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Texas Challenges EPA’s Failure to Make New Endangerment Findings for the Quad Oa Methane Rules for the Oil and Gas Sector

As discussed in this previous post, a number of states and industry groups have challenged EPA’s new VOC and methane emission regulations for the oil and gas sector (“Quad Oa”). Texas has now further defined the claims it plans to bring against EPA in the U.S. Court of Appeals for the D.C. Circuit.

Failure to Comply with the Clean Air Act

In its August 29, 2016 Statement of Issues to the D.C. Circuit, Texas asserts that Quad Oa is "arbitrary and capricious, an abuse of discretion, or otherwise not in accordance with law" for several reasons grounded in both administrative law and the text of the Clean Air Act ("CAA"). First, Texas asserts that Quad Oa includes sources "not originally included or contemplated in the listing of source categories as previously determined by the EPA under Section 111(b) of the CAA."

Texas also takes issue with EPA’s failure to prepare an independent endangerment finding for methane or the oil and gas source category. Instead of making a methane-specific finding, EPA relied on a previous endangerment finding that it made for six “well-mixed” greenhouse gases (“GHGs”) emitted from mobile sources. In 2009, EPA determined that emissions from these six gases collectively endanger both the public health and the public welfare of current and future generations by causing or contributing to climate change. This same finding has served as the basis for EPA’s previous GHG regulations. Quad Oa is the first regulation where EPA has specifically and directly regulated methane as a GHG.

The Statement of Issues reflects that Texas will argue that EPA needed to make a separate endangerment finding that methane emissions from oil and gas operations, on their own, endanger human health and welfare. When similar arguments were raised during the notice and comment period for the proposed Quad Oa, EPA responded that GHGs are the regulated pollutant under Quad Oa, as expressed in the form of methane. EPA argued that, although the 2009 Endangerment Finding defined the pollutant as the aggregate group of the well-mixed GHGs, the finding was also clear that a source category does not have to emit every single one of the six gases in order to contribute to endangerment. EPA also provided past examples of regulations limiting GHGs from sources that only emit a few of the six gases.

In addition, EPA did not prepare an independent endangerment finding for the oil and gas source category to establish standards of performance for methane and GHG emissions. As a result, Texas argues that “EPA failed to properly evaluate the scientific evidence concerning the effect of greenhouse gas emissions from the oil and gas source category.” In response, EPA is likely to rely on statistics that it cited in the preamble to the final Quad Oa regulation, including the assertion that the domestic oil and natural gas sector emits about 32% of the U.S.’s total methane emissions and about 3.4% of all U.S. GHGs.

Problems with EPA’s Cost/Benefit Analysis

Finally, Texas asserts that EPA “did not base its cost/benefit estimates on reasoned bases and analyses, and, therefore, the EPA failed to properly consider the complete regulatory burden of the Final Rule on Texas’ regulatory agencies and the oil and gas industry in Texas.” While the Statement of Issues does not explicitly reference the metrics that EPA used in its cost/benefit analysis, the agency’s use of the Social Cost of Methane has come under increased scrutiny, and may serve as part of the basis of this challenge.

As discussed in this previous article, EPA has used a particular social cost of methane metric to determine the economic value of methane reductions from multiple rules over the summer of 2016, including rules to regulate methane from landfills and the oil & gas sector. In addition, EPA and the Department of Transportation rely heavily on the social cost of methane and the social cost of carbon to quantify benefits associated with GHG and fuel-economy rules for light-duty vehicles in a July 2016 Report. The agencies also relied on both metrics in a recently finalized rule that regulates GHG emissions and fuel-efficiency standards for heavy-duty trucks.

Commentators report that over 95% of the benefits quantified for each of these rules are tied to the methane metric. This means that the metric is a crucial variable, playing a determinative role in the agency’s calculations of a rule’s worth. With respect to the methane rules for landfills, for example, the social cost of methane metric led the EPA to conclude that the rules would produce benefits of $512 million in 2025 – a valuation that far exceeded what EPA determined to be the rule’s $6 million price tag. Changing the metric, then, would change the math. If the social cost of methane increases (i.e., if the cost of incremental changes in methane increases), the benefits generated by methane regulation increase. If the social cost of methane decreases, the benefits decrease.

For this reason, EPA’s use of the social cost of methane has been subject to scrutiny and criticism, especially from Republican members of Congress. On July 7, 2016, Representative Evan Jenkins (R-WV) introduced legislation that would prevent EPA and the Department of Energy from using both the social cost of methane and another model called the social cost of carbon to justify rules. This legislation has received support from the American Fuel & Petrochemical Manufacturers, who sent a letter on July 11, 2016 sharply criticizing the social cost of carbon. It remains to be seen whether the courts will have similar questions about the use of the social cost of methane in agency rulemaking.

In August 2016, the Interagency Working Group published an Addendum on how federal agencies should value methane and nitrous oxide emissions in regulatory cost/benefit analyses, and references the metric that EPA relied on in these recent regulations. Whether this metric holds up in the face of Texas’ challenge remains to be seen.

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Rachel D. Comeskey

Rachel D. Comeskey Associate

Kristen P. Miller

Kristen Miller Associate

Corinne Snow

Corinne Snow Associate