A carbon tax in all but name

Hey,

Here’s a special edition in which I’m running content that first appeared in my friends at Overview Capital’s newsletter last week. It’s a breakdown of the EPA’s Waste Emissions Charge, which, from my vantage point, is one of the first major greenhouse gas emissions taxes in all but name. More are coming (see for instance, Denmark’s new tax on agriculture emissions for 2030 and beyond).

You should sign up for their newsletter too → do so here.

DEEP DIVE

Taxing greenhouse gas emissions has long been the dream of policymakers, economists, and other stakeholders concerned with climate change. Pricing greenhouse gas emissions could be a strong policy counterweight to the implicit subsidies from which fossil fuels benefit. Implicit subsidies refer to the uninternalized and external costs of air pollution, global warming, and other social costs caused by the extraction, transport, and burning of fossil fuels.

Despite how long a tax on emissions has been seen as the ‘holy grail’ of climate policy, one of the most significant greenhouse gas emissions taxes ever proposed in the U.S. hasn’t received that much attention. This year, the EPA has been working to finalize a waste emissions charge that would tax methane emissions from oil and gas facilities that emit more than 25,000 metric tons of carbon dioxide equivalent (“CO2e”).

Perhaps part of the reason this novel emissions tax has received less attention is because it’s focused on methane. As reflected in our fund thesis, methane is often overlooked. Despite having caused 0.5°C of global warming already (roughly a third of human-caused greenhouse gas warming to-date), methane receives only ~1% of all climate finance ($13.7B of an estimated $1.3T total in 2023).

The new EPA rule and its emissions charge structure could be a pivotal policy, not just for oil and gas and methane, but for the future climate-focused policy on the whole. Of course, as you can likely imagine, the rule isn’t going unchallenged. Let’s explore what the rule is and where it stands today.

What the rule means

The EPA's new "methane fee" was first proposed as part of the directives included in the 2022 Inflation Reduction Act. The proposed rule, announced by the Biden administration in January 2024 and updated in May, aims to charge oil and gas companies for excess methane emissions starting at $900 per metric ton in 2024, increasing to $1,500 per metric ton by 2026. Methane emissions can occur in many places in the oil and gas supply chain. For instance, methane can leak from oil wells themselves. It can leak from pipelines during natural gas transportation (natural gas is 70-90% methane). It can leak into the atmosphere from flares (as seen below), where combustion of excess natural gas in systems is always incomplete to some degree.

The fee aims to incentivize the adoption of technologies, systems, and practices that reduce these fugitive methane emissions from oil and gas operations, which in many cases should also align with the economic incentives of these operators, for whom gas is often a product.

The rule is also part of a larger methane emission reduction program (MERP) from the EPA, which also includes funding (to the tune of more than $1.5B) for a slate of stakeholders to reduce methane emissions from oil and gas operations. Further, the rule includes enhanced clarity on how new measurement and reporting technologies, such as satellite data, will develop a better baseline understanding and ongoing monitoring of methane emissions in general. It’s worth noting here that historically, most quantification of methane emissions from oil and gas has relied on estimates. As technologies improve, including ones like LongPath’s and Xplorabot’s, surveyors may well discover more methane in places where it was previously underestimated and better enforcement of new policies like the EPA’s waste emissions charge will become possible.

If the law stands, oil and gas producers could be on the hook for fees starting next year. The rule is already in effect for 2024, meaning that oil and gas companies that emit more than 25,000 tons of CO2-equivalent emissions directly from their operations will owe $900 for each additional ton of methane they emit this year next year.

In terms of which companies will be hit hardest by the rule, it’s worth noting there’s significant variance across geography and from producer to producer in terms of the methane intensity of oil and gas production. But with more than 6 million tons of leaked methane across the U.S. everywhere, the high end of what some producers might have to pay is, well, reasonably high.

On the impact side, the EPA estimates that the rule could help avoid more than 1 million metric tons of methane emissions by 2035, equivalent to 28-84 million metric tons of carbon dioxide equivalent, depending on whether you use a 100 or 20-year timeframe to compare the gasses.

At present, the specific details and full operationalization of the rule are still being refined. The EPA is actively engaging stakeholders to get input on how best to measure and verify methane emissions to ensure accurate reporting and compliance. Plus, predictably, there’s been plenty of pushback to the waste emissions charge, especially from stakeholders in jurisdictions where methane fees would cost operators the most.

Predictably, there’s pushback

In April, dozens of U.S. House of Representative Republicans called for the EPA to scrap the waste emissions charge entirely. While the EPA didn’t, after the rule was finalized and published in May, The American Petroleum Institute filed a petition in federal court for the EPA to revise the waste emissions charge to add exemptions for equipment used more temporarily.

While other parties are seeking more clarity on other specific components of the rule, and while we’re still in the 60-day period where organizations can file petitions for changes to the regulations, on the whole, most of the ongoing discussions are focused on establishing greater clarity or securing certain carve-outs. There are ongoing lawsuits and litigation questioning whether the EPA has the authority to regulate greenhouse gas emissions; suing the EPA to protect industry interests is as common a practice as commodities like oil and corn themselves. Still, surprisingly, so far, the waste emissions charge seems poised to survive.

That is, of course, also contingent on the looming presidential election. Post-November, the waste emissions charge stands out prominently as an example of a policy that might not survive in a Trump presidency. Current polling suggests the election is close, but not even a coin flip anymore, if it were held today.

What’s next

If the waste emissions charge ‘sticks,’ it should be seen as one of the most ambitious climate policies in the world. While it could cost some oil and gas companies a lot of money, it should ultimately encourage them to improve their operations in a manner that could economically benefit them and extend their license to operate by producing less methane-intensive oil and gas products. In that regard, having low methane-emitting operations could be seen as a competitive advantage. A win-win for asset managers and the atmosphere. The waste emissions charge also benefits companies and organizations working on technologies to both measure and monitor methane emissions from oil and gas operations and mitigate them. Examples of our portfolio companies that fit this bill include:

1. Highwood Emissions Management: An all-in-one data, analytics, and emissions reporting software for the oil and gas industry

2. Xplorobot: Detecting and verifying methane emissions with laser OGI

If the waste emissions charge gets lost in political shuffle, it will become emblematic of another missed opportunity to accelerate climate action and will follow in a worrying series of global signals that climate isn’t as popular politically as four years ago.

It’s also worth noting that the U.S. lacks a comprehensive policy to drive methane reductions in other key sectors, like agriculture, that emit as much, if not more methane than oil and gas operations do. While new policy proposals could change that, and while California has an ambitious state-level methane emissions reduction target, on the whole, whether and to what extent policy will accelerate methane emissions reductions is an open question.

Hope you enjoyed this one from Overview Capital. Reminder to sub for their newsletter here if you did.

— Nick