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Why Biden’s methane fee isn’t a gas tax

By Liam Denning

Bloomberg Opinion

Charif Souki, who founded the biggest U.S. natural gas-export firm and now chairs another called Tellurian Inc., isn’t known for mincing words. And he didn’t disappoint when tackling the issue of methane emissions at a recent event hosted by the Center for Strategic and International Studies: In the upstream, methane leaks are inexcusable. They’re avoidable. The technology is available to do it … It should not be allowed.

This is noteworthy for two reasons. First, an industry insider is calling out companies that are potential clients and suppliers. Second, he did so sitting across town from where lawmakers are weighing a punitive federal fee on methane leaks.

Business is all about incentives, and methane standards loosened under the last administration while, until very recently, natural gas prices were so low that capturing every last molecule wasn’t exactly top-of-mind. Naturally, the gas industry isn’t too pleased about the penalties now being proposed to address that. A month ago, several trade associations sent a letter to congressional leaders warning such penalties would effectively be a tax on energy consumers, raising average gas bills by perhaps 17%.

That math was based on an earlier figure of $1,800 per tonne of fugitive methane, versus the $1,500 now talked about, but it’s hard to see how it adds up. First, it assumes the cost of the gas itself accounts for almost half the average residential bill. While I haven’t seen the internal data used by the analysts, that proportion looks very high compared with public data from the Energy Information Administration.

Almost 76 billion cubic feet of gas per day was delivered to U.S. consumers of all types last year. Assume that was after 2% of penalized emissions, and the total penalty to be absorbed would come to about $21 billion — or 78 cents per thousand cubic feet of gas actually delivered. At last year’s average residential price of $10.78 per thousand cubic feet, as reported by the EIA, that implies an increase of just 7%.

This brings us to the second problem with the industry’s analysis: It assumes the fines would have no effect on behavior and just get passed all the way down the line to your basement boiler. Possibly that might happen in the very short term. Yet even when gas traded at just $2, the spread between capturing and selling gas versus being fined for not capturing it was more than $30 per thousand cubic feet. That would constitute an enormous incentive to invest in curbing emissions, and one that increases along with gas prices.

Moreover, several analyses, such as those by the Boston Consulting Group or Levi Marks at the Department of Justice’s antitrust division, have shown abatement costs to be relatively minimal, especially when you factor in the positive contribution of selling the captured gas. One recent analysis by economist Brian Prest at Resources for the Future, an environmental think tank, building on Marks’ work, implies a $1,500 penalty might raise wholesale gas prices, net, by between 9 and 30 cents per thousand cubic feet, or just 1-3% of the EIA’s average residential price.

Incidentally, that’s around the 10 cent figure Souki threw out when admonishing the industry, urging it to just get it done and “let’s move on.” Nikos Tsafos of the CSIS, who posed questions to Souki that day, set this in a wider context for me: You cannot say that gas has a constructive role to play in the energy transition without saying, at the same time, that emissions are unacceptable and must be eliminated immediately. I don’t buy the competitiveness objection: If you need to pollute with impunity to be competitive, then you really need to rethink your business model.

It is puzzling that an industry boasting enormous technical prowess in such fields as fracking and liquefied natural gas hasn’t moved more quickly to just hang onto and sell more of its own product. The opportunity to sell U.S. gas overseas (at sometimes very hefty spreads) as well as back-up renewable energy should be incentive enough to burnish its image via relatively easy fixes.

Framing the methane fee as a tax on billpayers may be politically useful, but it also isn’t true. This isn’t a tax on the gas we consume but rather the gas that somehow never makes it far enough for us to consume. In that sense, it’s a tax on failure. Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities.

 

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