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Price Regulation and Environmental Externalities: Evidence from Methane Leaks

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  • Catherine Hausman
  • Lucija Muehlenbachs

Abstract

We estimate expenditures by US natural gas distribution firms to reduce natural gas leaks. Reducing leaks averts commodity losses (valued at around $5/Mcf [thousand cubic feet]), but also climate damages ($27/Mcf) because the primary component of natural gas is methane, a potent greenhouse gas. In addition to this private/social wedge, incentives to abate are weakened by this industry’s status as a regulated natural monopoly: current price regulations allow many distribution firms to pass the cost of any leaked gas on to their customers. Our estimates imply that too little is spent repairing leaks—we estimate expenditures substantially below $5/Mcf, that is, less than the commodity value of the leaked gas. In contrast, expenditures on accelerated pipeline replacement are in general higher than the combination of gas costs and climate benefits (we estimate expenditures ranging from $48/Mcf to $211/Mcf). We conclude by relating these findings to regulatory-induced incentives in the industry.

Suggested Citation

  • Catherine Hausman & Lucija Muehlenbachs, 2019. "Price Regulation and Environmental Externalities: Evidence from Methane Leaks," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 6(1), pages 73-109.
    • Handle: RePEc:ucp:jaerec:doi:10.1086/700301
    DOI: 10.1086/700301
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    Cited by:

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    2. Scott, Ryan P. & Scott, Tyler A. & Greer, Robert A., 2019. "The environmental and safety performance of gas utilities in the United States," Energy Policy, Elsevier, vol. 133(C).
    3. Jordán, Felipe & Di Gregorio, Enrico, 2024. "The diversity we breath: Community diversity and gas leak management," Regional Science and Urban Economics, Elsevier, vol. 108(C).
    4. Jose-Miguel Abito & Christopher R. Knittel & Konstantinos Metaxoglou & André Trindade, 2018. "Coordinating Separate Markets for Externalities," NBER Working Papers 24481, National Bureau of Economic Research, Inc.
    5. Blundell, Wesley & Kokoza, Anatolii, 2022. "Natural gas flaring, respiratory health, and distributional effects," Journal of Public Economics, Elsevier, vol. 208(C).
    6. Walls, W.D. & Zheng, Xiaoli, 2021. "Environmental regulation and safety outcomes: Evidence from energy pipelines in Canada," Resource and Energy Economics, Elsevier, vol. 64(C).
    7. Ryan P. Scott & Tyler A. Scott & Robert A. Greer, 2022. "Who owns the pipes? Utility ownership, infrastructure conditions, and methane emissions in United States natural gas distribution," Review of Policy Research, Policy Studies Organization, vol. 39(2), pages 170-198, March.
    8. Severin Borenstein & James B. Bushnell, 2022. "Headwinds and Tailwinds: Implications of Inefficient Retail Energy Pricing for Energy Substitution," Environmental and Energy Policy and the Economy, University of Chicago Press, vol. 3(1), pages 37-70.
    9. Abito, Jose Miguel & Knittel, Christopher R. & Metaxoglou, Konstantinos & Trindade, André, 2022. "The role of output reallocation and investment in coordinating environmental markets," International Journal of Industrial Organization, Elsevier, vol. 83(C).
    10. Catherine Hausman, 2019. "Shock Value: Bill Smoothing and Energy Price Pass‐Through," Journal of Industrial Economics, Wiley Blackwell, vol. 67(2), pages 242-278, June.
    11. Xinming Du & Muye Ru & Douglas Almond, 2024. "Rapid Increases in Methane Concentrations following August 2020 Suspension of the US Methane Rule," NBER Chapters, in: Environmental and Energy Policy and the Economy, volume 6, National Bureau of Economic Research, Inc.
    12. Tanner, Sophia & Wang, Ying & Pratt, Bryan & Bowman, Maria S. & Wallander, Steven & Lupi, Frank, 2024. "Who transitions between agricultural conservation programs? The case of cover crops," 2024 Annual Meeting, July 28-30, New Orleans, LA 343746, Agricultural and Applied Economics Association.
    13. Rupayan Pal & Prasenjit Banerjee & Pratik Thakkar & A. M. Tanvir Hussain, 2022. "Green firm, brown environment," Manchester School, University of Manchester, vol. 90(2), pages 107-121, March.

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    More about this item

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D42 - Microeconomics - - Market Structure, Pricing, and Design - - - Monopoly
    • L95 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Gas Utilities; Pipelines; Water Utilities
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices

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