Making sense of methane regulation
© Greg Nash

The Obama administration's efforts to address climate change continue to stoke controversy, as the Environmental Protection Agency’s (EPA) new regulations to limit methane emissions from the oil and gas sector have sparked a wave of criticism from industry groups. Some claim that regulation is unnecessary since companies already have an incentive to capture methane that is released during production and distribution: methane, the primary component of natural gas, is a valuable product that can be sold profitably. In essence, these groups suggest that the EPA is ignoring economics and creating needless rules.

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But, in fact, it is the industry opponents of the rule who are disregarding economics. Methane regulation is necessary precisely because energy companies don't face the right incentive to reduce the adverse social consequences of their activities. The new EPA rule seeks to address this distortion. Unfortunately, though, the rule does not go far enough to properly tackle a problem that seems to be larger than previously thought.

Accounting for externalities

In many cases, the value of captured methane already does motivate oil and gas companies to rein in fugitive emissions (emissions from the sector have dropped 16 percent since 1990 while production has increased, though some of this reduction can be attributed to other EPA regulations). But what happens if the cost of action to reduce methane leaks is higher than the market value of the gas that will be captured? In such cases, companies can be expected to maximize their profits and let these emissions escape into the atmosphere.

Methane emissions are a classic economic externality: The costs of these emissions are borne by outside parties rather than by the emitters. And methane emissions have tremendous social costs. Methane is 86 times more potent a greenhouse gas than carbon dioxide over a 20-year timeframe. Slashing methane emissions will be critical in the effort to contain climate change, and the environmental benefits of reducing emissions are currently ignored when companies consider when to capture methane.

The EPA's new rule aims to internalize this externality. By regulating methane emissions, the EPA compels companies to act in the best interests of the public and to reduce emissions, even if individual controls aren't immediately profitable.

Is this rule sufficient?

While the EPA rule solves one economic issue by addressing an externality, it might create another by exempting existing emissions sources from regulation. The methane rule focuses only on new and modified sources, meaning that many existing wells, pipelines and storage tanks that leak methane will be able to continue doing so indefinitely.

This "grandfathering" approach has undercut the effectiveness of many past Clean Air Act regulations. Older, heavily polluting facilities have often been exempted from EPA air pollution restrictions under the assumption that they'll soon shut down. But this assumption is often incorrect. A two-track regulatory structure that controls the emissions from new sources but exempts the emissions from existing sources gives the latter a powerful incentive to continue operating far longer than would otherwise be the case. Many of our dirtiest coal plants have used this comparative advantage to keep operating (and polluting) decades longer than was expected when new-source regulations were put in place.

Given that production from oil and gas wells tends to drop after the first one to three years of use, exempting existing wells from regulation may not be an enormous problem. But existing pipelines, compressors, valves, storage tanks and other equipment could prove to be persistent sources of methane emissions. The EPA can choose to regulate existing sources of pollution under a separate provision of the Clean Air Act, and this may be necessary to adequately control methane emissions. 

The Obama administration has set a target of reducing methane emissions from the oil and gas sector 40 to 45 percent from 2012 levels by 2025. This proposed rule is a good start toward this goal, but more will be needed to reach it, including new policies governing methane capture on federal lands, and additional efforts to target sources outside the scope of this rule. Industry groups rightly point out that methane is a valuable resource that companies already work to capture. The EPA needs to ensure that these companies also account for the social value of capturing methane from all possible sources. 

Revesz is dean emeritus and Lawrence King Professor of Law at New York University School of Law, and director of the Institute for Policy Integrity. He is the co-author of the forthcoming book "Struggling for Air: Power Plants and the 'War on Coal.'"