This transcript has been edited for clarity. 

David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: ruminating on methane.

As policymakers seek to curb greenhouse gas emissions through taxation, the star of the show has always been carbon dioxide, but methane emissions are a significant challenge that also require attention. So why is it so important to address methane emissions, and what policy tools are we seeing in this area?

Here to talk more about this is Tax Notes contributing editor Nana Ama Sarfo. Ama, welcome back to the podcast.

Nana Ama Sarfo: Thanks, Dave. It's always great to join you.

David D. Stewart: So to start off, why don't we talk about the sources of methane? Where does it come from?

Nana Ama Sarfo: That's a great question. So methane is a greenhouse gas, as you had mentioned, and it comes from two main sources, agricultural emissions and then also oil and gas production. And when I say agricultural emissions, I'm referring to emissions from livestock. So for example, cows release methane gas as part of their digestive process. Rice cultivation is also a pretty big source of methane emissions. And then methane is also released at various parts of the oil and gas production process.

David D. Stewart: All right, so what is so important about methane? Why should it be targeted by policymakers?

Nana Ama Sarfo: Well, the issue is that methane is way more potent than carbon dioxide. So if you take a 20-year period of time, methane is actually 80 times more potent than carbon dioxide emissions, and that's according to the United Nations. Now, the one, I guess you could say, good thing is that methane actually doesn't linger in the atmosphere for as long as carbon dioxide does. And I think that's probably one of the reasons why policymakers tend to focus on carbon dioxide more so than methane. But for the amount of time that methane remains in the atmosphere, methane-related warming is pretty quick and furious, and it does quite a bit of damage. There are some estimates from the United Nations and from others that indicate that methane accounts for about 30 percents of global warming.

David D. Stewart: Well, that's definitely significant. Now, what are the sort of challenges of dealing with methane versus a traditional carbon tax?

Nana Ama Sarfo: Well, I think in terms of the structure or general goals for a methane tax or a carbon tax, there's really not that much difference. In both cases, there's a general policy goal of wanting to reduce emissions and then getting emitters to adopt cleaner technologies. But we do talk about carbon emissions more simply because they linger in the atmosphere a bit more than methane. So that's why we tend to see more attention placed on carbon.

David D. Stewart: So what are the general approaches or senses of the idea of a methane tax?

Nana Ama Sarfo: I would say that over the past few years, there seems to be a pretty broad and aligned sentiment that globally methane levels need to decrease. So at COP26, which was held in 2021, the United States and the European Union actually spearheaded a global methane pledge, and that aims to reduce global methane emissions at at least 30 percent from their 2020 levels within a 10-year period, so by 2030. And it also aims to limit methane warming to 1.5 degrees Celsius. And since the pledge started, 158 countries have signed it, which is actually not too far away from the Paris Agreement, which addresses carbon-dioxide-related warming. And the Paris Agreement has 196 signatories. So many countries have signed onto this pledge really quickly.

And then we're also seeing private industry get involved. So at COP28, which was held just a little less than a year ago, in the fall of 2023, nearly 50 oil and gas companies promised to cut their methane emissions to near zero by 2030, which is a pretty ambitious goal. So these pledges are relatively new and we're now starting to see countries act on those promises and start to think about how they can fulfill them.

David D. Stewart: So what are we seeing in the U.S.? There's often been a bit of a reluctance to take on things like carbon taxes. So what are you hearing going on here?

Nana Ama Sarfo: Yes, you were absolutely right about the reluctance. Well, thanks to the Inflation Reduction Act, we now have a methane fee. So the IRA is really important because it created a government methane emissions reduction program. And within that there's this fee, which is officially called a waste emissions fee, and it's the very first federal tax on greenhouse gas emissions in the country. Now, this methane fee focuses only on a subsect of methane emitters. It does not focus on agricultural emissions, only on oil- and gas-related emissions, and it focuses on petroleum and natural gas facilities that already report their emissions to the government because they're a little bit high. So in their case, they emit more than 25,000 metric tons of carbon dioxide equivalent.

So according to the Congressional Research Service, these facilities that are now subject to the methane fee include onshore and offshore petroleum and natural gas production, onshore natural gas processing, underground natural gas storage, liquefied natural gas storage, and then also onshore petroleum and natural gas gathering and boosting. That's just a small subsect of the facilities that are subject to this. So the charge is $900 per metric ton of methane in 2024, then $1,200 per metric ton of methane emissions in 2025, and then $1,500 per metric ton of methane emissions from 2026 onward. Now, the U.S. Environmental Protection Agency has issued proposed rules on this, but we are still awaiting the final ones.

David D. Stewart: That seems like a fairly significant penalty on methane emissions. What's really expected to come of this?

Nana Ama Sarfo: Well, the expectation is that this fee will change behavior, that oil and natural gas facilities will change their operations and then implement some methane mitigation strategies if it's cheaper to do that rather than pay the emissions charge. Of course not all operators will do this, but you landed on a really great point that the fees are really hefty, so it's definitely expected to change behavior. The Congressional Budget Office estimated how much revenue the government might generate over a six-year period, and it predicts a downward trend that actually the revenue that the government will receive by the end of those six years will be roughly halved because companies will implement these mitigation strategies.

David D. Stewart: So moving beyond the Inflation Reduction Act, I understand that there is a bill in Congress. Could you tell us what's been proposed?

Nana Ama Sarfo: Yes. So House Rep. Julia Brownley [D-Calif.], she thinks it's really great that the U.S. has this methane fee, but she thinks that it actually should be expanded and that it should apply to emissions generated by foreign oil and natural gas producers who want to import their products into the U.S. So in July she released legislation that's called the Methane Border Adjustment Mechanism Act [MBAM], and it would do just that. Her idea is that the law would essentially push foreign countries to follow America's methane emissions policy and then also reduce global emissions as a very happy byproduct of that.

Now, there are a few parts to the law aside from this adjustment provision. So one is that the Treasury Department over the next several years would have to keep running tabs on whether there are new products or existing products that should be subject to this MBAM. And that would be because they either generate notable emissions or because they rely on oil and natural gas supplies within their industrial processes. So Treasury would have to keep Congress informed about whether this MBAM should be expanded and then also provide a cost-benefit analysis for lawmakers.

And then another important part is that Treasury would spearhead the creation of an international methane emissions reporting and standard-setting body, but the legislation doesn't provide a lot of details on what that body would look like or where it would be located. And then lastly, the Treasury Department would encourage the top 10 highest oil and gas importing countries that also do not have an MBAM to create their own border adjustment mechanisms that follow America's standard. And then also it would encourage them to participate in that international emissions body.

So there's a lot within that bill. Clearly it's focused on international cooperation. And I think it's also important to note that it's actually based on a proposal that was released by three economists — Kimberly Clausing, Luis Garicano, and Catherine Wolfram — last summer in June 2023. And they think that if America and the European Union implement a methane border adjustment policy and they coordinate it, that that could lower worldwide methane emissions by between 15 percent to 45 percent. So that's a pretty big range.

David D. Stewart: So as with any policy that is looking to change behaviors, there's always going to be some sort of pushback. So what are we hearing from opponents?

Nana Ama Sarfo: Oh, yes, there's always pushback. And greenhouse gas taxation generally, I would say, has not been particularly popular amongst legislators in Washington. And that's apparent in a House resolution that passed just a few months ago. So in March, the House passed a bipartisan resolution stating that the U.S. should not have a carbon tax. So we're not talking about methane, we're just talking about carbon generally. The lawmakers were concerned that a carbon tax would raise the cost of goods manufactured in the country and could discourage private innovation in the energy sector and would shift energy research abroad.

So given that backdrop, there's also been pushback against the IRA methane fee specifically. So in May, two senators, Senator Ted Cruz [R-Texas] and then Senator Cindy Hyde-Smith [R-Miss.], introduced a piece of legislation. So it's called the Natural Gas Tax Repeal Act, and that seeks to strike the methane fee entirely. So it's been referred to a Senate committee, we'll see if it advances anywhere.

But there was a House version of the measure that was contained within a separate bill. It's called the Cutting Green Corruption and Taxes Act. And that actually passed the House in March. And then on top of that, we also see that there have been broad-based carbon tax bills that have been floated in Congress over the past few years, but they have not progressed at all. So there definitely has been pushback against these kinds of measures.

David D. Stewart: Now, turning to the EU, is it true that Denmark is taxing cows?

Nana Ama Sarfo: Yes, it is true. Denmark is going to implement the world's first methane tax on livestock. So Denmark is not the first country to think about this. New Zealand had actually considered the idea and then decided to abandon it. But Denmark is the first country to actually make some moves. And when I say make some moves, I mean that the government has said that it'll introduce the proposal and the Danish Parliament has indicated that it will approve the measure. But what we know is that the government plans to introduce a graduated tax on emissions from livestock. So it would start in 2030 and then escalate in 2035, and then farmers would receive deduction. So their actual tax burden is expected to be smaller. But it's definitely a promising start, I would say.

David D. Stewart: So looking at the EU at large, is the European Commission doing anything about methane emissions?

Nana Ama Sarfo: Yes, the European Commission has actually been working on this subject since the 1990s, and due to that work, it's made some pretty good progress. So emissions from the energy sector are half of their 1990 levels. Waste-related methane emissions have been reduced by a third, and then agricultural-related emissions have been reduced by just over 20 percent, according to the European Commission. But they think that there's more that can be done. So fugitive emissions are a problem.

It's also encountering some difficulties in collecting enough information from emitters to determine exactly where it should focus its efforts. So in October 2020, the European Commission published an EU methane strategy, and that strategy basically lays out how it wants to tackle methane emissions over the next few years. And one of the key priorities there is ensuring that companies apply more accurate measurement and then also reporting methodologies and ensuring that the data is being collected by regulators, which is similar to what we saw in the Brownley bill.

But the European Commission actually has an idea as to where that data should be housed, and it thinks that the data collection should be done by an independent international body that would preferably be located within the United Nations system. So in August of this year, a new regulation entered into force in the European Union, which pushes that strategy forward, and it's called the EU regulation on methane emissions reduction within the energy sector. So it put those measurement and reporting priorities into actual law. And then as part of the regulation, the European Commission actually encouraged member states to introduce some methane fees that tackle coal-related emissions. So it said that member states should be allowed to introduce these fees and charges specifically so that they can generate revenue and then use that to reroute investment into methane emissions reduction.

So the commission is really interested in investments that involve methane capture and then injection into the grid and methane emissions reductions from ventilation shafts and other activities.

David D. Stewart: Well, it's going to be fascinating to see how all of these various policies work over the next few years. Ama, thank you so much for walking us through them.

Nana Ama Sarfo: Oh, absolutely, Dave. It's been a delight. Thank you for having me.

David D. Stewart: And now, coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now is Acquisitions and Engagement Editor in Chief Paige Jones. Paige, what do we have for us?

Paige Jones: Thanks, Dave. We're excited to announce that the winner of this year's Tax Notes Student Writing Competition is Nicholas Lott. In his paper, Nick centers on the polarizing company-specific tax incentive that New York offered Amazon to entice it to construct its second headquarters in Long Island City. Through the lens of equity, efficiency, and simplicity, this article analyzes New York and Amazon's agreement, then extrapolates to a broader analysis of all company-specific tax incentives. His paper can be found in this week's edition of Tax Notes Federal, State, and International. Luis de la Cruz received an honorable mention for his submission. Congratulations to Nick and Luis.

In Tax Notes Federal this week, Heather Casteel and Arielle Lederman compare two effective estate planning techniques used for fund interest. Kathleen Thomas explains how Vice President Kamala Harris's proposed standard deduction for small businesses could be implemented.

In Tax Notes State, Billy Hamilton examines Colorado's recent battles over property taxes. Bob Willens argues that a Michigan court correctly ruled that the tax benefit rule does not apply to the plaintiff in the recent Michigan Bell case.

In Tax Notes International, Rémi Gagnon assesses the U.S. experience with the concept of economic substance and compares it with Canada's. Thomas Horst explains the effect of the OECD's pillar 2 minimum tax rules on U.S. multinationals and federal tax revenue.

And finally, in featured analysis, Ryan Finley explains why the European Court of Justice was wrong to assume that its understanding of OECD transfer pricing is the only reasonable interpretation.

David D. Stewart: That's it for this week. You can follow me online @TaxStew. That's S-T-E-W. And be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or a review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

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