An interview with Christi Wilson, Trinity Consultants’ most tenured expert on sustainability and environmental compliance, regarding the Inflation Reduction Act.
Welcome back to the fourth blog in our series on the Inflation Reduction Act (IRA). This 4-part interview series between Cority and Trinity Consultants (Trinity) has been an insightful journey, covering everything from the basics of the IRA and its impact on the oil and gas sector to helpful tips on identifying areas for methane reduction to how organizations can use their data to improve environmental performance.
In the final blog, we look at the financial impact of the Act and how organizations can prepare for the changes to come. We’ll also explore what other organizations are already doing and what they can expect in the future.
(Note: This conversation has been edited for clarity.)
The Inflation Reduction Act – Part 4:
Preparation
Cority: Based on what you are hearing from companies, what’s their perspective with this program and how have you seen them approach the upcoming ruling?
Christi Wilson (CW): I think the more ambitious companies are planning for the Inflation Reduction Act by assuming various pending rules, like NSPS (New Source Performance Standards), OOOOb/c, and Subpart W, will be finalized while actively taking steps to retrofit equipment and to ensure any purchases of new equipment to comply with those rules.
However, other folks are taking a more cautious wait and see approach – they aren’t necessarily going to spend that extra capital or take those extra measures until they absolutely know what is required and when.
Furthermore, there is also the likelihood that industry trade groups or individual companies will sue the U.S. Environmental Protection Agency (EPA) over one of more of these rules. It seems plausible that industry will take issue with how the EPA has done some of their cost-benefit analysis and question the technical basis for some of the decisions made. Also, it’s possible that some portion of the requirements may stay as part of such legal actions.
Cority: Has the EPA indicated how they’re going to enforce the methane Waste Emissions Charge (WEC) and penalties for non-compliance?
CW: The IRA itself does not include explicit provisions around penalties or enforcement for the Methane Emissions Reduction Program (MERP). What’s interesting about the current Greenhouse Gas Reporting Program (GHGRP), is that there has been virtually no enforcement for a decade. However, this rule has strictly been a reporting rule up to this point, with the primary purpose of collecting data to inform future rulemaking. There are no requirements under GHGRP to reduce emissions, install controls, or mitigate emissions directly. As a result, it’s simply calculate and report.
However, as EPA inferred, they are intentionally using the program to collect data to inform rulemaking. In this case, much of the data they have collected over the years has been used for these NSPS regulations as they’ve come out in a series of subparts (OOOO, OOOOa, OOOOb, and OOOOc).
To that end, the EPA has been using it the way they intended, but has also taken it a step further in the latest proposed revisions to Subpart W. This effectively pushes operators to implement strict monitoring and other practices of the NSPS provisions sooner (or risk paying higher fees under the MERP). In the language of the Act itself, the methane waste emissions charge provisions are stated as amendments to the Clean Air Act (CAA). Therefore, we should expect the same enforcement and associate penalty structure as any other CAA regulation. This includes criminal penalties such as knowingly making false material statements or omissions in required reports or records or failing to report, as well as knowingly violating NSPS requirements. These can carry 2-5 years of jail time and up to $500,000 in fines per offense. Civil penalties under the CAA are currently more than $100,000 per day per violation.
The fact that the government has tied the IRA and GHGRP so closely to the NSPS standards is an indication that it is going be a high priority enforcement area. In fact, EPA announced its 2024 – 2027 National Enforcement and Compliance Initiatives in August, and the first item on their list was mitigation of climate change with a focus on oil and gas methane emissions.
Cority: How can organizations prepare for potential audits?
CW: To prepare for audits, companies should ensure that they have a robust and up-to-date GHG (greenhouse gases) monitoring plan in accordance with the requirements of the GHGRP that:
- outlines the source data they are using for their calculations,
- covers the accuracy and calibration requirements of their measurement systems, and
- documents the calculation methods, emission factors, and any assumptions they are using in developing their reports.
These plans should be controlled documents that are reviewed periodically, and any updates or changes should be documented through a revision log.
Environmental Software
Cority: In conversations with your clients, to what or where do you see companies turn to for specific emission reduction support? Are they looking to expand their tech stack or perhaps retrofit current technology to lower their emissions?
CW: I think it’s a mixed bag. Most companies are looking at what their obligations are to reduce emissions and ways to do that. But, in that process of evaluating where they should be spending their resources, they’re realizing that making those decisions is difficult without some type of software solution to help them manage and analyze the data. There’s too much risk for us not to know every number.
In light of recent climate disclosure bills in California and the pending SEC disclosure rule (all of which require some level of independent third-party verification), it will be imperative to make sure there is an audit trail for every number that is used in calculating and reporting GHG emissions. This will become even more critical.
With this in mind, I think an auditability feature, coupled with a regulatory program with enforcement teeth, will certainly drive more and more companies to seek a solution that helps them manage their risk. The business case for digitization of data is strong.
Cority: How can environmental software estimate and track the financial impact of the methane charge on an organization’s operations?
CW: The potential fiscal liabilities with the MERP enhance the need to optimize data accuracy, calculation efficiency, and performance tracking. Software can enable all these functions and can be an effective way to forecast financial liabilities as well. That being said, companies may want to leverage software for calculating their methane emissions more frequently to maintain near real-time emissions estimates and to forecast their methane charge liabilities for the upcoming quarter or fiscal year or for budgeting cycles.
Having this granularity of data might be used to inform decisions regarding asset utilization or gas control measures (e.g., to preferentially utilize assets within the fleet that have lower methane operating emissions), as well as for negotiating gas purchasing/sales contracts, or budgeting and allocating operating costs across business units or individual facilities.
For example, some companies are now establishing their own internal cost of carbon metrics. This helps them evaluate mitigation strategies, calculate ROI for capital projects, and manage GHG performance of their operations as a cost of doing business.
Cority: Outside of avoiding compliance or noncompliance issues, where are the cost savings for organizations that use environmental software?
CW: There are a couple of things. We talked about the forecasting piece a little bit, but one aspect of this methane WEC we didn’t mention is, under the current structure, companies are allowed to net their emissions across multiple facilities.
For example, imagine a company with a large portfolio and many assets that could benefit from tracking. They may have some older assets and/or facilities, perhaps that have less emission control measures in place. Therefore, keeping net emissions below the threshold is a more responsible way to operate and it could save them a lot of money.
We’ve seen many investors and executives that have management incentives tied to GHG reduction goals and targets. Therefore, companies are even more committed to reductions in the short term.
As a result, executives want to know every quarter if they are on track to meet emission goals or not. For that reason, not having a tool to collect accurate data and calculate complete results becomes really challenging (if not impossible) especially at a granular level on a frequent basis for internal performance tracking.
Financial Impact & the Future
Cority: We hear environmental performances are becoming tied into sustainability and other goals. Although there are a lot of unknowns, what else does the EPA need to address in the methane charge’s implementation process, including WEC collection, the meaning of “gas sent to sale,” and the implications for carbon offsets?
CW: There are certainly a number of aspects of the IRA that we will be watching closely to see how EPA translates the details into the regulatory language. One of the biggest items is the exemption language around NSPS (“applicable to and in compliance with”) to understand the exact criteria that needs to be met to claim the exemption, and conversely, what type of action would disqualify a company from using the exemption (and for how long).
As has been noted, we’ll also be looking for additional direction or guidance around the calculation of the methane intensity basis for the MERP thresholds, including the definition of “sent to sale from or through the facility, as well as how the netting provisions will be implemented. We’d like to see a clearer definition and guidelines of what that means because there’s some ambiguity there.
Additionally, we’ll also want to better understand the mechanisms and timing around collecting the fees, and how the EPA will interpret the use of the netting approach to calculate the WEC in cases where a company has multiple legal entities operating in multiple segments or in different basins.
The Inflation Reduction Act is silent when it comes to carbon offsets for the MERP, so we do not believe there will be a place for generating, selling, or using carbon offsets for the purposes of meeting the methane charge requirements.
Cority: As far as the WEC itself, does it affect smaller versus larger organizations?
CW: It comes back to that 25,000 metric ton of CO2e threshold as the means to evaluating applicability (i.e., are you potentially subject to the fee or not). Companies can look at their historic emission levels to gauge whether they might be impacted, but should also consider that with many of the proposed changes to the GHGRP, their calculated emissions are likely to increase as a result of emission factor changes. Therefore, facilities that have not been above that threshold in the past may be above in the future, even if nothing has changed substantially with their operations. Another thing to keep in mind is the way the GHGRP applicability is constructed (based on CO2e). As it stands, oil & gas companies currently report methane, but they also report CO2 and N2O. However, this WEC is specific to methane. It identifies a potential nuance and organizations need to make sure we are talking apples to apples when looking at applicability (which is based on CO2e) vs. calculation of their potential WEC (which is only based on methane).
Cority: Are there any resources organizations can use or reference when funding initiatives of that nature?
CW: The Inflation Reduction Act does have a lot of funding set aside for various aspects of the Act, including the methane emissions waste charge piece. It’s geared toward pushing funding down to the states, local jurisdictions and to the EPA to help with collection of data, with the majority of it going to the EPA to help develop outreach guidance materials.
They have an applicability tool set up for oil & gas where companies can plug in some information to receive a general estimate if they are likely to be over 25,000 tons or not under the current program. The tool is helpful as a screening measure but can’t be used for calculating and reporting in compliance with the rule.
Cority: Do we see this concept of methane WEC transitioning to other industries outside of oil and gas? Could the Inflation Reduction Act be used as a vehicle to improve other government programs.
CW: I absolutely see the potential for it to translate to other industries. For example, at a global level, there is an understanding that we need to make our electricity and our energy greener and as sustainable as possible in all energy intensive sectors, especially those that are carbon sensitive. As a result, this would include almost all construction materials, such as steel, aluminum, wood, glass and cement/concrete composites.
All those sectors are struggling with similar challenges in terms of data collection and accuracy, managing calculations, and being able to do scenario analysis in one way or another. Therefore, there’s certainly a pervasive challenge when it comes to using digital tools to help companies on their sustainability journey.
Cority: As we wrap up our blog series, is there anything else organizations should be prepared to tackle?
CW: Companies should be closely monitoring climate policy and regulations that are evolving at local/state, regional, federal, and global levels. For example, many states have committed to net zero goals, there are state and federal level “buy clean” programs being proposed, and the state of California’s senate just passed two bills that would require companies of a certain size doing business in California to disclose Scope 1, Scope 2, and Scope 3 emissions as well as climate-related financial risks.
What’s next?
While we now understand the Inflation Reduction Act’s methane charge will impact the U.S. oil & gas sector, there are still a few details of the Act that are undefined.
However, organizations should start collecting the necessary data and developing a compliance plan to prepare for this future charge. This plan should identify opportunities for emission reductions, such as retrofitting equipment, improving operating procedures, and using more efficient technologies. With this in mind, organizations can minimize the impact of the methane tax and ensure compliance.
This is where Trinity Consultants and Cority can help.
Through environmental consulting, emissions management, and regulatory compliance support, Trinity provides guidance and offers tailored solutions to address environmental challenges by using advanced modeling and monitoring techniques that are needed to comply with the national regulations.
Cority offers the software solutions to help these companies develop and implement effective compliance strategies. From identifying areas of improvement, implementing data collection and analysis techniques, to leveraging advanced technologies to enhance environmental performance, Cority’s Air Emissions Management solution helps organizations manage the industry’s ever-changing requirements. Intended as a single source of truth, the solution truly simplifies the reporting and environmental compliance process.
Together, Trinity and Cority proactively support companies in navigating the methane emissions reduction program regulations. They provide strategies and insights that empower companies to thrive in the evolving regulatory landscape and drive sustainable practices.
