The process of political meddling in energy markets is endless, an eternal truth that will not prove different for the energy provisions of the Inflation Reduction Act. Most public attention has been directed at the massive subsidies and favoritism directed at unconventional electricity — wind and solar power in particular — and electric vehicles, rather than the tax provisions, less prominent but deeply problematic. Both sets of policies expand the effort to increase the use of uncompetitive energy expensive, unreliable, and environmentally destructive in place of conventional energy proven, reliable, efficient, and with environmental effects that have been addressed effectively by decades of regulation authorized by past legislation. Such a forced turn toward uncompetitive energy will continue to engender huge adverse effects with few benefits, a reality that policymakers in Europe, California, and elsewhere now have been forced to confront.
The tax provisions of the IRA have received less attention, but are likely to prove equally perverse. First, there is a reinstatement of the Hazardous Substance Superfund Financing tax (section 13601) on crude oil and petroleum products, the previous imposition of which ended in 1995. Put aside the fact that it is not the fossil energy producers or their customers who are responsible for pollution and cleanup problems at the Superfund sites; nor are they to blame for the massive mismanagement of the program over four decades. This tax — 16.4 cents per barrel — will cost energy producers about $1.2 billion per year, an outcome not consistent with the need to expand the availability of reliable energy.
Second, the IRA imposes two new taxes on methane emissions from crude oil and natural gas production. Section 60113 imposes per-metric ton fees ($900 in 2024, rising to $1500 in 2026) for methane emissions exceeding 0.2 percent of natural gas sold from a facility or 10 metric tons of methane per million barrels of oil produced. Section 50263 imposes the (new, higher) royalty rate for natural gas produced from future leases on federal land or the outer continental shelf on all such gas, even that lost because of necessary venting or flaring, with a few exceptions.
Put aside the reality that fossil producers have powerful incentives to minimize losses of natural gas that otherwise could be sold. The central justification for the tax on methane emissions is “climate” policy. U.S. methane emissions are 11 percent of all U.S. greenhouse gas emissions (on a CO2 equivalent basis). Were all U.S. methane emissions — not merely those from oil and gas production — reduced to zero, the global temperature reduction by 2100, using the Environmental Protection Agency climate model, would be 0.015 degrees C, an effect that would not be measurable in that the standard deviation of the surface temperature record is 0.11 degrees C.
Accordingly, the taxes on methane emissions cannot satisfy any plausible benefit/cost test. They are little more than a money grab, with little economic or environmental justification. Moreover, they create perverse political incentives: More methane emissions yield more revenue for the federal government, and so provide a disincentive to reform permitting and other policies so as to facilitate the improvement and modernization of the energy infrastructure, and thus reduce emissions.
Finally, section 50262 increases the royalty rate for oil and gas leases on federal lands and the OCS from 12.5 percent to 16.67 percent, increases the oil and gas minimum acceptable bid from $2 per acre to $10 per acre, and increases fossil fuel rental rates for reinstated oil and gas leases to 20 percent rather than 16.67 percent.
Notwithstanding Beltway rhetoric about “ensur[ing a] fair return for the American taxpayer,” these cost increases will have the opposite effect, by reducing the amount that the fossil producers will be willing to bid initially for the leases. This means that the net effect of the increase in the royalty rate and the obvious attendant decline in the initial bids is a shift of risk from the fossil producers onto the taxpayers, because the initial bids are certain, while the future royalty payments will be determined by future fossil energy prices and other conditions that are subject to substantial uncertainty.
Moreover, the royalty payments are analogous to an excise tax on fossil energy production, while the initial bid is analogous to a lump-sum tax that does not affect production decisions once the bidder obtains a lease. Accordingly, the combination of the increase in the royalty rate and the decline in the initial bids will have the effect of reducing fossil production from the leases that actually are granted, an outcome inconsistent with the goals of a rational energy policy and with the interests of taxpayers.
There simply is no rationale for these tax provisions that can withstand scrutiny. They will reduce the production of conventional energy, which is reliable, concentrated per unit of weight, and complementary with efficient capital investment. They will increase energy costs and reduce economic growth and national wealth, even as they yield no benefits in terms of environmental improvement. Let us hope that a future Congress is led to repeal them.