WEC as in Wreck: The US Energy Industry Prepares for the Waste Emissions Charge While EPA’s Rules Remain Unfinalised

Introduction

In August 2022, the Inflation Reduction Act (IRA or “Act”) became law. One of the Act’s goals was to foster “clean” energy, and it provided guideposts and programmes for the United States to achieve a net-zero economy by 2050. One such programme is the Waste Emissions Charge (WEC) on methane emissions from certain facilities regulated under Subpart W of the Greenhouse Gas Reporting Program (GHGRP). In short, the WEC is an annual tax on methane emissions from “Applicable Facilities” in specific segments of the oil and gas industry. The US Environmental Protection Agency (EPA) published a detailed proposed WEC rule in the Federal Register on 26 January 2024 (“Proposed Rule”), which is voluminous and calls for tax calculations using several technical, prescribed formulas. As of this article’s date, the EPA has to yet to publish a final WEC rule. Nonetheless, the EPA continues to advise that the final rule, when published, will apply to 2024 emissions, and the first methane “tax day” is 31 March 2025. As a result, the clock is ticking. The industry has limited time and limited guideposts to quantify relevant emissions and calculate the tax, which the remitter must then certify. This article provides insight regarding compliance and business implications of the Proposed Rule. Of course, there could be changes in the final rule, so the reader should carefully review the final rule for consistency with the Proposed Rule.

The Proposed Rule has been complemented by a related final EPA rule, published 14 May 2024, revising certain aspects of the GHGRP (“May 2024 GHGRP Rule”). This May 2024 GHGRP Rule was predicated by the IRA’s directive to the EPA requiring that waste emissions charges both be based on empirical data and reflect methane emissions from covered facilities. The May 2024 GHGRP Rule ultimately put into place revised WEC calculation methodologies.

The WEC will have a profound effect on the regulated community. It will take significant time and resources to determine and certify the charge. The Proposed Rule and its preamble make clear that it is intended to be a tool to raise revenue and perhaps even create a financial wing within the EPA. While the Proposed Rule contains certain exemptions from paying the WEC, it is entirely possible that they may be in large part, merely optics. To fully appreciate the WEC’s impact on business, a thorough understanding of the Proposed Rule will be necessary. Myriad contractual agreements may be impacted and corporate structuring may very well be affected by the Proposed Rule. Given that WEC implementation rules have not yet been finalised, subsequent changes could occur to the proposed programme. In fact, EPA called for comment on several integral aspects of the Proposed Rule in its preamble. It is likely, however, that the final rule will integrate material concepts from the Proposed Rule and the regulated community should plan accordingly. Regulated entities should thoroughly understand:

• the WEC’s nature;
• the payment obligation;
• the impact of newly defined terms;
• netting and exemptions;
• how the assessment is determined;
• general WEC requirements; and
• how the WEC will affect day-to-day business.

These are each discussed below.

The WEC explained

The WEC is a tax or charge on certain emissions from facilities in nine of the ten specified industry segments subject to the Subpart W GHGRP:

• onshore petroleum and natural gas gathering and boosting;
• onshore petroleum and natural gas production;
• onshore natural gas processing;
• onshore natural gas transmission compression;
• onshore natural gas transmission pipeline;
• underground natural gas storage;
• offshore petroleum and natural gas production;
• liquefied natural gas (LNG) storage; and
• LNG import and export equipment.

WEC applicability is determined first by identifying an “Applicable Facility,” quantified using CO2 equivalent (CO2e) emissions and then calculating what is known as the Waste Emissions Threshold (WET or “threshold”), quantified in terms of methane, not CO2e. The WET is designated based on one of the three groups of industry sectors that are given specific methane intensity thresholds, meaning generally the amount of methane emitted per unit of production. The IRA establishes three sector classifications that capture the nine relevant Subpart W industry segments:

• onshore/offshore petroleum and natural gas production;
• non-production petroleum and natural gas systems; and
• natural gas transmission.

The WEC is due on 31 March of the year following a threshold exceedance. The tax increases year over year beginning at USD900/metric ton (MT) for 2024 emissions and increasing to USD1,500/MT for 2026 emissions.

The Proposed Rule complements rules promulgated by EPA on 2 December 2023, known conversationally as Quad Ob and Oc. These rules require, among other things, heightened emissions control and emissions reduction from virtually all sources in the oil and natural gas production, transmission, and processing business sectors. Quad Ob and Oc also require heightened monitoring (including potentially by third parties) leak detection and repair, and well closure requirements, among other things. These rules are intended to ultimately affect both new and existing sources.

Quad Ob and Oc are integrated into the Proposed Rule in several ways. First, compliance with Quad Ob and Oc should heighten facility efficiency, thereby mitigating intensity and driving down the annual tax. Second, Quad Ob and Oc compliance should drive down methane emissions and compliance with Quad Ob and Oc can theoretically qualify a regulated entity for a WEC exemption. This, however, is unlikely at any time in the near future given the Quad Ob and Oc implementation timelines. Moreover, the Proposed Rule contains other speed bumps inhibiting the viability of the compliance exemption.

The WEC obligor

The obligation to make the WEC payment and attendant filings rests with the facility owner or operator, and if there is more than one, the regulatory responsibility must be contractually designated. The Proposed Rule defines this party as the “WEC Obligated Party”. A single WEC Obligated Party can be associated with more than one WEC Applicable Facility and is determined as of 31 December of the reporting year. If a facility is sold between 31 December and 31 March of the following year, the year-end owner/operator is responsible for the filing.

Each WEC Applicable Facility is associated with a single WEC Obligated Party and the WEC Obligated Party must designate an individual to sign as the designated representative for the WEC Applicable Facility. WEC Applicable Facilities associated with a common WEC Obligated Party can “net” under the Proposed Rule. EPA is seeking comment on whether a parent entity should be the reporting party, but the Proposed Rule looks to the facility owner or operator. Netting is discussed below.

Defined key terms

The Proposed Rule incorporates new terms, the understanding of which will be essential for the regulated community to implement and apply the concepts to its operations. The Proposed Rule distinguishes “Applicable Facility” from “WEC Applicable Facility”. An “Applicable Facility” is one within the nine of the ten covered Subpart W industry segments, while a “WEC Applicable Facility” is an “Applicable Facility” having GHG emissions exceeding 25,000 MT CO2e/year. Facilities can move in and out of the WEC Applicable Facility definition.

Similarly, the Proposed Rule distinguishes “Applicable Emissions” from “WEC Applicable Emissions”. “Applicable Emissions” are the annual methane emissions that do not take into account exemptions. “WEC Applicable Emissions” are annual methane emissions determined using regulatory equations that are equal to, below, or exceeding the Waste Emissions Threshold after exemptions.

“Waste Emissions Threshold”, discussed previously, is defined in terms of industry segment specific methane intensity, usually expressed as a percentage of throughput (eg, 0.02% of natural gas sent to sale). Understanding the Waste Emissions Threshold concept will be key to determining the assessment. As noted above, there are three Waste Emissions Threshold classifications, each of which generally ties to facility throughput and is generally consistent with Subpart W’s regulatory approach. If, however, a facility reports under multiple Subpart W industry segments, then the threshold is deemed to be the sum of all thresholds applicable to the facility.

Netting and exemptions

The Proposed rule contains provisions that allow for WEC mitigation. Specifically, it sets forth “netting” and “exemptions”, which may mitigate payment obligations.

Netting

The Proposed Rule allows for emissions “netting” to mitigate the WEC, but it is restrictive. First, the Proposed Rule contemplates that netting should not be determined at the parent level of a business organisation. Only WEC Applicable Facilities under common control can net. The concept of common control is restrictive and is tied to those facilities owned by a common WEC Obligated Party. And remember the WEC Obligated Party is the entity that owns or operates the facility for purposes of the WEC Rule. Thus, it typically should not encompass a parent entity that is not the owner or operator of a WEC Applicable Facility. It is important to keep in mind that a typical touchstone for operator status is consideration of the named permitted entity. Second, only WEC Applicable Facilities can net. Subpart W facilities reporting ≤ 25,000 MT CO2e/year are not eligible because they are by definition, not WEC Applicable Facilities. Thus, only WEC Applicable Facilities and WEC Applicable Emissions can be netted. Generally, the offset is only allowed for the WEC Applicable Emissions from WEC Applicable Facilities that fall below the 25,000 MT threshold.

Exemptions

These are three exemptions from the WEC, but they are limited. First, emissions caused by an unreasonable delay in permitting of gathering or transmission infrastructure can be exempted. EPA will use a four-part test to determine eligibility and among the criteria is no fault of the permittee. Exempted emissions must relate to those legally flared that would have been otherwise mitigated. This exemption will undoubtedly be within EPA’s discretion and be tough to secure. The second exemption, among other things, is the “regulatory compliance” exemption. It will also be tough to secure, if not illusory. Under this second exemption, facilities in compliance with Quad Ob and Oc may be exempted from the WEC, but this can occur only after Quad Ob and Oc plans are approved in all states, and then the WEC Obligated Party needs to be able to certify there have not been deviations from Quad Ob and Oc during the reporting year. At best, the exemption is years away from potential applicability, and even then will be challenging to assert given the deviation requirement. Finally, there is a “plugged well” exemption. This exemption looks to plugging activities in the prior year, and two criteria must be met:

• emissions must exceed the Waste Emissions Threshold; and
• the plugged well must meet certain permanence criteria (ie, permanently sealed, be closed in accordance with all legal requirements, be secured with a welded metal cap, among other requirements).

Therefore, this exemption may have some value.

Determining the assessment

Determining the WEC will be a significant process, including:

• verifying accuracy and completion of Subpart W reporting;
• determining WEC Applicable Facilities through GHGRP reporting and filings;
• determining whether a WEC Obligated Party may group WEC Applicable Facilities to take advantage of netting;
• evaluating the facility industry segments and the Waste Emissions Threshold on a per facility basis;
• undertaking threshold calculations with focus on methane intensity thresholds;
• identifying any potential exemptions; and
• quantifying any netting value.

These components of the Waste Emissions Charge assessment are subject to detailed regulatory requirements regarding the method used to undertake the assessment. They will be detailed, time consuming, and very technical in nature.

General WEC compliance requirements

WEC requirements are consistent with and expand upon typical Clean Air Act (CAA) requirements. Annual filings are due on 31 March after the prior calendar reporting year. Filings will include general facility information and data to assess and verify emissions, netting, and exemptions. EPA will verify calculations and if errors are identified a 45-day window exists to submit corrections. This process will have IRS-like characteristics, including, potentially, reimbursement for penalties, interest, and costs. Records will need to be maintained for five years. Non-compliance will be subject to traditional CAA penalties and EPA will be authorised to conduct “paper” and on-site audits. The WEC rules will likely create a new financial wing of EPA, perhaps much like the IRS.

Practical business considerations

The Proposed Rule presents the regulated community with myriad “planning” considerations, including contractual considerations, corporate structuring issues, as well as staffing issues, to name a few. First, many contractual provisions will require review and focused attention. These include, by way of example:

• allocation of the WEC;
• payment and filing obligations including among joint venturers or other co-owners; and
• access to records, documents, and even physical facilities to address potential EPA audits and inspections, even post-closing of a transaction.

Further, additional focused diligence and consideration of representations and warranties will be needed especially to address mid-year closings where the year-end owner/operator bears filing responsibility. The competency of contract operators will also take on a heightened focus. Further, because the netting provisions of the Proposed Rule are drafted so narrowly, attention should be drawn to common owners or operators who can qualify as a WEC Obligated Party for multiple WEC Applicable Facilities. Moreover, the rapid preparedness of a cross-functional team will be important to achieve and maintain compliance. The team should include environmental, technical, operational, and accounting expertise.

Conclusion

EPA’s Proposed WEC Rule is opaque, in development, and unique in many ways. Calculation methodologies are highly technical and as such, preparation, should commence now, even though final rules have yet to be promulgated. A cross-functional compliance team will materially assist in the WEC evaluation and computation process. The administrative burden to comply will be costly. In connection with facility acquisitions or divestitures, scalable technology will be necessary for accurate reporting. Finally, new enforcement opportunities will arise for EPA. The WEC rules equip EPA with a new general accounting-type function, including potential third-party facility auditing rights. In short, the WEC will impose significant cost and administrative responsibility upon the regulated community. The regulated community should expect heightened and focused enforcement that will not only focus on “paper” filing requirements, but also verification of physical facility operations.