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State Level Methane Taxes: Economic and Environmental Benefit

Nathan Ratledge's picture
Resources for the Future / Apogee EP
  • Member since 2018
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  • Mar 5, 2015
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methane emissions and states

Over the past year the White House has taken steps to reduce methane emissions in the oil and gas sector.  The latest effort, via the Environmental Protection Agency (EPA), aims to establish technology standards for portions of the production process.  President Obama chose this Executive Action strategy due to Congress’s resistance to climate and environmental legislation.  Politically practical, technology standards are not as effective or efficient at reducing emissions as taxing them directly.  While the opportunity for federal greenhouse gas (GHG) taxation may be limited; taxing methane emissions at the state level has a multitude of benefits that make it financially and politically feasible.

Methane is a potent GHG, roughly 34 times more powerful than carbon dioxide.  It typically accounts for 80% – 90% of natural gas and as such is a sellable commodity.  Despite its value, methane is lost throughout the production, transmission and distribution phases due to uncapped completion procedures, old valves and leaky pipes.

In the natural gas industry the largest amounts of methane are vented during the completion phase and in processing.  During distribution companies are allowed to charge the consumer for lost gas, which means there is limited incentive to reduce leakage.  In the oil industry large amounts of methane are flared (i.e. burned) rather than captured and used.  The EPA estimates that the oil and gas sector comprises 29% of U.S. methane emissions.  Flared gas is not included in this total since the methane is converted to carbon dioxide when it is burned.  Thus, the net waste includes the emissions counted by EPA and the flared methane, totaling billions of dollars in economic loss annually.

Leaked and flared gas represents direct financial loss for state budgets, county governments and the oil and gas industry.  State and local taxes, notably property and severance taxes, are often based on the quantity or value of the commodity produced. As gas escapes via venting, flaring and leaks, the taxpayer loses.  In some cases, public coffers lose substantially.

Take North Dakota, home of the new and expansive Bakken oil formation.  Due to the rapidity of development, lack of gathering lines and value of oil over gas in recent years, North Dakota oil producers have wasted a staggering amount of natural gas through flaring.  The problem is so bad that starting in 2012 North Dakota flared more gas than was used by the state as a whole, 79bcf and 73bcf respectively.  The Energy Information Administration (EIA) reports that in 2013 North Dakota vented and flared nearly 103 billion cubic feet (bcf) of natural gas.

Applying the average Henry Hub spot price for natural gas, the 103bcf of lost product in 2013 represents $394m in value.  As Ceres noted in their 2013 report “Flaring Up” the actual value is likely much higher due to the fact that produced gas also includes highly valuable natural gas liquids, like ethane and butane, as by products.  Ceres’ estimated value for a thousand cubic feet (mcf) was roughly $10, much higher than the $3.73 Henry Hub price for dry gas.  Using Ceres’ prices estimate, the value of lost product is over $1 billion in 2013 alone.

North Dakota’s tax on natural gas production is set at a per mcf rate, currently $.0982.  Assuming 103bcf, the lost tax revenue is a relatively modest $10m per year.  However, if produced gas was taxed at the same rate as oil, 11.5% of production value, total lost revenue approaches $115m.

While North Dakota is the most egregious offender, other states like Wyoming, Texas, and New Mexico are foregoing substantial amounts of public revenue. 

Taxing methane leakage not only recoups lost income for states and counties; it also reduces public and private expenses.  

Methane emissions are correlated with significant amounts of volatile organic compounds (VOCs), like benzene.  As evidence, EPA’s new VOC rules for natural gas wells tout their effect on mitigating methane.  Regardless of which way you approach it, reducing methane and VOC emissions limits the release of carcinogenic pollutants and the formation of ground level ozone.  Decreasing respiratory effects and public impacts stemming from poor air quality is a direct benefit to public and private health costs.

The positive impact on local revenue and benefit to public health makes reducing venting and flaring politically advantageous for state and local politicians. 

From Pennsylvania to California, elected officials are facing citizen led efforts to limit the negative side effects of fracking and drilling, including air quality concerns and climate impacts.  Colorado assumed a leadership position on cutting methane emissions in February 2014.  Despite the state’s more rigorous standards, Colorado’s legislation leaves a variety of holes related to existing wells, transmission, flaring, inspection and enforcement. 

A methane tax, on the other hand, covers the entire value chain by monetizing waste.  As such, a methane tax is an easy additive to existing state and federal rules for VOCs or methane.  A tax could also be implemented in states that have yet to impose strict standards.  Of course, decreasing methane emissions will also help states meet their climate objectives.  

Economically, it is readily accepted that taxes are more efficient and effective than technology standards for pollution control.  Their feasibility, however, relies on politics.  The substantial upsides to public revenue, local public health and climate mitigation should make a methane tax an alluring possibility for many state and local leaders.

Photo Credit: States and Methane Policy/shutterstock

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