Assessing Changes to EPA’s 2016 Rule to Limit Methane Emissions

Shortly after taking office, President Trump signed an executive order requiring agencies to review existing regulations and other policies that could burden the development of energy resources. Under that directive, the Trump administration’s Environmental Protection Agency (EPA) proposed a two-year stay  of parts of the Obama-era EPA’s regulation to reduce emissions of methane (a powerful greenhouse gas) from new, reconstructed, or modified sources in the oil and gas sector. An initial 90-day stay was vacated by the District of Columbia Circuit Court of Appeals last summer. EPA has announced a formal reconsideration of parts of the rule that will be delayed. The rule currently remains in effect, albeit under a cloud of uncertainty.

In a new report, we carefully analyze the costs and benefits of repealing or modifying EPA’s 2016 methane rule. This report is the latest in a series assessing the costs and benefits of rules being considered by the Trump administration for possible repeal or modification, including the Bureau of Land Management’s methane emissions rule for oil and gas sources on federal lands.

The regulatory impact analysis accompanying EPA’s final methane rule estimated net benefits of $35 million and $170 million in 2020 and 2025, respectively. The benefits are climate related, captured by a metric known as the social cost of methane, as well as revenues to industry from the sale of captured gas. The costs of the rule are primarily the costs of installing new technology as well as surveying and repairing leaks.

We replicated EPA’s original analysis and updated various inputs (such as the price of natural gas) to generate a baseline assessment for repealing the rule, which indicated that there would be net costs to society of $27 million and $152 million in 2020 and 2025, respectively. Our analysis suggests that the rule should be left in place, because the forgone benefits outweigh the cost savings associated with repeal.

According to EPA’s analysis supporting its proposal to delay implementation, the present value of cost savings from the two-year stay (which would halt implementation of the rule in 2018 and 2019) is $280 million, which comes primarily from the delay of monitoring and repair costs. There are, of course, forgone benefits from emissions that would have been avoided if the rule were in effect during these two years, which the Trump administration values at just $37 million. This figure can be attributed to the use of a domestic estimate of the social cost of methane, measuring the costs to only the United States, rather than the global estimate of the social cost of methane (which was used by the Obama administration). Using the global social cost of methane, we estimate that the proposed delay would have net social costs of $18 million, discounted at 3 percent. Using a 7 percent discount rate, we find that the delay would have net benefits of $195 million.  The discount rate helps value future benefits in present value terms, and increasing the discount rate means placing less value on future benefits. Many economists consider the use of the 7 percent discount rate to be inappropriate for calculations of the social cost of methane. While our reports discuss everything in terms of the 3 percent discount rate, we also conducted analysis using a 7 percent rate.

There are other controversies associated with this rule beyond the uncertainty in valuing the climate-related benefits (we wrote about some of these issues following the DC Circuit court decision last summer). One significant issue is the inclusion of low production wells in the monitoring requirements for fugitive emissions. These wells were excluded from the proposed rule on the assumption that they were mostly owned by small businesses and that they generally have low levels of fugitive emissions. A low production well, as its name suggests, produces less oil or gas than a regular well. Under the Obama administration, EPA received public comments claiming that the potential fugitive emissions from low production wells are in fact comparable to higher-production wells, and the agency ultimately included them in the final rule . The inclusion of low production wells was cited by EPA under the Trump administration as a reason to delay the rule because of claims from industry that there was insufficient time to comment on the change. However, the DC Circuit Court pointed out that the proposed rule directly solicited comment on whether to include low production wells in the fugitive emissions requirements as well as on the emissions potential of these wells. We estimate that the net benefits of implementing this rule without low production wells would be $36 million and $141 million in 2020 and 2025, respectively. Notably, in 2025, the implementation of this modification yields lower net benefits than our baseline scenario, suggesting that, over time, the inclusion of low production wells does yield greater benefits than costs, given EPA’s assumption in its original 2016 analysis that low production wells have emissions rates similar to higher-production wells.

Ultimately, whether it makes economic sense to repeal this rule depends on the valuation of methane emissions reductions. Given the uncertainty over which figure to use, it would be useful for the Trump administration to provide a full and transparent range of estimates to best inform the public about the potential impacts of delaying or repealing the rule.