Lawmakers recently imposed a charge for methane emitted by the oil and natural gas industry. In this report, the Congressional Budget Office outlines the nonbudgetary effects of such a charge and discusses how the agency generally analyzes them.
Methane is a potent greenhouse gas that has a much stronger warming effect than carbon dioxide but that remains in the atmosphere for a shorter period. The oil and gas industry is responsible for almost one-third of methane emissions from human activities in the United States. The production, processing, storage, and transportation of natural gas (which consists mainly of methane) account for most of the industry’s methane emissions.
Accurately estimating methane emissions is a challenge. Current estimates are largely based on the equipment that companies use to produce and supply natural gas rather than on direct measurements. As a result, facilities with the same equipment-based estimates of emissions could emit very different amounts of methane, depending on how their equipment was operated.
The following are important aspects of CBO’s analysis of the nonbudgetary effects of charging companies for methane emissions:
Charging for methane emissions affects the amount of emissions and companies’ costs to produce natural gas. How much those costs increase and how much emissions decrease depend on abatement costs and the details of the law and regulations establishing the charge, but a large percentage of emissions could probably be avoided at a low cost. Beyond that point, abatement costs would probably increase steeply.
Charging for emissions decreases the output and increases the price of natural gas. The increase in natural gas prices depends on how sensitive end users are to such increases compared with producers’ sensitivity to them. Because end users of natural gas are not as sensitive to price increases as its suppliers are, much of the cost for abatement is expected to be passed through to end users as a price increase. Because abatement costs are relatively low for a large percentage of emissions, the price increase and output decrease associated with abating that percentage is expected to be correspondingly small.
CBO’s analysis of a methane charge depends on the details of the law and regulations establishing the charge. The way methane emissions are estimated, the structure and timing of the charge, and the scope of emissions subject to it all determine how the charge affects emissions, companies’ costs, and the price and output of natural gas.