5 Things to Know About the Inflation Reduction Act’s Environmental Provisions
On Sunday, August 7 the Senate passed the Inflation Reduction Act of 2022 (the Act) as part of the FY 2022 Budget Reconciliation bill. The House is now slated to reconvene on Friday, August 12 to vote on the Act and send it to President Biden for signature. Senate Democrats state that the sweeping legislation will “make a historic down payment on deficit reduction to fight inflation, invest in domestic energy production and manufacturing, and reduce carbon emissions by roughly 40 percent by 2030.” The Act allocates hundreds of billions of dollars to facilitate a clean energy transition, primarily through clean energy tax credits. We have previously discussed the Act’s tax provisions here and provisions related to offshore wind and related transmission infrastructure here. This article spotlights the Act’s Methane Emissions Charge and other notable environmental provisions.
1. The Methane Emissions Charge would be the first direct federal fee on GHG emissions.
The Act’s Methane Emissions Reduction Program includes both carrots and sticks to reduce oil and gas sector methane emissions. The carrot: up to $1.55 billion in grants, rebates, and loans to help reduce methane emissions from certain petroleum and natural gas systems. The stick: a methane emissions charge that would be the first direct federal charge, fee, or tax on GHG emissions.1
The charge will apply only to methane emission from specific types of facilities that are subject to annual greenhouse gas reporting under subpart W of part 98 of title 40 of the Code of Federal Regulations. Specifically, the following types of subpart W facilities would be subject to the charge:
- offshore petroleum and natural gas production;
- onshore petroleum and natural gas production;
- onshore natural gas processing;
- onshore natural gas transmission compression;
- underground natural gas storage;
- liquefied natural gas storage;
- liquefied natural gas import and export equipment;
- onshore petroleum and natural gas gathering and boosting; and
- onshore natural gas transmission pipelines.
The Act characterizes the fee as a Methane “Waste Emissions Charge”, setting statutory thresholds for “waste” by facility type, and then imposing an escalating charge for emissions above those thresholds. The “waste” thresholds defined in the statute are as follows:
- For petroleum and natural gas production facilities, any reported subpart W emissions in excess of 0.2% of the natural gas sent to sale from the facility.
- For nonproduction facilities, any reported subpart W emissions that exceed 0.05% of the natural gas sent to sale from a facility.
- For natural gas transmission facilities, any reported subpart W emissions that exceed 0.11% of the natural gas sent to sale from the facility.
The methane emissions charge would start in calendar year 2024 at $900 per ton of methane, increase to $1,200 in 2025, and be set at $1,500 for 2026 and each year after.
2. Future costs of the Methane Emissions Charge are far from clear.
The Congressional Budget Office estimates that the charge will generate over $1 billion per year in gross revenue through FY 2030.2 But such projections are complicated by the Act’s inclusion of potential exemptions, and these exemptions are not a model of clarity.
Facilities are exempt from the charge if:
- “methane emissions standards and plans pursuant to subsections (b) and (d) of [Clean Air Act] section 111 have been approved and are in effect in all States with respect to the applicable facilities” and
- “compliance with the requirements described in clause (i) will result in equivalent or greater emissions reductions as would be achieved by [EPA’s 2021 methane proposal], if such rule had been finalized and implemented”; or
- emissions exceeding the applicable thresholds “are caused by unreasonable delay, as determined by the [EPA] Administrator, in environmental permitting of gathering or transmission infrastructure necessary for offtake of increased volume as a result of methane emissions mitigation implementation.”
We have previously detailed EPA’s 2021 methane proposal, as well as some of the proposal’s potential vulnerabilities. Since EPA has yet to propose any actual regulatory text, there are significant uncertainties with respect to implementation of EPA’s proposal. At any rate, determination of whether any future final rule results in “equivalent or greater emission reductions” will be a tremendously complex undertaking that will inevitably spur litigation. Similarly, the scope of the alternate exemption based on lack of pipeline infrastructure provides no boundaries to guide the EPA’s decision of what constitutes unreasonable delay, signaling a potentially high bar for facilities to overcome. These exemptions are not static, and a facility may qualify for an exemption in one year only to lose it in subsequent years, making it difficult to ultimately predict the funds that will be available from the assessment of the methane fee. Wells that have been permanently plugged and abandoned in compliance with all applicable regulations are also technically exempt from the fee. However, the compliance determination rests with the EPA Administrator, and given the increasing focus on potential methane leaks from plugged and abandoned wells there is potential risk of aggressive fee assessments on these assets.
3. The Act provides over $30 billion in financial assistance for GHG reduction projects.
The Act creates numerous programs providing grants and other financial assistance for projects that reduce GHG emissions, including:
- $27 billion for a Greenhouse Gas Reduction Fund that will provide technology-neutral funding to states, nonprofits, and other institutions for projects that reduce or avoid GHG emissions and other forms of air pollution. $8 billion of this funding is specifically earmarked for low-income and disadvantaged communities.
- $5 billion in competitive grants to states, tribes, and municipalities to develop and implement GHG emissions reduction plans.
- $3 billion to fund installation of zero-emission port equipment or technology.
- $1 billion in grants and rebates to businesses, states, tribes, and municipalities to fund the replacement of Class 6 and Class 7 heavy-duty vehicles with zero-emission vehicles.
4. The Act has a strong focus on environmental justice.
Environmental justice is a significant focus of the Act. After the initial text of the Act was released, President Biden stated in a press release that the “investment in environmental justice is real.” The Act includes a mix of provisions aimed at (1) improving the health and environment of communities facing environmental justice issues (particularly in the context of harmful emissions), and (2) providing tax credits, grants, and funding to disadvantaged communities. Among others, the below provisions are indicative of these efforts:
- An increase in energy credits (10% to 20%) for solar and wind facilities placed in service in connection with low income communities.
- Over 40% of the $27 billion Greenhouse Gas Reduction Fund ($10.8 billion) is essentially earmarked for low-income and disadvantaged communities.
- $3 billion for states, tribes, municipalities, and community-based nonprofit organizations for environmental justice and climate justice block grants. Eligible activities include community-led air monitoring, mitigating climate risks from heat islands and wood heater emissions, and reducing indoor air pollution; climate resiliency; and facilitating engagement of disadvantaged communities.
- $3 billion to reduce air pollution and emissions at ports via the installation of zero-emissions equipment and technology.
- $37.5 million in grants to monitor and reduce air pollution and greenhouse gas emissions at schools in low-income and disadvantaged communities along with another $12.5 million to provide technical assistance to help schools address environmental issues.
- $33 million to the Council on Environmental Quality (CEQ) to collect data and track disproportionate impacts of pollution and climate change on environmental justice communities in addition to $3 million in grants to deploy, integrate, and operate air quality sensors in low-income and disadvantaged communities
5. Comprehensive permitting reform is part of the deal.
The degree to which the time, costs, and uncertainty associated with current environmental permitting will hinder the United States’ clean energy transition goals is the subject of intense debate. The Act provides funding to several federal agencies to improve the efficiency of environmental reviews, including $40 million to EPA and $30 million to CEQ to address staff and resource shortages. But many contend that comprehensive permitting reform is needed.
Accordingly, Senate Democrats have stated that the Act is part of a broader “agreement call[ing] for comprehensive permitting reform legislation to be passed before the end of the fiscal year.” And a joint statement from Senators Chuck Schumer and Joe Manchin announcing the Act says that they have already “reached agreement with President Biden and Speaker Pelosi to pass comprehensive permitting reform legislation before the end of this fiscal year.” According to a one-page summary of the permitting reform deal, it would:
- Set maximum timelines for permitting reviews, including two years for NEPA reviews for major projects and one year for lower‑impact projects.
- Set a statute of limitations for court challenges.
- Direct the president to designate and periodically update at least 25 high-priority energy infrastructure projects and prioritize permitting for these projects.
- Improve Section 401 of the Clean Water Act by incorporating improvements from both the Trump and Biden administrations.
- Clarify FERC’s jurisdiction over interstate hydrogen pipeline, storage, import, and export facilities.
- Enhance federal government permitting authority for interstate electric transmission facilities that have been determined by the Secretary of Energy to be in the national interest.
Such permitting reform falls outside the bounds of the Senate budget procedure being used to pass the Act, meaning permitting reform legislation would require 60 votes and Republican support. Some Republicans have already warned Senator Manchin not to expect Republican votes for permitting reform if he votes to pass the Act. But it remains to be seen whether Republicans will be willing to vote down permitting reform. The stakes are only raised by the fact that Senator Schumer plans to attach the permitting reforms to a stopgap bill to keep the government running past September 30, 2022, in which case a no vote would risk a government shutdown.
1 Congressional Research Service, Inflation Reduction Act Methane Emissions Charge: In Brief at 1 (Aug. 4, 2022), https://crsreports.congress.gov/product/pdf/R/R47206.
2 See id. at 9.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.