Social Cost of Methane Changes the Equation for Colorado Utility Policy

August 10, 2021

As a growing list of states pass laws aimed at curbing carbon emissions, Colorado has widened its scope, taking the groundbreaking step of requiring state officials to consider the social cost of methane in regulatory decisions, according to a report from Energy News Network on August 2.

Methane, the primary constituent of natural gas, has powerful heat-trapping properties before it breaks down into water vapor and carbon dioxide after 12 years. It is 84 to 87 times more powerful than carbon dioxide over a 20-year span, according to the U.S. Environmental Protection Agency.

“By focusing on methane reduction now, it has the greatest potential to bend the curve on fighting climate change,” said state Rep. Tracey Bernett, a Democrat from Boulder County and a prime sponsor or co-sponsor of several bills passed this year that instruct state utility regulators to use the social of cost of methane when evaluating proposals.

Other successful bills seek to reduce natural gas in buildings and other applications, and to stanch leaks in the supply chain of natural gas. Most natural gas is extracted from geological deposits by drilling.

Legislative and environmental advocates say the new laws have made Colorado the national leader in tackling emissions from buildings.

The social cost of methane emissions was set most recently at $1,756 per short ton by the U.S. Interagency Working Group on Social Cost of Greenhouse Gases, compared to $68 for carbon dioxide. Both metrics estimate the economic damages of releasing emissions into the atmosphere.

A Bernett bill, HB 21-1238, tilts the regulatory table in favor of demand-side management programs offered by private utilities that sell natural gas for use in buildings. State regulators must now take a longer-term view of the cost savings of reducing energy use. With that longer view, more programs that reduce demand through improved insulation and other devices will be justified as cost-effective.

In deciding what programs are cost-effective, state regulators must incorporate into their evaluations “the costs of greenhouse gas emissions, including the social cost of carbon dioxide and methane leaked or emitted into the atmosphere,” the law says. It also says regulators must use a discount rate of 2.5% or less. The lower the discount rate, the greater the future benefits of not producing greenhouse gas emissions.

Another provision of the law tells state regulators to get the best available information about leaks of methane upstream of buildings, beginning with its extraction and processing, then delivery through an elaborate network of pipelines.

“We need to reduce the demand for methane by improving the energy efficiency of the building sector through weatherization, more highly efficient space and water heaters, and aggressive adoption of clean-heat technologies,” Bernett said.

“Reducing greenhouse gas emissions in the building sector is what I’ve called the hardest nut to crack because it will take the longest time to convert the building sector to clean-heat technologies, especially retrofitting existing buildings,” Bernett said. “That’s why we need to start now.”

The law requires utilities to submit plans in 2022. Bernett expects rapid results in improved energy efficiency, still the most economical answer to reducing emissions.

Other legislation passed this session requires plans to be filtered through the social cost of methane and carbon. A beneficial electrification law, SB21-246, requires utilities to submit program proposals by July 1, 2022, for converting existing gas boilers and other uses of fossil fuels in buildings and industrial electrical applications.

Colorado aims to rapidly decarbonize its electricity generation this decade. Renewables provided 30% of electricity in 2020, but utilities have pledged to close all but one coal plant by 2030, allowing them to achieve a minimum 80% reduction in emissions as compared to 2005. Some smaller utilities have vowed to get to 100% renewables.

Still another new law, SB 21-264, pokes the elephant of methane from yet another side. The state’s four largest gas distribution utilities must file plans with state regulators about how they will adapt resources to meet clean-heat targets. The most important target requires a 22% reduction in carbon dioxide intensity by 2030 as compared to 2015 levels. Costs for doing this are capped at 2.5% of revenues for the three investor-owned utilities — Xcel Energy Colorado, Black Hills Energy, and Atmos — and at 2% for the municipal Colorado Springs Utilities.

State regulators must use the social cost of methane and carbon in evaluating the proposed clean-heat plans.

The clean-heat law gives utilities many tools for achieving the required reductions. They can harness other existing sources of methane, including emissions from landfills, dairies, and sewage-treatment plants. They can also take methane leaking from existing coal mines. But these recovered methane techniques can constitute no more than 5% of the target of 22%.

Utilities also have the option of developing green or blue hydrogen to be delivered in lieu of natural gas. Green hydrogen is made from renewable sources, and blue hydrogen can be made from fossil fuel, but only when the emissions are captured and stored. The law also gives utilities the option of ramping up methane leak detection from their distribution networks.

Integrating the social cost of methane into decisions will not necessarily produce specific outcomes, said Erin Overturf of Western Resource Advocates, a regional environmental conservation group based in Boulder.

“I just think it will lead to a more accurate accounting [of the costs and benefits] as we do these evaluations at the Public Utilities Commission,” added Will Toor, the director of the Colorado Energy Office, which helped shape many of the laws. “I think it will lead to significantly larger investments in efficiency and beneficial electrification, particularly in the clean-heat plans submitted by gas utilities.”

The Natural Resource Defense Council’s Alejandra Maija Cunningham said these and other bills put Colorado at the forefront of states taking actions to wring emissions caused by buildings.

More important than the new tool of the social cost of methane, she said, is how it’s being used to lower emissions from buildings. “It’s not just that they use the social cost of methane, but that it is being used to require a 22% reduction in this sector by 2030.”

Several other new laws make no mention of the social cost of methane or of carbon but also seek to suppress emissions caused by buildings. For example, HB 21-1286 requires owners of buildings of 50,000 square feet or more to benchmark energy use. These data will then be scanned as state and local officials assemble standards that seek to achieve a 7% reduction in emissions by 2025 and a 20% reduction by 2030, both compared to a 2021 baseline.

A more general provision requiring the integration of the social costs of greenhouse gas pollution in decision making is in a law that overhauls the state’s transportation funding. That generality allows policymakers to look at less common but still potential greenhouse gases, including nitrous oxide and hydrofluorocarbons.

A guiding document for the legislation was the Colorado Greenhouse Gas Pollution Reduction Roadmap, which was released in January, just prior to the start of the legislative session. The 206-page document lays out the challenges for Colorado to meet its economy-wide emissions reduction targets of 26% by 2025 and 50% by 2030. In hewing to the recommendations of climate scientists, the 2019 law also requires a 90% decline by 2050.

As coal plants have started closing, transportation has become Colorado’s largest source of greenhouse emissions, according to the roadmap, followed by fugitive emissions from the oil and gas industry, and then buildings.

“To achieve the state’s 2025 and 2030 emissions goals, methane emissions from the oil and gas sector as a whole will need to be reduced by at least 33% by 2025 and over 50% by 2030,” the roadmap declared. It said the reductions are both economically and technically feasible. The roadmap also said methane emissions from landfills, sewage plants and other sources would have to be cut for Colorado to hit its 2030 goal.

Colorado in 2014 adopted regulations that became a model for other states and the federal government in squeezing fugitive methane emissions from oil and gas operations. A state agency, the Air Quality Control Commission, is expected to produce rules that will achieve a 30% reduction by 2025 and over 50% by 2030.

All this is a lot — but it’s not enough for Laurent Meillon, a board member for the Colorado Renewable Energy Society and a solar thermal entrepreneur. He said the social cost of methane needs to be applied to electric resource planning, too. Without it, he said, utilities may want to build or buy gas-burning power plants.

He also wants to see the metrics apply to what he called the “de facto billion-dollar infrastructure investments into gas lines” by Xcel Energy, the state’s largest gas distribution company.

An even more piercing appraisal comes from 350 Colorado, an affiliate of the international climate action group. Colorado ranks fifth in oil production and seventh in natural gas, but most doesn’t stay in Colorado.

“We export about 90% of our oil and 75% of our natural gas production, and Colorado is turning a complete blind eye to all those emissions,” said Micah Parkin, the executive director. Those exported emissions altogether dwarf those occurring inside Colorado, she said. “It’s like saying we’re going to have a drug-free house but we’re making crack and selling it.”

Parkin says she’s skeptical Colorado’s efforts to clean up the natural gas supply lines will succeed to the extent that state leaders propose. Methane, she said, “is very leaky.” Her solution: phase-out oil and gas drilling.

Others note that Colorado is not Oklahoma or Texas, but it’s still a purplish state. Colorado can only achieve what it has the power to do, and reducing demand for natural gas from buildings will reduce fugitive emissions from wells and pipelines, said Howard Geller, senior policy advisor for the Southwest Energy Efficiency Project.

Colorado, Geller insisted, should be seen as a national leader after this legislative session, one that has created strong legs to go along with its goals that were adopted in 2019.

“A lot of cities and states have adopted ambitious targets for 90% reduction emissions by 2040 or 2050,” he said, “but very few are adopting packages of specific policies for reaching those targets.”