Will Carbon Offsets Be Required for Pipeline Projects?

What’s the issue?

Last month, Mountain Valley Pipeline announced that it would be purchasing carbon offsets to make its operations carbon neutral for the first ten years of its operations. Also, TC Energy announced plans to lower its emissions by switching to renewable energy to run its oil and gas pipelines in Canada and the United States.

Why does it matter?

Voluntary efforts to mitigate emissions is generally a positive step by the industry, but FERC may soon require such offsets and that would lead to additional costs for shippers either as a pass-through cost in a fuel tracker for operational emissions or possibly as part of the rate base if FERC requires mitigation for end-use emissions.

What’s our view?

If FERC decides to mandate carbon offsets for pipeline projects, that could actually lead to adverse environmental impacts because the cost of such offsets would be borne by shippers. Because such costs appear to be more than minimal, the imposition of these costs on some, but not all, pipelines may lead shippers to choose pipelines without such mandates, which could drive up the industry’s overall emissions.

 


 

Last month, Mountain Valley Pipeline (MVP) announced that it would be purchasing carbon offsets to make its operations carbon neutral for the first ten years of its operations. Also, TC Energy announced plans to lower its emissions by switching to renewable energy to run its oil and gas pipelines in Canada and the United States. While voluntary efforts to mitigate emissions is a positive step by the industry, any action by FERC to require such offsets for projects seeking its approval will undoubtedly lead to increased costs for shippers. Because such costs appear to be more than minimal, the imposition of such costs on some, but not all, pipelines may lead shippers to choose pipelines that have not yet been required to obtain such offsets. Those market-driven decisions could result in higher carbon emissions than if such offsets were not required.

 

MVP’s Proposal

MVP announced that it would purchase carbon offsets to make MVP’s operational emissions carbon neutral for the first 10 years of service. The emissions that would be offset include carbon dioxide emitted from compressor stations, methane released during operation and maintenance of the pipeline, as well as carbon dioxide resulting from the generation of purchased electricity. The foundation of the plan is a methane abatement project located at a coal mine in southwest Virginia near the West Virginia border. Current mining operations at this facility vent allowable emissions of methane into the atmosphere. The methane abatement project will capture methane from the mine and convert it into carbon dioxide and water vapor to significantly reduce the climate impact.

Upon completion, the Virginia methane abatement project is expected to reduce statewide underground coal mining emissions by approximately 25%. Mountain Valley estimates that it will spend $150 million for these carbon offsets during its initial 10 years of operations. The carbon credits will be verified annually and registered with the nonprofit American Carbon Registry, the first private voluntary greenhouse gas registry in the world.

The Environmental Impact Statement that was prepared by FERC in its review of the MVP project showed that the operational emissions, primarily carbon dioxide from the operation of the compressor stations, was expected to be no more than about 900,000 tons of CO2e per year. Assuming that the $150 million price tag mentioned by MVP is based on offsetting this amount of GHG, the cost per ton of GHG is about $16.49.

 

Environmental Activists Respond

In announcing the plan, Equitrans Midstream Corporation, the largest equity holder in the project, indicated that this decision was part of the company’s commitment to aggressively pursue climate change mitigation and adaptation while also balancing the immediate and increasing need for energy in our country, and was part of the company’s efforts to achieve net-zero carbon by 2050.

The immediate response of the environmental activists opposing the project was to accuse the company of attempting to “greenwash” the project, and a coalition of over twenty opposition groups formally objected to FERC about various aspects of the proposal, calling it “woefully inadequate.” Interestingly, while complaining about the methane emissions of MVP, the opposition groups also complained that the project at the mine would reduce methane emissions, but still release carbon dioxide. They also complained that the plan would “only” cover the pipeline’s first ten years of operation. They noted that the plan does nothing to mitigate the GHG emissions from the end-use of the gas. This shows that even mitigating all of the operational emissions will not resolve the objections of the environmental opposition, who appear to be satisfied by nothing less than stopping projects entirely or requiring mitigation of the full life-cycle emissions.

While the total cost of offsetting the operational emissions is not small at $15 million per year, the cost of offsetting the downstream GHG emissions would be astronomical. According to the EPA’s greenhouse gas calculator, the combustion of natural gas equal to one year’s worth of MVP’s maximum capacity would equal 38,624,300 tons of CO2e. To offset that at $16.49 per ton for ten years would cost MVP, and therefore its shippers, over $6 billion, more than doubling the cost of the project.

 

TC Energy’s Plan

Last month, TC Energy also announced that it was looking to reduce its operational carbon emissions from its pipeline operations by powering its pipelines with wind and solar, instead of natural gas. TC Energy estimated that it would take 5 to 7 GW to power its U.S. and Canadian pipeline network. It is not exactly clear how TC Energy intends to achieve this. Actually replacing all of the natural gas compressor stations with electric drives would be a very large capital commitment. But we did look at what would happen at TC Energy pipelines if it purchased offsets like MVP is proposing.

With regard to the reported GHG emissions at the TC Energy-owned pipelines, we can estimate the annual cost of offsets using MVP’s $16.49 cost per ton of CO2e. We can then combine that cost with the annual throughput of each of those pipelines to determine the cost per dekatherm of gas transported on an annual basis.

 

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As seen above, the cost per dekatherm varies from a low of about .25 cents per dth to a high of over 1.5 cents per dth. The cost per dth for MVP appears to be much higher, at about 2.5 cents per dth. We do not expect any pipeline to absorb such costs, which would mean shippers would have to pay for this mitigation, likely as part of the fuel cost recovery mechanism that each pipe has.

 

FERC Mandate Versus Voluntary Action

The voluntary actions taken by MVP and TC Energy are admirable, but there is a growing concern that such actions may be mandated by FERC in the not too distant future. Chairman Glick has indicated that GHG emissions are not unlike any other environmental impact that FERC can require a pipeline to mitigate to receive approval. Certainly, the environmentalists have made it clear that mitigating the operational emissions will not satisfy them. Thus, it is even possible that FERC will order some type of mitigation for the end-use emissions. Given the price tag for that type of mitigation, the mitigation cost may be added to the rate base of a project and recovered from shippers through the reservation charge.

The problem with any recovery of such mitigation costs from shippers is that it may result in the opposite effect that FERC intends. Making the cost to ship on only some pipelines, but not others, to include the cost of mitigating operational or downstream emissions would provide a competitive advantage to the pipelines that have not yet been ordered to mitigate such emissions. That likely would lead shippers to underutilize the pipeline ordered to mitigate its operational emissions and overutilize the unmitigated pipeline, actually driving up overall emissions. We have yet to see what Chairman Glick thinks is an appropriate mitigation measure for a pipeline’s GHG emissions, but any such measure will almost certainly have harmful environmental consequences.

Contact us if you’d like to look at the emissions profiles of particular companies.

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