Price Regulation and Environmental Externalities: Evidence from Methane Leaks

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.