By Mark Agerton and Ben Gilbert
Methane reduction efforts in the oil and gas sector are a hot topic because cutting methane emissions buys time for the world to decarbonize. Methane warms the planet 85 times more than CO2 over 20 years, even though CO2 sticks around longer.
Many methane reduction efforts work by tying firms’ financial performance to their emissions. In a previous post, we discussed how a methane fee like the one proposed by Senators Whitehouse, Booker and Schatz would do this. Firms are also voluntarily reducing emissions, getting their emissions certified, and asking for a price premium for their “low emissions” gas. They’re also reducing emissions to avoid legal and regulatory risk associated with government mandates.
To make ANY of these methane reduction incentives truly effective, they need to target measured methane emissions directly—not specific equipment or operational practices that MIGHT emit methane.
The beauty of measurement-based incentives, like a methane emissions fee levied on verified emissions, or a monitoring requirement for low emissions gas certifications, is that they give producers powerful incentives to optimize their operations around reducing emissions.
Unfortunately, measurement is hard. Methane is colorless and odorless. Measuring it requires expensive tools.
Equipment inventories are not emissions monitoring.
A seemingly low-cost alternative to high-cost measurement is to leverage government inventory-based emissions reporting programs like the EPA’s Greenhouse Gas Reporting Program (GHGRP) or the UK’s version. Under these, companies report inventories of potentially emitting sources: equipment, components, and practices. The EPA multiplies these sources by their estimated average emissions rate, called an “emissions factor.”
Companies like Shell and EQT are currently using inventory-based estimates to calculate their climate footprint. Then, they’re reducing or offsetting it in hopes of getting paid more by climate-conscious buyers.
For politicians looking at methane policy, it’s tempting to simply leverage existing inventory-based reporting programs in new methane regulations.
But relying on inventories for methane regulation would be a mistake
The fundamental problem with inventory-based reporting is one of information: government regulators and 3rd-party certifiers simply can’t know how much methane each individual source emits.
Taking the inventory shortcut creates a number of perverse incentives. Tying financial performance to inventory-based estimates incentivizes producers to optimize their operations around reported inventories, not around actual emissions. It also means that inventory guidelines and emissions factors have to be continually updated.
Creating a new standard to measure actual emissions may involve larger changes up front, but it’ll be better government and business. Government programs will be less complicated and less burdensome. Companies will be able to reduce emissions faster and cheaper.
By not targeting emissions, inventory-based incentives distort behavior.
When you tie profits to emissions-based inventories, you’re making inventory changes profitable —not emissions reductions. Firms will want to reduce or swap existing sources for ones with lower emissions factors. These new sources might or might not emit less than what firms were doing before.
In fact, it’s possible for a company to improve its inventory-based emissions estimates while actually emitting more.
When companies make changes to improve their inventories, they could substitute something that emits a bit of methane and gets counted in the inventory for something that emits a lot of methane but doesn’t get counted. Government regulators and 3rd-party certifiers will have to constantly play catch-up to make sure everything that needs to get counted does.
Distorted behavior changes emissions factors.
Even if reducing inventories doesn’t exacerbate emissions, an inventory-based incentive will cause firms to change their behavior. That’s going to change the true emissions factors, and make existing ones inaccurate.
Although scientists are getting better at modeling emissions from specific types of components, each time producer behavior changes, these models would need to be revised and updated. Of course, updated models would lead to more behavior changes, making the updated emissions factors wrong again. (This general principle is known in social sciences as Campbell’s Law, Goodhart’s Law, or the Lucas critique.)
Inventory-based incentives don’t target super-emitting components.
We know that individual sources emit different rates. In fact, emissions are characterized by a majority of sources that emit moderate amounts of methane, and a few large “super-emitters” that emit a disproportionate share of emissions.
When we use emissions factors to calculate methane taxes instead of actual measurements, for example, we’re not targeting super-emitters. Instead, we’re taxing sources at an average rate: taxes are too high for the majority of sources that emit low amounts, and too low for super-emitters. The same exact logic applies to certifications.
That means companies will spend too much money on low-impact methane abatement efforts, and too little on the high-impact reduction of super-emitters. Plus, low emitting firms won’t be rewarded enough for their good performance. Instead, they’ll be using average emissions factors that include high-emitting firms. We’ll spend too much on optimizing inventories, and not enough on reducing the incidence of super-emitters.
Inventory-based incentives can’t reward innovation.
We need hungry innovators to see a business opportunity in designing new equipment, new methane detection methods, and new AI algorithms to help companies find and fix leaks as they happen.
But for innovation to happen, innovators need to get financially rewarded. That means EPA or private certifiers would need to add the new equipment, detection methods, and leak prevention programs to their inventory programs. This would be a massive undertaking, and create new uncertainty for innovators about whether and how their technology would get “counted”.
Methane monitoring is realistic about what we can and can’t know.
Yes, coming up with new monitoring certifications to measure actual emissions is hard. But the alternative is harder. We’ll have to continually update inventories with every single component in the roughly one million active oil and gas wells in the country and recertify the changing emissions factors of existing and newly developed equipment. That seems a lot more ambitious and a lot less effective at getting firms to cut emissions.
Fortunately, there have been recent movements in the direction of actual measurement over inventory-based approaches. The Gas Technology Institute has launched a Differentiated Gas Initiative, which is developing a framework for measurement-based approaches. Certifiers like Project Canary are implementing continuous monitoring approaches. Satellite companies like Kayrros and Bluefield are offering satellite-based methane tracking. Federal legislation like the Methane Emissions Reduction Act could act as a catalyst to help industry harmonize monitoring standards that could undergird new markets for low-emissions gas.
Fundamentally, a methane monitoring regime is a lot more humble about what companies, government regulators, and third-party certifiers know about the minutiae of an ever-changing oil and gas supply chain. Sure, monitoring is a tall order. But monitoring costs are coming down, while the whack-a-mole of updating inventories will stay expensive.
Reducing methane from the oil and gas industry is one of the lowest-cost ways we can slow climate change. Rather than taking an inventory-based shortcut, government, academia, and industry should collaborate on development of trustworthy methane monitoring standards. In the long run, these standards will be simpler; get faster, cheaper reductions in emissions; and facilitate the development of a market for low-emissions gas that rewards clean producers.
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Mark Agerton is assistant professor of resource economics at the University of California Davis and nonresident fellow at Rice University’s Baker Institute for Public Policy;
Ben Gilbert is assistant professor of economics and research fellow at the Colorado School of Mines’ Payne Institute.
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