Price Regulation and Environmental Externalities: Evidence from Methane Leaks

64 Pages Posted: 24 May 2016 Last revised: 30 Apr 2023

See all articles by Catherine Hausman

Catherine Hausman

University of Michigan at Ann Arbor

Lucija Muehlenbachs

Resources for the Future; University of Calgary

Date Written: May 2016

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), 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, i.e. 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

Hausman, Catherine and Muehlenbachs, Lucija, Price Regulation and Environmental Externalities: Evidence from Methane Leaks (May 2016). NBER Working Paper No. w22261, Available at SSRN: https://ssrn.com/abstract=2783176

Catherine Hausman (Contact Author)

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States

Lucija Muehlenbachs

Resources for the Future ( email )

Washington, DC 20036
United States

University of Calgary ( email )

University Drive
Calgary, Alberta T2N 1N4
Canada

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