Research from RFF Fellow Brian C. Prest suggests that, overall, the Inflation Reduction Act reduces greenhouse gas emissions to a degree that far outweighs the potential increases in emissions due to the bill’s oil and gas leasing provisions.
The Inflation Reduction Act (IRA)—which passed in the US Senate on August 7, passed in the US House of Representatives on August 12, and soon will head to President Joe Biden’s desk to be signed into law—marks a major step toward reducing US greenhouse gas emissions. Yet, a key compromise that secured the vote of Senator Joe Manchin (D-WV) is the mandate of new oil and gas lease sales on federal lands and waters, including a commitment to tie future renewable energy development on federal lands and waters to analogous onshore and offshore oil and gas leasing. At the same time, the bill imposes higher costs on companies that drill on federal lands—most importantly through higher minimum royalty rates, but also through higher rental rates, minimum bids, and the elimination of noncompetitive leasing.
Despite these stricter leasing terms, the prospect of continued federal oil and gas development has sparked concern among some that the leasing provisions in the IRA could undermine the emissions reductions achieved by the other provisions in the bill. This blog post draws upon my recent peer-reviewed research about federal oil and gas leasing policy, which puts the emissions impacts of federal oil and gas leasing into perspective. My work to date suggests that the emissions reductions triggered by other provisions in the IRA would far outweigh the potential impacts of the oil and gas leasing provisions.
The question of how much impact the leasing provisions will have on emissions actually is a very nuanced one. Why? Two reasons: First, we must identify the counterfactual baseline outcome to which we are comparing the outcomes of the bill. Second, we need to determine whether we’re considering the effects of just US emissions or the broader global emissions.
What’s the Right Emissions Baseline?
First, let’s talk baselines. When thinking about the effects of any policy proposal, we need to ask, “Compared to what?”
In the context of the IRA, is the counterfactual baseline continued oil and gas leasing, or no new leasing at all? The Biden administration has in fact implemented both scenarios over the past year and a half. Upon inauguration, Biden issued an executive order that paused all new oil and gas leasing on federal lands, pending a review of the federal leasing program. The order also specified that the review should consider raising royalty rates to reflect “climate costs.” But over the past year, under court order, the Biden administration has resumed onshore lease sales, although at a smaller scale than previously, and announced its consideration of a five-year plan that contemplates further offshore lease sales. In this context, it’s conceivable that, absent the implementation of the IRA, a likely counterfactual simply would have been continued leasing at previous existing royalty rates.
Complicating matters further, the meaning of “previous royalty rates” also is unclear. The Mineral Leasing Act set a minimum royalty rate of 12.5 percent (but no maximum), but in its most recent auction, the Bureau of Land Management flexed its legal authority to impose a higher rate of 18.75 percent. The IRA instead sets onshore royalties at exactly 16.67 percent for the next decade, before making that level a floor after 2032. In this context, the IRA represents a substantial increase in royalty rates (to 16.67 percent) from past practice by the Bureau of Land Management (12.5 percent), but a slight decrease relative to the bureau’s newly established level (18.75 percent). Regardless of these intricacies, the key takeaway from my research is that continued leasing at any of these royalty rates would produce very similar emissions outcomes. I’ve estimated that emissions outcomes by 2030 under all three royalty rates would be within a few million tons of carbon dioxide equivalent (CO₂e) of each other.
In short, when compared to a “continued leasing” baseline, the IRA provisions for oil and gas leasing wouldn’t necessarily impact emissions materially (Figure 1).
Figure 1. Change in Greenhouse Gas Emissions in 2030 Due to Oil and Gas Leasing Provisions in the Inflation Reduction Act of 2022, Relative to Baselines of Other Leasing Scenarios
Bars indicate the range of estimated emissions and reflect uncertainty in future oil and gas prices
An Alternative Baseline
But it’s also worth considering another baseline scenario. Let’s say, hypothetically, that absent the IRA, the Biden administration were to aggressively shut down leasing again, fend off the ensuing court cases, and is followed by a subsequent administration that follows suit through 2030.
Under such a scenario, a “no new leasing” baseline would seem to be the correct baseline counterfactual. In that case, how much more emissions would we expect under the IRA’s reinstatement of leasing, albeit at potentially higher royalty rates?
Using the same modeling approach underlying my paper, I find that, under the leasing provisions in the IRA at the new 16.67 percent onshore royalty rate, US emissions in 2030 would be about 20 million tons of CO₂e higher than a “no new leasing” baseline (Figure 1). For context, analyses by Energy Innovation and the Princeton Zero Lab both estimate that the other provisions in the IRA, considered in the aggregate, would cut US emissions by around 1,000 million tons of CO₂e in 2030, which is 50 times larger than the 20-million-ton increase in my estimates.
Considering Global Emissions
However, this 20-million-ton CO₂e increase represents only the impacts to US emissions.
Considering only US emissions is an appropriate comparison when assessing the likelihood of hitting the Biden administration target of 50 percent emissions reductions by 2030, given that the 50 percent reduction corresponds to only US emissions. Greenhouse gas emissions, however, are global in their scope, dispersal, and impacts—and US leasing policy has global consequences, not just domestic ones. Any actions that reduce US oil and gas production on federal lands will take supply off the market, which would result in fewer barrels consumed domestically and fewer barrels exported and consumed abroad. Reduced federal oil and gas leasing hence reduces emissions both domestically and abroad.
The effects on global emissions of any change in US oil and gas leasing provisions would be much larger than the domestic impacts alone—roughly in the range of 70–100 million tons more emissions in 2030 under continued leasing with the IRA versus a “no new leasing” counterfactual (Figure 1). That’s larger than the US-only value of 20 million tons of CO₂e. But the approximately 1,000 million metric tons of CO₂e reductions that we might expect to result from the IRA’s other provisions still exceed even my highest global estimates by a factor of 10 or more.
