Key questions for evaluating severance tax legislation

Pennsylvania lawmakers are in the third week of a budget stalemate that even the most optimistic political observers saw from miles away. I cannot overstate how important these budget negotiations are to the environment. In addition to funding state environmental protection agencies, the budget negotiations include debate on levying a severance tax on natural gas drilling and using part of that revenue to invest in Pennsylvania's clean energy economy as well as enforcing environmental regulations.

So far, the severance tax has been a moving target in the budget debate. Negotiations have ranged from haggling over the details to outright hostility. Legislative leaders such as Rep. Mike Turzai (R-Allegheny) have been particularly outspoken and largely refuse to negotiate with Gov. Tom Wolf on any aspect of the tax. Other leaders, such as Sen. Jake Corman (R-Centre), are more open to negotiating.

Negotiations are expected to continue at least for another couple of weeks, if not longer. But as the negotiations drag on though, there are some key questions to keep in mind when evaluating any potential piece of severance tax legislation:

1. Where is the revenue going? The most important part of any severance tax proposal is how the revenue is invested. PennFuture has strongly advocated that part of the revenue must go to re-starting key clean energy programs as well as beefing up enforcement of environmental regulations. In both cases, budget cuts have severely depleted these programs at a staggering cost to the environment. Their inclusion in any severance tax legislation is crucial.
2. What about the Impact Fee? In 2012, policymakers implemented a "Impact Fee" on natural gas drillers that effectively taxes the industry at the lowest rate of any state with gas drilling. The majority of the revenue from the fee is returned to local municipalities impacted by drilling to rebuild their infrastructure. As a result, the Impact Fee is very popular among drilling counties, making whether the Fee remains or is eliminated due to levying a severance tax a key negotiation sticking point.
3. What about the price floor? Gov. Wolf's severance tax proposal includes a "price floor" of $2.97/mcf, meaning that natural gas drillers would be taxed at $2.97/mcf even if the price of gas falls below this level. In theory, the price floor protects state revenue from possible fluctuations in the price of gas as well as guaranteeing a minimum level of revenue. Currently, natural gas prices in Pennsylvania are lower than the price floor, but are expected to rise as pipeline projects are completed. Nonetheless, the natural gas industry still decries the price floor.
4. What about policy riders? During the course of crafting legislation, the General Assembly has a funny habit of sneaking in provisions in larger bills it knows it can't pass on its own. Their hope is no one notices. Any potential severance tax deal will offer an opportunity to do the same and we've already seen legislative leaders attempt to eliminate new oil and gas regulations by slipping a provision in the Fiscal Code bill. It's entirely possible a similar situation could happen again, potentially reducing the overall benefit of the deal.

Ultimately, the severance tax is crucial environmental policy - if not the most important piece of environmental policy to be enacted in 2015. It's vital we get it right.

Matthew Stepp is director of policy for PennFuture and works out of our Philadelphia and Harrisburg offices. He tweets @MatthewStepp.

To date, severance tax the most significant environmental legislation of 2015

June 1 was the unofficial start to Pennsylvania’s state budget negotiations. Expect the same budget showmanship and political stunts as years past but, nonetheless, this year’s budget negotiations have the potential to be an historic turning point. In fact, I’ll go so far as to say the Governor’s budget, anchored by a 5 percent severance tax on natural gas drilling, could be the most significant piece of environmental legislation of 2015.

That might sound off base to some so hear me out.

The overall impact of the severance tax can and will be measured by where the revenue it generates is directed, not necessarily from the direct impact of the severance tax itself. As most in the Commonwealth know, Gov. Tom Wolf has long proposed using most of the severance tax revenue to invest in education. But a deeper look at his budget also shows that the governor wants to leverage the severance tax to kick-start the state's clean energy economy and bolster environmental protection.

In particular, Gov. Wolf has proposed using a portion of the revenue generated to float a bond that would invest:

1. $225 million for clean energy and energy efficiency programs that will cut pollution and position Pennsylvania as a hub for clean energy jobs and industries;
2. $10 million to hire 50 new enforcement staff at the Department of Environmental Protection that will ensure Pennsylvania’s growing gas industry is safe and cleaner;
3. and $19 million to reduce the Department of Conservation and Natural Resources’ budgetary dependence on extractive industries so the state can increase its investment in our parks and forests.

The importance of restarting state investment in clean energy cannot be overstated. In four years, Pennsylvania went from being a leading state for clean energy job and industry growth to a lagging state because policymakers decided to end most incentive programs. The governor’s budget proposes to reverse that process by injecting some much needed investment in solar, energy efficiency, wind, and combined heat and power. It certainly wouldn’t be the end of the debate on state clean energy policy or proper investment levels but it’s a step in the right direction.

It’s critical that the clean energy and environmental protection piece of the governor’s budget proposal be included in all budget negotiations, particularly those surrounding the severance tax. It may sound funny linking natural gas drilling to clean energy but jump-starting these programs and industries requires revenue -- and the severance tax is the best bet.

Matthew Stepp is director of policy for PennFuture and works out of our Philadelphia and Harrisburg offices. He tweets @MatthewStepp.

The real story behind regulating natural gas drilling in Pennsylvania

Talk about being rude. I wrote an entire blog post without actually introducing myself to PennFuture’s dedicated readers! Hi, I’m Matthew Stepp – PennFuture’s new director of policy. I’ll be sharing my thoughts, rants, and reactions in Session Daze on all things state and federal policy. I’d dive deeper into who I am, but I actually think this post—and my participation in the PCN Call-In Show earlier this week—is a good introduction. I look forward to connecting with PennFuture’s readers across Pennsylvania in the weeks and months ahead.

On April 20, I participated in the PCN Call-In show, along with Marcellus Shale Coalition President David Spigelmyer, to discuss the issues surrounding natural gas drilling in Pennsylvania. My message was straightforward: Thoughtful oil and gas policies are necessary so that all Pennsylvanians benefit from affordable, environmentally sustainable energy. Mr. Spigelmyer’s message was the opposite: If Pennsylvania wants cheap energy, trust us and let the oil and gas industry do what it wants to Pennsylvania’s air, water, and land.

A stark difference, no doubt! 

In fact, the show teased out a number of critical points central to the statewide debate on issues surrounding shale gas drilling. 

It’s not a choice: Pennsylvania can have cheap and clean energy 

If you listen closely to Mr. Spigelmyer’s comments—as well as the comments of his colleagues throughout the oil and gas industry—he’s offering Pennsylvanians a black and white choice. We can either grow the state economy through shale gas or incur economic catastrophe through environmental sustainability. 

This could not be farther from the truth. Through common sense regulations and a state energy policy that looks to the future and not just the present, Pennsylvanians can have cheap energy as well as clean air, water, and land. It’s not a give and take. And one only needs to look to other leading states, such as Colorado, that are benefiting from regulated shale development while investing in zero-carbon renewable energy and energy efficiency. The catch is Colorado is benefiting from low energy costs similar to Pennsylvania but without the pollution. Pennsylvania can do the same. 

Strong regulations needed to cut methane emissions 

A big issue with shale development is the release and leakage of methane—a greenhouse gas 84 times more potent in its first 20 years than CO2. In fact, it is possible methane leakage eliminates the climate change benefits from electricity producers switching from burning coal to burning less carbon-intense natural gas. 

Mr. Spigelmyer argues that his industry is taking the problem seriously for no other reason than to capture leaked methane and sell it. In other words, it is profits leaking out of their pipes. And industry has a point. The Pennsylvania Department of Environmental Protection (DEP) released data this week that found methane emissions from oil and gas drilling declining. This comes after similar findings from the U.S. Environmental Protection Agency (EPA). 

But you need to crunch the numbers. The reality is methane emissions are decreasing in areas of natural gas production that are regulated. In particular, the EPA promulgated new rules in 2012 that required drillers to control methane leaks from fractured wells, otherwise known as green completions. Both the EPA and DEP found that the reductions were narrowly focused on these leaks. Other areas of production, such as pneumatic devices, dehydrators, and fugitive emissions, actually increased. 

The lesson here is that regulations work. The oil and gas industry is responding to thoughtful methane regulations in a serious way, but not responding to other unregulated leaks. Broader and stronger methane emission regulations are needed to kick start industry into action. 

The public must have a voice on regulating shale gas 

For a decade, the oil and gas industry has had free rein in Pennsylvania and that time is coming to an end. In the interest of our environment, the sanctity of our public and private lands, as well as our climate, the state is proposing regulations to limit negative impacts stemming from drilling activity. Unfortunately, the oil and gas industry is doing everything it can to limit public engagement during the creation of these regulations. For his part, Mr. Spigelmyer did everything he could to not answer questions on this topic during the show. 

As I said during the PCN Call-In Show, PennFuture is astonished and deeply concerned at industry's efforts to block the public’s voice. While the oil and gas industry believes the public is not knowledgeable enough to engage in technical conversations surrounding these regulations, I believe the public understands the issues surrounding drilling better than anyone. The drilling is occurring in their backyards, near their schools, and on their farms. The public interest should have every opportunity to engage the regulatory process. 

A severance tax will build the bridge between shale gas and zero-carbon energy 

Mr. Spigelmyer’s most vociferous criticism of Pennsylvania shale gas policy centered on Gov. Tom Wolf’s proposed severance tax. Under his predecessor, Gov. Corbett, a modest “Impact Fee” was levied on oil and gas drillers that charged a flat amount per well and shared the revenue with all counties of the Commonwealth. Gov. Wolf has proposed replacing the Impact Fee with a direct tax on the value of the gas being extracted from the well and using the revenue to not only invest in the counties, but also invest in stronger oversight of the drilling industry as well as clean energy programs. 

The nut of the criticism is that the severance tax will cost oil and gas drillers more than the Impact Fee. In response, Mr. Spigelmyer and his industry colleagues argue that “capital will leave the state” if the severance tax is implemented—a threat that I believe is hollow. Pennsylvania is the only shale-producing state without a severance tax. In fact, Gov. Wolf’s proposal is similar to other state severance tax policies such as West Virginia. As industry’s argument goes, drillers would pick up and leave Pennsylvania to go to another state that has the very tax from which they purport to be running. Doesn’t make sense, right? 

The truth is, Pennsylvania is one of the largest sources of natural gas in the world—many of the top producing wells are located in Susquehanna County. The oil and gas industry is not going to turn away from such production because of a modest tax proposal similar to neighboring states. 

And we cannot talk about the efficacy of a severance tax in a vacuum. To fully understand how good of a deal the oil and gas industry is getting in Pennsylvania—and will continue to get even with a severance tax and thoughtful regulations—look no further than the $3.2 billion in annual subsidies that fossil fuels receive from Pennsylvania.

Matthew Stepp is director of policy for PennFuture and works out of our Philadelphia and Harrisburg offices. He tweets @MatthewStepp.