Understanding and Optimizing EPA’s Finalized Waste Emissions Charge

Understanding and Optimizing EPA’s Finalized Waste Emissions Charge

On November 12^th, 2024, as part of the Methane Emissions Reduction Program, EPA announced the finalization of its Waste Emissions Charge (WEC) rule. This levies, in 2025, a $900/ton (rising to $1500/ton in 2027) fee on qualified methane emissions over defined thresholds, detailed in a previous article. In this article, we will discuss which assets are subject, facility netting, and implications for the oil and gas industry. We will also discuss WEC optimization strategies and work that we are conducting with some of our clients.

Which Facilities are Subject to WEC?

Non-distribution facilities¹ reporting 25,000 tCO2e or more under Subpart-W are subject to WEC assessment. EPA clarifies that a facility’s reporting under both Subpart-C (combustion) and Subpart-W will only be subject if the Subpart-W portion alone exceeds this threshold. EPA further clarifies that the refining and NGL supply segments, as well as end users, are not subject to the WEC.

EPA has now stated, in contrast to their original proposal, that non-production facilities with zero natural gas throughput, such as gathering and boosting facilities reinjecting underground, would not be subject to a WEC charge. EPA has also provided WEC exemptions for permanently plugged wells, unreasonable environmental permitting delays, and regulatory compliance.² However, a facility with exempted emissions can never generate negative WEC emissions for netting purposes.

¹Segments subject to WEC: Onshore production, offshore production, gathering & boosting, processing, transmission compressor stations and pipelines, underground storage, and LNG.

²Available on a state-by-state basis when all of NSPS OOOOb and EG OOOOc requirements are fully implemented. Regulatory compliance exemption granted on a facility-wide quarterly basis. Facilities with negative WEC applicable emissions are not eligible for exemption.

Netting

The WEC will be based strictly on Subpart-W reported emissions. For 2024, operators can use either Subpart-W methodology in its present form, or choose to utilize empirical quantification methodology in the pending Subpart-W amendments. For the 2025 reporting year, the Subpart-W amendments will become mandatory; this includes the new source “other large release event” which will be subject to WEC assessment.

An owner/operator of assets owned on December 31^st of the reporting year is the WEC obligated party.³  WEC obligations are calculated with the following steps:

1. Waste emissions threshold is determined based on the facility’s segment and throughput.
2. Facility applicable emissions are determined by subtracting the waste emissions threshold from that facility’s Subpart-W methane emissions.
3. WEC applicable emissions are determined by subtracting exempt emissions from Facility applicable emissions. May be negative (only if no emissions are exempted), positive, or zero.
4. Net WEC emissions are determined by summing the facility applicable emissions for every facility that the WEC obligated party owns.
5. (Optional) WEC obligated parties with negative net WEC emissions may transfer to WEC obligated parties with positive net WEC emissions, provided they are owned by the same parent company. Negative net WEC emissions can only be transferred for the reporting year in which they are generated, and transfer of positive net WEC emissions is not permitted.
6. WEC obligation is determined by multiplying net WEC emissions after transfers by the per ton rate for that year.4

³For facilities with shared ownership, the EPA has clarified that those parties must select among themselves a single owner to be the WEC obligated party.

⁴2025: $900/t (2024 ry), 2026: $1200/t (2025 ry), 2027: $1200/t (2026 ry).

WEC Payment

The EPA will be determining from Subpart-W reporting the possible universe of WEC netting transfers under parent company ownership. Therefore, they stress the importance of consistency in spelling of owners and parent companies under Subpart-W reporting.⁵ The EPA has stated they are developing electronic tools to assist in WEC calculations, including WEC obligation and parent company transfers.  After submitting Subpart-W reporting for the previous calendar year by March 31^st, a WEC obligated party is required to self-assess and pay their WEC obligation by the next business day on or after August 31^st. The EPA will accept resubmissions/revisions until December 15^th,⁶ which may result in a refund or additional payment owing. WEC filings will be verified by the EPA, which may raise flags subject to third party auditing.

⁵The EPA is asking for identical spelling across all reporting: “Historically, facilities have been inconsistent in reporting the owner/operator, for example: Onshore Production Company; LLC, Onshore Prod Co. LLC; Onshore Production Co. LLC”.

⁶Resubmissions are allowed after December 15^th in specific circumstances, such as resolution of the verification process or submission of new OOOOb/c reports.

Implications

Although negative net WEC emissions can’t be sold on the open market, the companies that own them can be acquired. To reduce the WEC obligation of subsidiary companies, a parent company may seek to acquire new subsidiary companies with negative net WEC emissions so that they would be eligible for transfer. Alternatively, low methane emissions intensity assets within a subsidiary company could be purchased by any company looking to offset their WEC obligation. In either case, it is likely the market will place a premium of up to the WEC obligation savings⁴ on acquiring low intensity assets with negative net WEC emissions.

Even after OOOOc state plans are fully implemented and compliant facilities are exempt, facilities still qualify for parent company netting transfers if their net WEC emissions are negative. This could create a market where assets in states leading in emissions reductions, such as Colorado, become highly sought after by companies in states with high methane intensities.

Because WEC obligation is determined by ownership on the last day of the reporting year, this could be the impetus for an increase in acquisition activity in Q4. WEC is a potent market lever which will put an acquisition premium on low emitting assets. Exactly how the market values those assets will become clear in the coming months and years as the WEC charge rises to $1500/ton.

How to De-Risk WEC Exposure

In Highwood’s view, Other Large Release Events (OLREs) are the greatest source of uncertainty driving WEC exposure. A novel regulatory instrument, OLREs may be detected by an operator during routine LDAR inspections. However, OLREs may also detected by an independent third party such as an environmental non-profit. Given the extreme temporal and rate variability in methane emissions sources, this makes managing the process and predicting WEC fee exposure incredibly difficult.

Highwood has been working with several large US-based energy companies in recent months to perform “Technology Audits” to model WEC exposure in a computer simulation and develop custom mitigation strategies. Please contact us if you’re interested in learning more.