gas sent for sale from the facility.
• For natural gas transmission facilities, the charge applies to methane emissions that exceed 0.11% of the natural gas sent for sale from the facility.

These thresholds effectively allow for some amount of methane to be released from these facilities without being subject to the charge, thus decreasing the amount of emissions reported under the GHGRP that are subject to the charge. Table 3 compares the actual reported emissions (in 2019) for onshore petroleum and natural gas production facilities and onshore petroleum and natural gas gathering and boosting facilities (the two facility types that account for most of the methane emissions) with the emissions that are subject to the methane charge at these facilities. As the table indicates, when the thresholds are applied, the methane emissions subject to the charge decrease by about 35%.

In its August 3, 2022, cost estimate ("score") of the Inflation Reduction Act, the Congressional Budget Office (CBO) provided another resource that may be informative. CBO estimated the revenue that the methane charge will generate over time. CBO's estimated revenue by fiscal year is provided in the first row of Table 4. CBO's analysis does not provide an estimate of methane emissions subject to the charge, but Table 4 provides these estimates by applying CBO's revenue estimate and the rate of the charge in the act. As CBO's revenue estimates are net revenue estimates, the second row includes an estimate of gross revenue from the methane charge.²⁶ The annual gross revenue is divided by the rate of the methane charge (ranging from $900 to $1,500) to produce annual estimates of methane emissions (in metric tons of methane). The last row converts metric tons of methane into metric tons of CO₂e for comparison purposes.

Rate of Charge

The methane emissions charge in IRA starts in calendar year 2024 at $900 per metric ton of methane, increases to $1,200 in 2025, and increases to $1,500 in 2026. The charge remains at $1,500 in subsequent years. Table 5 indicates the value of the methane charge rates in mtCO₂e, the measure commonly used in carbon tax and emission charge proposals. The methane charge rates below are comparable to the carbon tax and emission charge rates in recent legislative proposals.²⁷

Potential Exemption from Charge

IRA provides for a conditional exemption from the methane emissions charge if facilities are subject to and in compliance with subsequent Clean Air Act methane regulations. To date, such regulations have not been finalized. On November 15, 2021, EPA proposed regulations to address methane emissions from the same categories of new and existing facilities that are subject to the IRA methane charge.²⁸ IRA allows for an exemption from the emissions charge if future, final EPA regulations addressing methane emissions (1) are in effect in all states, and (2) will "result in equivalent or greater emissions reductions as would be achieved" by the November 2021 proposed rule. IRA directs EPA to determine whether future methane regulations will meet these conditions.

Selected Factors Affecting the Scope and Impact of the Methane Charge

A range of factors could play a role in determining the scope of emissions subject to the IRA methane charge and its ultimate impacts on GHG emission levels and economic measures, such as natural gas prices. A comprehensive analysis of these factors is beyond the scope of this report. Selected factors include the following:

• EPA Regulation of Petroleum and Natural Gas Systems. On November 15, 2021, EPA proposed regulations to address methane emissions from the same categories of new and existing facilities that are subject to the methane charge.²⁹ As discussed above, if EPA finalizes these requirements, they may provide for an exemption from the methane emissions charge. The degree to which the regulations will affect the methane emissions charge depends on the scope and applicability of the final regulations.
• Changes to Equipment or Operations. A charge on methane emissions from petroleum and natural gas systems provides an economic incentive for facilities to modify their equipment and operations in order to avoid paying the charge. Economic theory suggests facilities will likely find ways to reduce onsite methane emissions until the costs associated with these changes reach the level of the charge. At that point, facilities will pay the charge for the remaining emissions. The degree to which facilities make such changes will likely be based on site-specific economic conditions.
• Funding for Technological Improvements. The Inflation Reduction Act includes supplemental appropriations of $850 million to EPA to provide grants to facilities subject to the methane charge for a range of objectives, including "improving and deploying industrial equipment and processes" that reduce methane emission. The act also includes supplemental appropriations of $700 million for "marginal conventional wells" for the same purposes. These funds may lead to methane reductions at oil and natural gas facilities, thus affecting the impact of the charge.
• Other IRA Climate and Energy Provisions. IRA includes a range of climate and energy-related provisions that will likely affect the portfolio of fuels and sources of energy that are used in various economic sectors: electricity, transportation, and industry.³⁰