This is a re-post from February 18th, 2020, in light of the Senate’s proposed methane fee. Original post here.
Economists of every ideological stripe and from every continent have argued for decades that the best way to reduce climate risks linked to carbon dioxide emissions is to tax them. Elevate the price, reduce the demand, and add complementary policies as needed. The economic case for a carbon tax is compelling and its administration would be simple. Many proponents agree that such a tax should be assessed at the point of upstream production of fossil fuels. The big hurdles for a carbon tax are the politics.
Methane is also a greenhouse gas, and a more potent one than carbon dioxide during its first century in the atmosphere. Increased methane concentrations contribute about one quarter of the net human effect on the climate.
So what about methane policy? Methane emanates from oil and gas production, agriculture, livestock, and landfills, although energy-related releases are the largest source in the United States. Could it be taxed like carbon? Are the politics of methane and carbon different?
Methane is the key component of natural gas and so has value. But companies that are pursuing oil may view gas as a waste product, particularly if prices are low and transportation costs are high. If they cannot easily gather and pipe it to a buyer, they may flare it — burning off the methane but releasing carbon dioxide and other pollutants — or simply vent it through direct release.
Methane researchers from the natural and physical sciences have upped their game in recent years, applying increasingly sophisticated technology and methods to measure and track releases. They frequently conclude that traditional reporting underestimates actual emissions and also demonstrate how to increase measurement precision. Social scientists, however, have been very slow to consider methane and its policy ramifications. Consequently, we decided to devote much of a summer to exploring a seemingly simple question: Do states that generate methane through oil and gas production tax those releases? Our findings are examined in a new article published in the Review of Policy Research.
No state directly taxes carbon emissions. But nearly all energy-producing states tax extraction of oil, natural gas, and coal. They apply severance taxes, designed to capture public value from the permanent loss of a natural resource. Such taxes have routinely faced brutal opposition from industry at their inception, beginning with those adopted during the 19th century. Even so, they generally retain bipartisan support and endure over decades, with some of the highest rates found in very conservative states that are generally tax-averse. However, we found that they only cover methane that is captured for profit — not methane that is blown into the atmosphere.
One of the world’s leading oil and gas producers, Norway, has maintained extremely low methane release rates for generations. It combines tough regulatory standards with a hefty carbon tax explicitly applied to methane released at the point of production. The World Bank has championed the Norway model for decades, advising governments around the world to include released methane in severance tax or royalty regimes in order to reduce waste, deter both greenhouse and air-quality emissions, and capture natural resource value for citizens.
We found that Norway has no rivals in America. Emerging research suggests similar findings for Canada and Mexico, although the Australian state of Queensland includes flared and vented methane in its royalty system. In fact, many American 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 placed methane off-limits from leakage fees. Those historic protections remain largely operational in the shale era, providing either explicit statutory exemption or administrative review processes that empower officials to routinely waive taxes.
Much the same finding applies to royalties for private landowners who authorize 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 (producing carbon dioxide and hazardous air contaminants), you pay nothing to either party. If you simply vent pure methane, you may violate regulatory provisions in some states but are unlikely to pay anything. Plus, venting is harder to detect visually than flaring, creating a potentially perverse incentive to release pure methane and not report it rather than burn it off.
Even if one dismisses the impact of methane emissions on climate and air quality, flaring and venting represent the sheer waste of a valuable energy source. Rather than early concerns about climate, Norway’s revulsion toward that wastefulness was the driving force behind its hybrid regulate-and-tax approach.
Some American states have actively considered methane taxation. Political pressure to do this has come not from climate activists but rather local natural-resource groups, teachers, farmers, and ranchers appalled by this waste. The opprobrium toward methane waste is often uniquely bipartisan.
The political nerve center of this effort for decades has been North Dakota. A boom-and-bust oil producer for generations, North Dakota first began to consider including methane waste in its long-standing severance tax system during the mid-1980s. Legislation surfaced to tax flaring following a full year free of charge. But sustained industry opposition served to water down that reform, rendering it largely meaningless ever since.
The state’s methane issues never were resolved, however. They resurfaced with a vengeance during the past decade’s shale surge. Tapping into sprawling Bakken oil deposits with ever-flexible state regulatory restrictions led to surging methane releases, making North Dakota the second-largest emitter after Texas. Many North Dakota wells increase their gas production markedly over time, but insufficient gas capture or transmission capacity has been developed due to the abiding focus on oil. In 2018, the state’s gas capture rate hovered between 80 and 85 percent, suggesting that 15 to 20 percent was released. Norway, in contrast, also contends with oil-to-gas transition as production increases but reports methane releases of just one-tenth to two-tenths of a percent.
On three occasions in the 2010s, North Dakota legislators reintroduced legislationto 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 reduce production in the state if it faced costs for methane waste. On all three occasions, the legislature caved, most recently last March.
Identical results occurred 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 exemptions.
If there are any serious Norway aspirants among states, Alaska comes closest. Nearly a half-century ago, state officials considered global best-practice models for methane, long before greenhouse gas concerns arose. They adopted a rough variant of the Norway model, blending tight flaring regulations with fees (up to double natural-gas value) on flared methane. The fees are not uniformly applied and can be waived when the state negotiates terms of compliance with firms. Nonetheless, this policy has endured and state officials report that it contributes to flaring levels that approach Norway’s.
But Alaska continues to stand alone. With taxation largely off the table, very few states have taken steps to adopt substantial regulatory provisions designed to minimize methane releases. The same story generally applies to methane being generated by landfills, livestock, and agriculture. Most states just look the other way, as do most nations.
The sluggish pace of state action coincides with the Trump administration’s evisceration of emerging federal methane standards initiated during the Obama presidency. Consequently, methane mitigation remains largely uncharted intergovernmental policy territory in the United States, as is true in many other nations.
A growing number of carbon tax proposals introduced into recent Congresses propose taxing carbon emissions upstream at production, the same spot where state severance taxes operate. One could envision a federal methane tax that would deter releases while also capturing some of the lost resource value from flaring and venting. It could operate independently or be woven into a broader carbon pricing regime.
Some portion of the revenue from a methane tax could be used to deploy state-of-the-art methane monitoring systems around the nation. 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 inevitable changes in American energy use. As with carbon taxes more generally, a methane tax would be highly complementary to other policies that could further drive down methane releases.
About the author
Barry G. Rabe is the J. Ira and Nicki Harris Family Professor of Public Policy at the Gerald R. Ford School of Public Policy at the University of Michigan. He is the author of Can We Price Carbon? (MIT Press, 2018) and co-author of the forthcoming Trump, the Administrative Presidency, and Federalism (Brookings Institution Press).
Claire Kaliban is a Staff Assistant in the U.S. Senate. She is a former Policy Analyst at the Center for Local, State, and Urban Policy at the Ford School.
Isabel Englehart is a J.D. candidate at Tulane University Law School. She is a former Policy Analyst at the Center for Local, State, and Urban Policy at the Ford School.