Understanding EPA’s Cost Analysis in the Proposed Methane NSPS
Oil & Gas Financial Journal recently published an
article by V&E partner Larry Nettles and associate Corinne Snow discussing the assumptions underlying the cost analysis in EPA’s recently proposed New Source Performance Standards (NSPS) for methane and volatile organic compound emissions from the oil and gas sector. The article explains how EPA was able to
conclude that the proposed rule will have an net economic benefit by assuming that upstream operators will be able to generate revenue from the additional methane gas that they capture as a result of complying with the rule, and by using a model known as the social cost of methane to assign a value in present-day
dollars to each ton of reductions in methane that will result from this rule.
As explained more fully in the article, EPA assigned a value of $4/Mcf to additional natural gas that it anticipates that the industry will capture as a result of the new control methods required under the proposed NSPS. This estimate is higher than current market rates for natural gas, which
have declined over the past year. According to the
Henry Hub Natural Gas Futures Quotes, natural gas is currently valued just over $2/Mcf, and is predicted to stay below $4/Mcf until the end of 2024. As the chart below demonstrates, EPA was able to reduce its estimates of the costs associated with the proposed NSPS by assuming the $4/Mcf in revenue for the
captured gas, which industry is unlikely to actually realize.
EPA also compared the estimated compliance costs to the climate-related benefits that it anticipates resulting from this proposed NSPS. The social cost of methane metric is a variation on another model frequently used by EPA to assess climate change regulations, known as the
social cost of carbon. In part because methane is considered a far more potent greenhouse gas than carbon dioxide, the social cost of methane model results in a far higher value for each ton of methane emissions than for carbon emissions. For the sake of performing its cost analysis, EPA valued the methane reductions
at $1,100/ton in 2015, while carbon dioxide is currently valued at $36/ton.
EPA used the $1,100/ton figure to conclude that its proposed NSPS would result in a monetized climate benefit of $200-210 million in 2020, and $460-550 million in 2025. These figures outweigh the $170-180 million in new compliance costs for 2020, and estimated $280-330 million in compliance
costs in 2025. As a result, EPA concluded that the proposed NSPS has a net economic benefit.