Even Modest Fees Could Produce Substantial Reductions in Methane Leaks at Low Cost

A new issue brief released today finds that fees on methane emissions from the oil and gas system would have small effects on natural gas prices while incentivizing companies to reduce methane leaks. Reducing the emissions of methane, a potent greenhouse gas, from the oil and gas system is a key component of many proposed emissions reduction policies.

“Like a carbon tax, a methane fee is a policy option that many economists see as a cost-effective approach to reducing emissions,” author and RFF Fellow Brian Prest said. “Right now, emitters do not have sufficient financial incentive to reduce methane emissions because the market value of the lost methane is much smaller than the environmental costs. Policy will likely be needed to reduce the amount of this powerful greenhouse gas in the atmosphere.”

The Biden administration recently rolled back a Trump-era rule that allowed natural gas producers to release more methane than allowed under the Obama administration. However, the US Environmental Protection Agency has indicated that it is looking to further clamp down on methane emissions. One target could be methane leaks, which occur along the natural gas supply chain and release approximately 13 million metric tons of methane per year. A fee on methane leaks, which would put a price on each ton of methane unintentionally released into the atmosphere from the oil and gas system, could incentivize oil and gas companies to tighten up their supply chains.

Prest used a simple economic model to estimate the effects of several proposed methane fees on leakage rates, the cost of natural gas production, and the increase in wholesale natural gas rates. By fully measuring the effect of methane fees across the entire natural gas supply chain, Prest calculated the following central estimates for a range of possible methane fees:

• A $500/ton methane fee would increase wholesale natural gas prices by $0.07–0.10/MMBtu. A $2,000/ton methane fee would increase wholesale natural gas prices by $0.18–$0.26/MMBtu. These increases amount to about 5 percent of current wholesale gas prices and about 1 percent of retail residential gas prices.
• A low methane fee of $500/ton of methane could nearly cut the leak rate in half. Higher fees achieve larger reductions, but with diminishing returns. A $2,000/ton fee could reduce the leak rate by 70 percent.
• A fee assessed on an incomplete measure of methane emissions, such as the Environmental Protection Agency’s existing inventory and reporting programs, would have smaller impacts on both prices and leak rates.