On Tuesday, August 18, 2015, the U.S. Environmental Protection Agency (“EPA”) issued proposed New Source Performance Standards (“NSPS”) under the Clean Air Act covering methane and volatile organic compound (“VOC”) emissions for certain equipment, processes, and activities in the oil and natural gas source category—including hydraulic fracturing and refractured oil wells that can contain natural gas as well as oil.
The proposed NSPS would require companies to take affirmative steps to find and repair potential leaks; capture more natural gas during well completion; and limit emissions from new and modified pneumatic pumps. EPA also proposed emissions from several types of equipment used at natural gas transmission compressor stations, including compressors and pneumatic controllers. EPA’s proposed standards would complement voluntary efforts like EPA’s Methane Challenge Program and the Natural Gas STAR Program. EPA asserts that the NSPS are based on practices and technology currently used by industry.
EPA’s proposal is a part of the Administration’s effort under the Climate Action Plan to cut methane emissions from the oil and gas sector by 40–45% from 2012 levels by 2025. EPA estimates that the draft standards are expected to reduce 340,000–400,000 short tons of methane and 170,000–180,000 tons of ozone-forming VOCs in 2025.
According to EPA, those reductions in methane are expected to yield net benefits of $120–$150 million in 2025 after total costs ($320–$420 million) are subtracted from total benefits ($460–$550 million). While net benefits of $120–$150 million are indeed significant, they represent a fairly modest margin between the upper bound of the cost estimate and the lower bound of the estimated benefit—$40 million. Even modest changes to the manner in which EPA estimated costs and benefits could very well eliminate any projected benefit to this rule.
Given the narrow margins between costs and benefits, EPA should be fairly certain about the sufficiency of its estimates. It is clear; however, that the Agency is less than confident about its estimates. EPA offers both cost and benefit estimates “give or take” about $100 million each. Importantly, EPA has good reason to doubt its benefits calculations in particular.
EPA calculated future benefits using an estimate of the social cost of methane that has never before been used in rulemaking. This estimate was developed by Agency staff in a study released in 2014, but which was seemingly never peer reviewed. In the last few months, EPA apparently conducted its own peer review of the Agency’s use of the study to model benefits from the Oil and Gas NSPS, but never identified the peer reviewers.
Nor did EPA provide any meaningful opportunity to comment on the “social cost of methane” the Agency had been developing for some time. EPA noted that it sought comments on developing a “social cost of methane” in the Light-Duty Vehicle Standards it proposed in 2012. Even if true, how would a person interested in providing input on the “social cost of methane” identify proposed CAFE standards as their opportunity to comment on methane?
In many ways, EPA’s “social cost of methane” mirrors the federal government’s social cost of carbon. The social cost of carbon was developed by an interagency working group, the members of which are unknown. The interagency working group conducts no public meetings, provides no meeting minutes, and offers little to no insights into how decisions are made. One of the key decisions in developing both the social cost of carbon and the social cost of methane is the determination of the discount rate.
Both social cost estimates use various emission scenarios to project the severity of future climate impacts, assign costs to those impacts, and then derive present values from those future costs. While the Office of Management and Budget (“OMB”) recommends use of a 7% discount rate, both estimates use 3% discount rates. While we have not examined the impact on the “social cost of methane” of abandoning the 7% discount rate EPA most frequently uses in benefits analyses, selecting a 3% discount rate instead of a 7% discount rate could cause the “social cost of carbon” to switch from projecting net benefits (largely from agricultural yields) to showing net costs.
Importantly, both the “social cost of methane” and the “social cost of carbon” estimate global benefits—not domestic benefits. The problem with estimating global benefits instead of domestic benefits is that it results in a skewed economic benefits analysis. The proposed Oil & Gas NSPS provides a great example of this bias. EPA projects that the proposed NSPS will result in $460–$550 million in global benefits, and between $320–$420 million in purely domestic costs in 2025. The benefits appear larger than the costs, but the costs are borne by the U.S. economy alone, while the benefits are shared with every other country in the world.
A more accurate portrayal of the costs and benefits of the proposal would be based on a comparison of domestic costs to domestic benefits. If EPA were to use the United States’ relative contribution to global GDP (27%) as the proportion of benefits the United States would realize from the proposed Oil & Gas NSPS, domestic benefits would range between $124 and $148 million. Under this more accurate portrayal of costs and benefits, the proposed NSPS will result in no domestic benefits—in 2025, it will result in a net cost to the U.S. economy of between $196 million and $272 million.