IER

How the Market Process Regulates Methane Emissions

This past month, the Interior Department proposed delaying the implementation of the Methane and Waste Prevention Rule. The purpose of the rule is to limit the amount of methane that oil and natural gas producers may release or burn off as part of their production on public lands. According to some estimates, the rule would cost $279 million a year and block more than 800,000 jobs by 2020.

The decision to review this costly regulation has been met with the usual animosity in Washington: politicians have drafted a letter condemning the decision and anti-fossil fuel groups are challenging it in the courts. But why are so many people interested in saving a regulation that will have such a negligible impact on reducing carbon emissions?

In order to appease various interest groups, politicians have a strong incentive to adopt regulations, even when the costs of the regulation are much higher than its presumed benefits. Such is the case with the methane rule. What makes the adoption of these new methane regulations particularly onerous, however, is the fact that the market process is doing a great job of reducing methane emissions on its own.

Between 1990 and 2015, the oil and natural gas industry made significant reductions in methane emissions during a period of rapid industry growth. Over this 25-year span, petroleum and natural gas systems in the United States reduced their methane emissions by 29 percent and 16 percent respectively. If those numbers appear underwhelming, keep in mind that production of crude oil grew by 28 percent, and the number of producing natural gas wells increased by 113 percent during that time.

How did this happen?

You might be surprised to discover that the market process has been helping to reduce methane emissions. Methane is a valuable commodity, so it makes sense that oil and gas companies want to prevent any of it from going to waste. Companies have a market incentive to capture as much methane as they can, and for the past 25 years they have been doing so without any added regulation.

Still, there are instances where the cost of capturing methane emissions exceeds the amount a company could make selling the captured resource on the market. In these instances, companies do not capture all of the methane emissions at a given drill site. However, we can expect oil and gas companies to continue to invest in new technologies that lower the cost of capturing methane emissions, allowing them to continue to reduce their methane emissions over time.

In the same way companies invest in their employees in order to improve their productivity, oil and gas companies invest in technology that make their drilling operations more efficient. The market value of methane emissions for a given year offers us an approximation of how strong of an incentive that is.

In 2015, natural gas systems emitted 6,497 kilotons of methane in the United States. Based on the national benchmark price at the Henry Hub in Louisiana, the average spot price for natural gas was $2.61 per million British thermal unit in 2015. Keeping other things equal, it would have been worth over $60 million for natural gas companies to capture 100 percent of their methane emissions that year. The opportunity to collect that revenue is what is driving innovation in methane capture technology and the corresponding reduction of methane emissions.

When considering methane regulations, we should also take into account the role natural gas has played in reducing carbon emissions more broadly. New technologies like horizontal drilling and hydraulic fracturing significantly lowered the price of natural gas, allowing it to become a major source of electricity. Because of this, greenhouse gas emissions in the electric utility sector continue to fall, and the United States has reduced its greenhouse gas emissions more than virtually any other country since 2007.

If the goal is to reduce carbon emissions, then policymakers should be apprehensive about raising the cost of natural gas through excessive regulation. The Bureau of Land Management’s regulatory impact analysis of the methane rule acknowledges that the rule could prevent future natural gas production. Therefore, methane regulation might actually slow down our reduction of carbon emissions.

For those concerned about carbon emissions, the profit and loss system is producing something heavy-handed regulation cannot: a sizeable reduction in carbon emissions without straining economic growth. For this reason, the Interior Department should continue forward with its plan to revise—and hopefully rescind—the methane rule.