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EPA’s proposed rule implementing the first-ever methane tax was published to the federal register January 26, 2024 and is open for comment until March 11, 2024.

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Proposed Rule provides formula for calculating assessable emissions.

Proposed Rule aims to clarify exemptions and penalties.

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We wrote an <a href="https://www.jdsupra.com/legalnews/overview-of-the-inflation-reduction-act-6648116/" target="_blank" rel="noreferrer noopener">overview of the methane tax</a> after the Inflation Reduction Act was signed into law in August 2022 and Congress directed the Environmental Protection Agency (EPA) to impose the first-ever direct tax on methane emissions under new Section 136 of the Clean Air Act. Here, we will focus on what EPA’s new proposed rule fills in.

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The proposed rule was published in the <a href="http://www.epa.gov/system/files/documents/2024-01/wec-proposed-rule-fr_1-26-2024.pdf" target="_blank" rel="noreferrer noopener">Federal Register January 26</a> and is currently open for comment until March 11. Although the rule is not final, the first methane taxes will be assessed for emissions being reported now — for reporting year 2024.<a id="_ednref1" href="#_edn1">[i]</a>

The tax — or “waste emissions charge” (WEC) as the statute and proposed rule call it — is tied to EPA’s Greenhouse Gas Reporting Program, under 40 CFR part 98, Subpart W (the subpart for oil and gas systems).<a href="#_edn2" id="_ednref2">[ii]</a> In other words, it is only the oil and gas industry that is subject to the methane tax for now.<a href="#_edn3" id="_ednref3">[iii]</a>

The tax escalates from $900 per metric ton (mt) this year to $1,200 next year and caps out at $1,500 per mt in 2026 and thereafter.<a href="#_edn4" id="_ednref4">[iv]</a>

The new proposed rule does four main things:

It lays out the formulas to calculate the amount of emissions that will be taxed for each applicable facility.<a href="#_edn5" id="_ednref5">[v]</a>

It refines the tax exemptions mandated by the statute.<a href="#_edn6" id="_ednref6">[vi]</a>

It explains how to net all of one payer’s applicable facilities’ emissions.<a href="#_edn7" id="_ednref7">[vii]</a>

It provides the procedure for when to pay the tax and what happens if you do not pay or report at all.<a href="#_edn8" id="_ednref8">[viii]</a>

A reporter with one or more facilities (a) within one of the nine industry segments defined in the statute and (b) that emits more than 25,000 mt CO2e of greenhouse gases per year is subject to the tax.<a href="#_edn9" id="_ednref9">[ix]</a> That was clear from the statute.

However, the proposed rule introduces a formula for calculating the second threshold — how much of those applicable facilities’ methane emissions would actually be taxed.<a href="#_edn10" id="_ednref10">[x]</a>

To calculate the “waste emissions threshold,” above which the payer will pay taxes on her methane emissions, the payer multiplies the facility’s reported throughput by the segment-specific threshold percentage spelled out in statute as well as the density of methane, which is now spelled out in the proposed rule.<a href="#_edn11" id="_ednref11">[xi]</a>

Next, the payer subtracts her waste emissions threshold number from the facility’s methane output reported under Subpart W.<a href="#_edn12" id="_ednref12">[xii]</a> This number is the payer’s “facility applicable emissions,” which can be negative if the facility’s output is below the waste emissions threshold.<a href="#_edn13" id="_ednref13">[xiii]</a>

There are also three exemptions that the proposed rule refines. The first is for emissions subject to “unreasonable delay” in permitting, the second is for emissions from permanently plugged wells, and the third is for compliance with the new source performance standards — but only after they are adopted by all 50 states.<a href="#_edn14" id="_ednref14">[xiv]</a>

For example, a payer’s emissions for unreasonable delay in permitting may be exempt if (1) the facility is an applicable facility (meets the first threshold of 25,000 mt CO2e greenhouse gas), (2) the payer did not contribute to the delay, (3) the facility’s emissions are from flaring and (4) a set number of months have passed. For the fourth element, the EPA currently proposes 30 to 42 months for now but has said it is open to suggestions in the comments.<a href="#_edn15" id="_ednref15">[xv]</a>

The payer then subtracts the exempted emissions from her facility’s applicable emissions to get the “WEC applicable emissions” that will be taxed.<a href="#_edn16" id="_ednref16">[xvi]</a> If a facility meets the new source performance standards exemption, its number of taxable emissions would go to 0.<a href="#_edn17" id="_ednref17">[xvii]</a>

Another major area of the statute the rule teased out is netting. The statute allows applicable facilities under “common ownership or control” to net emissions across those facilities, which could result in a reduced total charge.<a href="#_edn18" id="_ednref18">[xviii]</a> So, if one of a payer’s applicable facilities is under the waste emissions threshold and one is above, the payer can use the facility that is under the threshold to offset her other facility. The only catch is a payer can only net applicable facilities that meet the first threshold of 25,000 mt CO2e greenhouse gas.<a href="#_edn19" id="_ednref19">[xix]</a>

The proposed rule also lays out the nuts and bolts of reporting and paying. Those who have taxable emissions after walking through the above calculations will have to report those taxable emissions and pay those taxes on March 31 of every year for the prior reporting year.<a href="#_edn20" id="_ednref20">[xx]</a> Thus, the first collection of this first-ever methane tax will be March 31, 2025, for those emissions being recorded now.<a href="#_edn21" id="_ednref21">[xxi]</a>

If there are any corrections a payer needs to make to her reporting, she would need to fix those by November 1 under the proposed rule.<a href="#_edn22" id="_ednref22">[xxii]</a>

Penalties and Fees for Late Payments or Non-Payments

The rule also introduces interest accrual for late payments and a yearly fee for very late payments — or what the EPA is calling “non-payments.”<a href="#_edn23" id="_ednref23">[xxiii]</a> If you do not report or pay at all, EPA proposed to enforce yearly fees on top of that.<a href="#_edn24" id="_ednref24">[xxiv]</a>

Though the WEC is tied to reporting under Subpart W, that regulation is changing too. EPA is required to publish a final rule amending Subpart W by August 2024. Taxes will be based on emissions reported under the new Subpart W starting for reporting year 2025.<a href="#_edn25" id="_ednref25">[xxv]</a>

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<a href="#_ednref1" id="_edn1">[i]</a> 42 U.S.C. § 7436(e)(2)(A).

<a href="#_ednref2" id="_edn2">[ii]</a> See id. at § 7436(e)(1).

<a href="#_ednref3" id="_edn3">[iii]</a> See 40 C.F.R. Part 98, Subpart W, titled “Petroleum and Natural Gas Systems.”

<a href="#_ednref4" id="_edn4">[iv]</a> 42 U.S.C. § 7436(e)(2).

<a href="#_ednref5" id="_edn5">[v]</a> Waste Emissions Charge for Petroleum and Natural Gas Systems, 89 Fed. Reg. 5318, 5328 (proposed Jan. 26, 2024) (to be codified at 40 C.F.R. Parts 2 and 99); see also Memorandum from Off. of Atmospheric Prot., Env’t Prot. Agency on Examples of Charge Calculations Under the Proposed Waste Emissions Charge 2-4 (Jan. 19, 2024) (WEC Memo), &nbsp;https://www.epa.gov/system/files/documents/2024-01/merp_wec_proposal-calculation-examples-memo.pdf

<a href="#_ednref6" id="_edn6">[vi]</a> Waste Emissions Charge for Petroleum and Natural Gas Systems, 89 Fed. Reg. at 5327.

<a href="#_ednref7" id="_edn7">[vii]</a> Id. at 5327-28.

<a href="#_ednref8" id="_edn8">[viii]</a> Id. at 5351-33.

<a href="#_ednref9" id="_edn9">[ix]</a> 42 U.S.C. § 7436(c)-(d).

<a href="#_ednref10" id="_edn10">[x]</a> WEC Memo, at 2-4.

<a href="#_ednref11" id="_edn11">[xi]</a> Id.

<a href="#_ednref12" id="_edn12">[xii]</a> Id. at 4.

<a href="#_ednref13" id="_edn13">[xiii]</a> Id.

<a href="#_ednref14" id="_edn14">[xiv]</a> Waste Emissions Charge for Petroleum and Natural Gas Systems, 89 Fed. Reg. at 5332-43.

<a href="#_ednref15" id="_edn15">[xv]</a> Id. at 5376-77.

<a href="#_ednref16" id="_edn16">[xvi]</a> WEC Memo, at 5-6.

<a href="#_ednref17" id="_edn17">[xvii]</a> WEC Memo, at 5.

<a href="#_ednref18" id="_edn18">[xviii]</a> 42 U.S.C. § 7436(f)(4).

<a href="#_ednref19" id="_edn19">[xix]</a> WEC Memo, at 6.

<a href="#_ednref20" id="_edn20">[xx]</a> Waste Emissions Charge for Petroleum and Natural Gas Systems, 89 Fed. Reg. at 5350.

<a href="#_ednref21" id="_edn21">[xxi]</a> Id.

<a href="#_ednref22" id="_edn22">[xxii]</a> Id.

<a href="#_ednref23" id="_edn23">[xxiii]</a> Id. at 5372-73.

<a href="#_ednref24" id="_edn24">[xxiv]</a> Id. at 5373.

<a href="#_ednref25" id="_edn25">[xxv]</a> Id. at 5327.

Methane Series Part III: Implementation Is Here. EPA Published the Proposed Rule Implementing the First-Ever Direct Tax on Methane Emissions

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