Lessons from Norway and American Democratic System Capacity

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Methane Basics (CH4)

• Multiple sources: oil, gas, and coal production; agriculture & livestock; solid waste landfills
• But oil and gas production leading U.S. & Canadian source
• GHG: 25X greater Global Warming Potential than CO2 during first century in atmosphere (1/4 of GW that has already occurred)
• Contributes to volatile organic compounds
• Waste of a non-renewable natural resource, as methane is the main constituent of natural gas

Methane Flaring, North Dakota-Style

Methane Supply Chain

• Venting: Direct release of methane in atmosphere at drill site

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• Flaring: Combustion at point of release, converting to carbon and other toxics

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• Leaks at every stage of supply chain until end use of energy

Federal & State Policy Engagement: The Case of Methane

High

Low

Federal

High

Low

State

Methane Policy in U.S. Federalism

• State Domination of regulation and taxation: 1870-present

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• Most Western production states have an oil & gas commission whereas Eastern states place oversight in an environmental protection agency

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• Obama era regulations and Trump “search and destroy” process maintains state control

Welcome to North Dakota

North Dakota’s Dominant Issue

North Dakota’s 2^nd Most Dominant Issue

Gov. Doug Burgum: Methane nightmare

Senior Senator Brad Bekkendahl

The most controversial photo in North Dakota

Current North Dakota Methane Policy

• State reviews promptly all oil and gas drilling proposals—and usually approves
• Formal methane restrictions in legislation are routinely waived administratively
• Methane exempt from severance taxes
• Major methane release issues as Bakken oil deposits shift toward gas
• Releases between 10-20% in most months of recent years, based on industry reporting (Norway well below 1%)

Off-shore drilling debacle, 2010

Welcome to Norway

Unique Features

• Massive hydro legacy & technical expertise in government
• Prior boom & bust periods—and learning from them
• Ten Commandments and tight methane flaring restrictions
• National decisions about drilling locations, government ownership of resource, but large private production role
• Steep carbon tax applied explicitly to methane released from oil & gas production

Methane—A Rare Sight in Norway

World’s premier sovereign-wealth fund

Norway vs. Alberta: Energy Super Powers

The Norwegian Model: No Avfull

Fiorino: Criteria for Full, Robust Democracies

• Free & Fair Elections (Norway)
• Respect for political freedoms/civil liberties (Sweden)
• Satisfactory government functioning (New Zealand)
• Political culture for flourishing democracy (Germany)
• Independent & diverse media (Canada)
• Checks & balances on exercise of power (Australia)
• Independent judiciary/rule of law (Uganda)

Consider severance taxes in the US States

• Impose a cost on the extraction of natural resources as they are being severed from beneath the surface of the earth.”
• Technically straightforward & easy to implement—if you have good compliance & monitoring
• Usually brutal battles over adoption—and then little change for decades
• Unusual partisan combinations, often linked to revenue use

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What exactly are they addressing?

• Compensation for permanent loss of a non-renewable natural resource

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• Revenue to offset “resource curse” risks and reduce energy dependence

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• Revenue to address long-term negative externalities that may be difficult to know in advance. (Air & water quality; abandoned mining sites, GHGs)

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Evolution of North Dakota Severance Taxes

• Pioneering use of coal severance taxes for related mining closure & site remediation through a trust fund (Gov. Arthur Link)

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• Initial 5% oil severance tax adopted in 1950s with separate tax on gas

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• Added 5% tax on oil adopted by ballot proposition in 1980s, creating a net 10% tax rate. Strong voter support despite vigorous industry opposition. Very durable ever since.

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North Dakota Legacy Fund & Norway Model: 2010 Ballot Proposition

Tax Rate Changes in the Shale Era

Findings with Rachel Hampton

• Tax rates stable and taxes have broad political support: Highly durable policies

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• A few states have slashed taxes to try to spur development—but no evidence that it has worked (OK: 7% to 2% to 5%)

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• But some shifts in revenue use as opposed to general placement into state operating funds: More targeted over time.

American Considerations: Methane

• Multiple methane frames: Climate, air quality, permanent loss of non-renewable natural resources…

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• Nearly all oil/gas production states tax upstream—They endure after intensive political adoption battles

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• Are States Racing-to-Top with methane innovation, particularly given federal EPA/BLM reversals? Do they tax methane with existing severance taxes?

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USGS Price of Grade-A Gaseous Helium (1999-2017)

Cases of Interest: RPR 2020 article

Did states price methane, 1960-2000?

• Alaska followed Norway (flare ban and fines)—but has eased back over time

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• 1985 North Dakota legislation imposed taxes after first year of flaring (but altered in 1993: “may” vs. “shall”)

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• Common path: Exemptions and delegations to state oil and gas commissions for waivers

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• What happens in the shale era post-2000?

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North Dakota Monthly Natural Gas Flared (1990-2018)

Flaring in Wyoming & Air quality: Pinedale

Have states taxed methane flaring and venting in the shale era?

• Multiple rounds of legislation proposed in Wyoming and North Dakota during 2010s to extend existing taxes—all rejected decisively and with decreasingly bipartisan support over time

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• No concerns expressed over technical feasibility in hearings but much uncertainty over release volumes

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• Aggressive oil and gas industry opposition:

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-- Threats to shift production to other states if adopted (Senator Bekkendahl)

-- States must provide gas capture infrastructure before taxation

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Where next on methane?

• Expected spikes linked to expanding development: Permian Basin, outlying Bakken counties, et al.
• Limited legislature engagement on methane in most states (except landfills)
• Regulatory reforms via performance standards in some states—CO, NM, PA
• Possible state methane tax legislation proposals in early 2021
• What will Biden Administration do???

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Lessons from Leading U.S. States and Canadian Provinces

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Fall 2020

Where we began in September

• Feasibility of a carbon price?

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• Feasibility of other policies like carbon regulations or a clean energy standard?

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• Months later, we finish with methane. Tax? Regulation? Hope the problem goes away?

PAs Corbett & Act 13: Industry-Defined Regulation

What about Colorado and its regulatory reforms? Models for North Dakota?

Colorado Innovations to Date

• Colorado Oil and Gas Conservation Commission becomes state-of-art agency
• Major methane performance standards and regular site inspections
• Early water quality/well testing regulations
• First state-local task force seeking “common ground”
• New set-aside legislation amid continued high production levels
• And major revenue-use shifts…

Some Targeted Allocation towards Negative Externalities & Localities: Colorado

Multiple CO climate bills signed with specific methane provisions: Gov. Polis (2019-20)

Including methane from landfills as “renewable natural gas”

Polis Era Reforms in Colorado

• 2020 legislation launches regulatory process heading toward bans on all venting and flaring (with very few exemptions): Very similar to Norway model, unprecedented in US

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• Legislation should be more durable than regulation by agencies

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• But continued political reluctance to increase COs relatively low severance tax, which still exempts methane

Next Up: New Mexico Regulatory Reforms

New Mexico Shale Landscape

New Governor, New Approach to Methane through Executive Action

New Mexico’s Emerging System

• Governor advances regulatory reform without support of legislature, using executive orders

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• Flexible application of regulatory oversight linked to measurable performance: Greater the methane release rates, greater the regulatory presence (monitoring, inspections, fines). Lower the releases, lighter the oversight.

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• Possible royalty reforms to cover flared/venting methane in payments to land owners

The Three Amigos and Hopes for a Continental Climate Strategy: 2016

British Columbia

Carbon Tax

Alberta

Federal fuel charge (Jan 1 2020),

AB OBPS

Quebec

Cap-and-Trade

Northwest Territories

Carbon Tax (Sept 1 2019)

Newfoundland & Labrador

Carbon Tax + OBPS

Nova Scotia

Cap-and-Trade

Saskatchewan

Federal fuel charge, partial OBPS,

SK partial OBPS

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Prince Edward Island

PEI fuel charge,

Federal OBPS

Ontario

Federal Backstop

Manitoba

Federal Backstop

Nunavut

Federal Backstop

Yukon

Federal Backstop

Current State of Play – Provincial and Territorial systems

New Brunswick

NB fuel charge (Apr 1 2020), Federal OBPS

Back to Alberta, the dominant provincial producer of oil and gas

One area of cross-partisan agreement

Albertan Regulatory Reforms

• Meet national/continental targets, reducing methane 45% from 2014 levels by 2025
• More rigorous measurement and public disclosure
• More frequent monitoring/inspections
• Initial 2016 carbon tax was applied to methane but entire tax reversed in 2018
• But methane fee on flaring/venting used to cover some technology/compliance costs

Canadian Regulatory Reforms

• Working with oil and gas producing provinces, setting a federal floor to achieve reductions of 2016 North American agreement.

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• Give provinces flexibility to try to match or exceed federal standards if they want to maintain control

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• Alberta and other provinces attempting to secure federal approval to maintain their own policy (versus federal oversight)

Final Thoughts

• Write your best paper of the semester for next week!

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• Come prepared for robust discussion of your findings.

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• Finish evaluations!

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• Thanks!!

American Shale Plays

Western PA Fracking Operation

One of the strongest proponents of a severance tax…

Percent share of state severance tax revenue in total state tax revenue by year

A Charge from Aristotle on Governance

• Three seemingly simple questions:
• 1) Who governs?
• 2) How do they govern?
• 3) What are the results of their governance?

Governance Options in a Federal System

High

Low

High

Low

Federal

State

Federal and State Shale Policy Engagement

High

Low

Federal

State

High

Low

Some Overarching Questions

• What’s the problem? Is there a problem?

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• What does the sudden discovery of massive quantities of natural gas and oil beneath American soil means for the American economy – and public policy?

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• Is this an extension of US fossil-fuel dependence OR the long-awaited ticket to energy independence?

Energy Independence Anyone?

Environmental Issues

• Groundwater contamination
• Air contaminants, including methane
• Massive water withdrawals
• Chemical disclosure and transparency
• Local land-use concerns: Noise, safety, storage, pipeline/rail transport
• Seismic activity (underground injection)

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Consequences of Decentralized Governance

• What are the results if governance remains largely devolved to individual states and localities – as opposed to a federal set of rules and regulations?

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• One view: Would states race to the bottom?
• Resource extraction trumps environmental protection: export problems, out-bid neighbors, create as cozy a governance setting as possible

Another view: Would States Race to the Top?

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• States on the frontier of innovative governance:

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• Transparency and public engagement
• Performance metrics and management
• Policy tool innovations: Markets, voluntarism
• Cross-state collaboration (regionalism)

What about states

Tale of Two States and New Mega-Legislation

Pennsylvania

Unconventional Gas

Well Impact Fee Act

Illinois

Hydraulic

Fracturing

Regulatory

Act

Matt Damon to the Rescue in PA

Edwin Drake 2.0??

Drake Well Museum

1859

2017

Act 13 Passes in Harrisburg

• Divide largely along partisan lines
• Key provisions:
• Limited local land-use roles: Strong state control over local land use decisions
• No severance tax. Instead, option of “local impact fee” (Locals impose fee, state collects revenue, state shares some revenue IF locals behave)
• No mandatory testing (presumed liability)
• Limited disclosure – CBI
• Rapid implementation, litigation, political challenges, judicial reversals, uncertainty

The Pushback

• Let’s sue – Litigation from some local governments leads to litigation and some reversals by PA Supreme Court
• Let’s amend – Numerous proposals to amend Act 13 and revise regulations – a 2014, 2016 & 2018 election battleground
• Let’s protest – Enter the “fracktivists,” some of whom seek a moratorium or ban, though that has little traction to date

Diffusion to Neighbors?

• Do other Marcellus Shale neighbors follow the Pennsylvania model?
• New York?
• Ohio?
• West Virginia?
• Maryland?
• Ontario, Canada?

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Ohio’s John Kasich – Seize the fracking moment…but approach with some caution

Andrew Cuomo: Leave it in the ground but keep importing natural gas

In general, would you say that you strongly support, somewhat support, somewhat oppose, or strongly oppose the extraction of natural gas from shale deposits in NY/PA? (Boudet, et al.)

Outside the Marcellus: Is Illinois Racing to the Top?

• Not a state known for political and governmental integrity
• Corruption
• Fiscal chaos

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• But a state with a fossil fuel history – and a discovery of major shale deposits

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• Launched a multi-year process with very diverse stakeholders

“Let’s Make This Work for the Long Haul”

• Senator John Bradley

Key Illinois Design Elements

• Severance tax (6%) and Impact Fee
• Extensive chemical disclosure provisions
• Extensive/explicit pre- and post-drilling testing of water (6, 18, 30 months) by independent 3^rd party
• Unique waste-management provisions
• Seismic warning system, with process to show/halt drilling if problems emerge
• BUT very little subsequent drilling

Looking Ahead

• Does this state-to-state diversity reflect geological tailoring – or other factors?
• How do we define governance “best practice”?
• Can shale energy be a bridge toward a cleaner future, possibly with tax revenue, or not?
• How do we address cross-border issues?
• Borrowing from Aristotle… What will be the results of this emerging approach to shale gas governance?

Illinois Passes HB 2856 (2013)

• Overwhelming GOP and Democratic support after extended stakeholder process:
• 108-9 in House
• 52-3-4 in Senate
• Substantial environmental group and industry support for “toughest in the nation” bill:
• NRDC and IL Chamber of Commerce
• IL Sierra Club and IL Oil and Gas Association
• IL AFL-CIO and IL Petroleum Council
• Major state agencies and AG
• No sign of litigation or serious political challenges

Mark Wahlberg jumping around