Many oil and gas producing countries already have regulations, bans on routine flaring, or voluntary commitments.  Yet global gas flaring and venting continue to rise (Figure 1). One challenge is ensuring compliance. 

Figure 1

Source: EnergyCC analysis

A performance-based fiscal element (e.g. methane rebate fee) should be designed to make gas capture more profitable than flaring

The biggest fiscal upside comes from turning wasted gas into taxable economic activity whether for LNG sales, chemical feedstock, power generation, and gas re-injection, rather than relying only on penalties / fees.  A methane rebate fee can be designed to incentivize operators to make the investments necessary to commercialize the wasted gas.

The fee must be high enough to change behaviour because repurposed gas has greater economic value than the fee itself. It must provide a ‘carrot’ and ‘stick’ to operators to reduce and repurpose emissions. The internal rate of return (IRR) of incremental gas developments can reach a marginal IRR, but a rebate fee can turn a marginal project into a profitable one.

Implementation of a performance-based emissions fee should be combined with measurement, transparency, and gas monetization. For example:

• satellite technologies can detect flaring locations precisely and regular overpasses provide a large number of flare rate measurements each year. Satellite and third-party verified data can reduce reliance on self-reporting and establish reliable asset level emissions.
• A rebate fee is assessed based on deemed emissions. Verified reductions earn rebates.
• Operators, not the Regulator, provide actual data on emissions with independent verification. Independent measurement reduces disputes and improves enforcement.
• Gas monetization can be supported through fiscal stimulants for measures that reduce energy waste, such as gas aggregation schemes, gas pipelines, exemption of import duties on gas emission metering equipment.

Tax revenues and penalties accrue to the government and, if properly calibrated, give incentives to companies to limit wasteful flaring. This video illustrates the process and the potential for moving this forward and details are given in this CGD blog and note.

Applying a methane rebate fee would enable companies to benefit from improved efficiency, increased profits, reduced tax liabilities, and lower emissions to help meet national and international commitments to end routine flaring. The performance-based fee rewards good quality operators, while those unable to control their emissions are ‘incentivized’ to reduce emissions or pay the price.

Enablers for implementation

Globally, the 8 per cent of natural gas wasted annually due to flaring and venting has a value of USD 124 billion per year at 2024 average international gas price (USD 9/MMBtu). The role of international organizations, including the International Monetary Fund (IMF), will be key in supporting governments to achieve more (fiscal) value from improved gas utilisation.

One suggestion is for the IMF to use its well-established processes to provide policy advice and technical assistance to support the adoption of a methane rebate fee. The IMF comments annually through its Article IV consultations on each country’s macroeconomic policies, including how to increase government revenues. Thus there is an established process to raise flaring and venting issues on the policy agenda in support of its 60+ oil and gas producer countries. CGD-EnergyCC’s larger proposed project seeks funding to create a primer for establishing effective win-win-win performance tax regimes for flaring.

Lessons from Brazil can point the way. Petrobras already measures emissions and links executive compensation to emissions performance. Brazil also has a strong regulatory framework. There is an opportunity for fiscal incentives to build on these foundations.  Brazil aims to expand oil production to 5.4 million bpd by 2030, up from 4.3 million in 2023/2024. To meet Brazil’s NDC targets, it is important that this expansion is done responsibly with minimal methane emissions. Companies would be rewarded if they capture, use, sell, or transfer wasted gas into additional economic activity.