Oil and gas companies will soon be required to pay annual fees to the federal government based on their methane emissions. These fees, which the Environmental Protection Agency (EPA) expects will exceed $2 billion over the next decade, are driven by Congressional directives in the Clean Air Act, but the specifics are currently being worked out by the Environmental Protection Agency.

Background

Congress passed the Inflation Reduction Act in 2022, amending the Clean Air Act to direct the EPA to collect a “waste emissions charge” on oil and gas operators whose annual methane emissions from a facility exceed 25,000 metric tons of CO₂e. Emissions for comparison to that threshold will be reported on an operator’s annual Subpart W greenhouse gas emissions reports. In general, 2024 emissions that exceed the threshold will be assessed at a rate of $900 per metric ton, with the rate increasing to $1,200 per metric ton and $1,500 per metric ton in 2025 and 2026, respectively.

EPA’s Proposed Rule

Although Congress prescribed the general framework for the waste emissions charge in the Clean Air Act, EPA is currently hammering out the specifics via rulemaking. For example, Congress provided three fee exemptions in the Clean Air Act, but EPA’s rule proposal significantly narrows them, as follows:

1. Infrastructure exemption. Section 136(f)(5) of the Clean Air Act establishes an exemption for emissions caused by certain delays in pipeline infrastructure permitting. But the EPA’s rule proposal specifies timelines around the delays, and limits the applicability of the exemption to, among other things, flaring emissions that are in compliance with all applicable local, state, and federal rules.
2. Quad Ob/c exemption. Section 136(f)(6) of the Clean Air Act establishes an exemption for facilities that are subject to and in compliance with methane-related Section 111 new source performance standards – such as the EPA’s recently promulgated OOOOb/c standards applicable to new and existing sources in the upstream and midstream energy sectors. But EPA’s rule proposal limits the exemption, specifying that the exemption will only apply when EPA has approved state plans implementing OOOOb/c (which will take years) and where all regulated equipment within a given facility is in full compliance with those standards (a high bar).
3. Shut-in and plugged well exemption. Section 136(f)(7) of the Clean Air Act establishes an exemption for emissions from shut-in and plugged wells. The EPA has proposed that a well be considered shut-in and plugged when the operator has met all applicable federal, state, and local requirements for closure, and a metal plate or cap has been welded or cemented onto the casing end.

Next Steps

The EPA’s rule proposal drew significant industry interest. Thousands of comments were filed by the March 26, 2024, commenting deadline, with many of them focused on the disconnect between what Congress has directed in the Clean Air Act and how the EPA has proposed to implement those directives. On March 26, Senators Capito and Manchin weighed in, as well, emphasizing in letters to the EPA Administrator that the agency’s rule proposal will impermissibly impact small operators and inappropriately restricts exemptions and other provisions (such as emissions netting) provided in the underlying legislation. We are expecting the EPA to finalize the rule by the end of the year. Jackson Walker is advising clients on the impact of the waste emissions charge, as currently proposed, as well as on the interplay between the waste emissions charge and other EPA rulemakings (such as OOOOb/c and Subpart W) affecting the energy sector.