America’s first federal emissions tax will only increase emissions

The new year brings a historic and self-defeating tax courtesy of the Inflation Reduction Act. Certain methane emissions produced by oil and gas companies this year will be subject to the nation’s first federal emissions tax. Designed solely to punish the backbone of the American energy industry, the tax will likely achieve its goal, albeit while increasing methane emissions in the process.

Since its initial drafting in 2021, the tax was written to target energy companies that are disfavored by the Biden administration. For methane emissions above a low threshold in 2024, the tax is $900 per metric ton — equivalent to a tax of $36 per ton of carbon dioxide. This tax will be levied exclusively on companies that produce or transport oil and gas.

Yet, the oil and gas industry is not the largest overall producer of methane emissions in America. That title belongs to livestock farmers, who get a pass under the law. The landfill industry is the third largest source of methane, yet it too goes untouched because regulators are determined to scrap the oil and gas industries first. All three industries are essential to modern life, but evidently, some emissions are more acceptable than others under the Inflation Reduction Act.

If reducing methane were the real objective, the act’s authors would have rewarded the energy industry. According to the Environmental Protection Agency’s most recent blockbuster emissions report, between 1990 and 2020, methane emissions from natural gas systems fell 15.7 percent. That achievement is in addition to the fact that the majority of the U.S. carbon dioxide emissions reductions since their peak in the early 2000s are attributable to a shift toward natural gas.

This year’s tax hike is only the beginning. The tax rises to $1,200 per ton of methane in 2025 and $1,500 in 2026, pushing the carbon equivalent price to $60. According to the Congressional Budget Office, the tax is expected to penalize American energy companies to the tune of $6.35 billion over 10 years.

These cascading costs are a dark harbinger for consumers. American oil and gas production has finally surpassed pre-pandemic levels, yet household energy prices remain elevated due to a litany of regulatory restrictions on refining, transportation and electricity generation. Energy prices are 32 percent above when President Biden took office, and the cost of these new taxes will inevitably flow to consumers in the coming years.

While this is the federal government’s first direct fee or tax on greenhouse gas emissions, it already dwarfs similar taxes in other industrialized nations. According to data compiled by the World Bank, the Inflation Reduction Act’s $36 carbon-equivalent tax is already larger than those on greenhouse gases in Japan ($2.17), Singapore ($3.77), Spain ($16.31) and Denmark ($26.53). 

China is the world’s largest emitter of methane, but the Communist Party has so far rebuffed progressive pleas to reduce its emissions. While the country has a carbon emissions trading scheme, in recent weeks, the price per ton has fluctuated around a paltry $10. Unlike China’s scheme, the Inflation Reduction Act methane tax and its initial $36 carbon-equivalent price are designed to move in only one direction.

Rather than reducing emissions, punishing the clean American oil and gas industry will drive up methane emissions on a global scale. American oil production is significantly cleaner than most of its global peers. On a per-barrel basis, the World Bank estimates that American oil production in 2022 resulted in far less methane emissions through flaring than in Russia, Venezuela, or Iran.

Oil and natural gas are largely fungible, meaning that taxing cleaner and more efficient energy production at home will make dirtier production by our adversaries more competitive. The ability of efficient American producers to meet the globe’s growing energy demand will be hobbled, and this pyrrhic emissions policy will drive up global aggregate emissions.

Ultimately, America’s first federal greenhouse gas tax will go down in history as a hairshirt folly. By punishing America’s oil and gas producers and fueling inflation, the tax is a victory for the world’s dirtiest energy producers and a loss for American consumers and businesses.

Oliver McPherson-Smith, Ph.D., is the director of the Center for Energy & Environment at the America First Policy Institute and a research fellow at Stanford University’s Hoover Institution.