Catherine Hausman’s NBER working paper, “Price regulation and environmental externalities: Evidence from methane leaks,” (with Lucija Muehlenbachs) looks at the unintended consequences of cost-of-service price regulations of privately-owned natural gas distribution firms. It is the first paper in the academic economics literature to focus on the value of methane gas leak repairs.
Over one percent of the natural gas supply chain is lost annually, writes Hausman, from leaks caused by “imperfect maintenance, decaying infrastructure, or intentional venting.” Cost-of-service price regulations, which are often used to control naturally-occurring industry monopolies, allow firms to pass the cost of this lost gas on to their customers.
Hausman finds that this regulatory practice reduces the natural inclination of firms to minimize their costs by detecting and repairing leaks. While cost-effective opportunities to mitigate leaks exist, writes Hausman, price-regulated firms rarely take full advantage of them. This costs customers money, writes Hausman, but the consequences are even larger because of the related environmental impacts.
Hausman notes that methane is “a powerful greenhouse gas with a global warming potential 34 times that of carbon dioxide.” In 2015 alone, Hausman estimates the commodity value of natural gas leaks at $1 billion. Her estimate of the climate change value of these leaks in 2015? Roughly $8 billion, nearly an order of magnitude more.
Additionally, because methane is combustible and leaks can result in loss of life and extensive property damage, there are significant safety costs, as well.
In the absence of a carbon tax, writes Hausman, reducing distortions that stem from economic regulation could be “low-hanging fruit for climate change abatement.”
Catherine Hausman is an assistant professor of public policy at the Ford School. Her research focuses on environmental and energy economics.