Simple Math: Carbon-Equivalent Prices

by | Dec 18, 2023 | Policy

This is the second in a series of 4 blogs exploring carbon pricing policies that make the true costs of emitting greenhouse gasses visible at key decision points so climate futures are always present. Here are links to the first, third, and fourth in the series.

The first post in this series suggested 3 rough categories using a wider, and more chemically inclusive definition of “carbon prices”. Here we consider the first rough grouping: carbon equivalent prices, which are just a simple units conversion away from more traditional carbon prices. Methane fees, severance fees or royalties, and various carbon removal efforts all fall into this category. 

Methane is second only to carbon dioxide in terms of the warming its excess emissions have caused since the industrial revolution. It has a well-defined and well-understood CO2-equivalent value. That is, how many molecules of carbon dioxide it would take to equal the warming caused by one molecule of methane (CH4). Such values are calculated not just for methane, but for many greenhouse gasses. For methane, this value includes its indirect effects – the cumulative impact methane has on other atmospheric constituents that either warm or cool the planet as the molecule breaks down. Such values are commonly expressed after both 20 years and 100 years (IPCC AR6 WG1 Table 7.15). 

Politicians tend to favor the lowest of these numbers in policymaking, i.e. the 100-year value. Multiply a CO2 price (expressed in dollars per ton of emitted CO2) by the 100-year CO2-equivalent value of methane, currently 27, and you get the carbon equivalent price of methane, expressed in dollars per ton emitted methane. 

Little noticed in the Inflation Reduction Act (IRA) was a methane fee. The United States is one of only two countries to impose such a fee, with Norway being the other. The IRA prices methane emissions at $900/ton in 2024, $1,200/ton in 2025, and $1500/ton in 2026, where the fee will stay. The fee only applies to methane emissions that greatly exceed the industry average, and it is designed to work in tandem with regulations that were announced in the first days of COP 28. 

The fee only applies to big facilities that emit over 25,000 metric tons of carbon dioxide equivalent per year, and exceed applicable waste emissions thresholds. In other words, the biggest and least efficient producers. If the company mining the methane is in full compliance with the regulations, no fee is due. A Congressional Research Service report estimates that 2,172 facilities will be subject to the methane fee. It would not apply to wells permanently plugged in the previous year nor to emissions caused by an unreasonable delay in environmental permitting of transmission pipelines. Combining carrots with sticks, the program further provides $1.55 billion for the EPA to fund and provide technical assistance for methane abatement in the oil and gas sector. 

Similarly, severance fees or royalties are just a simple units conversion away from a carbon price. Severance fees are in place in 36 states. They may be assessed based on the market value of the fuel extracted, the volume extracted, or some combination thereof. However, because the chemistry of these fossil fuels is so well characterized by the companies that extract them (since that in turn determines their value), and because it is a safe assumption that all the fossil fuels so extracted will be burned, it is easy to convert these units into dollars per ton of CO2

Royalties are similar. The distinction is that severance fees are levied on resources extracted from private lands, and royalties are collected from resources extracted from public lands. Both severance fees and royalties are spiritually quite different from carbon prices, however, in that they are not intended to slow the mining of fossil fuels. Eliminating them is also quite problematic for some states, such as Alaska, where such revenues not only have enabled them to get along without a state income tax, but to fund wildly popular government programs, such as the Alaska permanent fund

The financial and cultural repercussions of threatening such programs are frequently, and counter-productively, ignored by climate advocates. Accordingly, such programs have not been effectively turned into rallying cries for more carbon prices. However, they are an effective riposte to arguments one sometimes hears on mechanical grounds; i.e. that it’s administratively too difficult to price carbon. 

When a government fails to collect or undercharges for a severance or royalty fee for a fossil fuel, this is considered an explicit subsidy. Note, even for these explicit subsidies, it is not a direct payment by a government to a fossil fuel company. Rather, it is a failure to collect revenue that would otherwise be owed. This is a point of confusion for many people, and I believe there is further confusion when, for instance, one hears news from the IMF that there were over $7 trillion of subsidies for fossil fuels worldwide in 2022. While some of this amount is due to explicit subsidies (18%), the bulk of this astonishing number (82%) is due to implicit subsidies. The IMF defines implicit subsidies as undercharging for environmental costs and forgone consumption tax revenues. For both explicit and implicit subsidies, the only way to remove them is to actually charge or charge more for fossil fuels. In other words, to call for removal of all fossil fuel subsidies is to call for universal carbon prices. 

Finally, we consider carbon dioxide removal. This is less a change of units and more a shifting of those units from one side of the ledger to the other. Warming is caused by carbon dioxide equivalent emissions in the atmosphere. It is not caused by carbon dioxide stored in the ocean, underground, or tied up in the organic matter of living things. These correspond to the four major reservoirs of carbon on earth; the atmosphere, the hydrosphere, the lithosphere, and the biosphere. Moving carbon dioxide from the atmosphere to one of these other reservoirs addresses the problem of global warming, though it might have other negative effects we’d like to avoid, such as ocean acidification in the hydrosphere, induced seismicity in the lithosphere, or nutrient removal in the biosphere. All these side-effects should be responsibly addressed for any efforts at such reservoir-shifting. 

Perhaps the most widely-known (and controversial) method for such reservoir shifting is carbon capture and sequestration (CCS). This generally refers to the capture of CO2 from a smokestack, and sequestering (i.e. storing) it permanently underground. Carbon dioxide removal (CDR) is a more general and inclusive term. CDR need not happen at a smokestack, and the term is applied to processes that may or may not include sequestration. When the process includes sequestration, the storage may not be as permanent. Plants, for example, perform CDR when they photosynthesize. Direct air capture (DAC) is another three-letter acronym (TLA) that only refers to removing CO2 from the well-mixed air we breathe. It says nothing of sequestering the captured CO2 for any length of time. The IPCC has grown increasingly unequivocal in its reports about the need for CDR. In a factsheet to accompany its most recent report, it states flatly that “CDR is required to limit global warming to 1.5oC”. 

Each of these TLAs has a cost associated with it, and thus puts a price on the carbon being removed from the atmosphere. This creates a very direct linkage between such projects and carbon pricing. There is, in fact, a bit of a gold rush going on right now, with a lot of money going into technologies and processes for removing CO2 from the atmosphere and storing it. This is being driven in part by federal investments made both in the Infrastructure Investment and Jobs Act (also known as the Bipartisan Infrastructure Package) passed in 2021, and the IRA. These two bills created a number of incentives for various kinds of CDR, but perhaps most eye-catching is the increase in the value of the subsidy the federal government is willing to pay under section 45(q), which was updated to pay $180 per ton of CO2 removed by DAC that is sequestered geologically. 

Companies are also increasingly interested in paying such high prices for the certainty of permanent removal. For example, a company called Heirloom opened the first commercial direct air capture facility in the United States only in November, with a contract from Microsoft, and plans to open a second facility soon. Companies are deciding today that it’s worth it to pay very high prices to actively remove and sequester CO2 from the atmosphere. This payment for removal suggests a mirrored price to avoid emitting it in the first place. 

In this blog, we considered three very concrete examples of carbon-equivalent prices: the US methane fee, the severance fees and royalties that state and federal authorities have levied (or not) for decades, and the price companies are willing to pay for shifting carbon dioxide from the atmosphere to the lithosphere. The next blog in the series will consider conceptual carbon prices. While these policies address less tangible prices that, in some cases, no one will ever pay, the impact they have on people’s lives and their decisions is very, very real. 

Featured photo by Anne Nygård on Unsplash

Latest News