Working Paper

Price Regulation and Environmental Externalities: Evidence from Methane Leaks

Jan 26, 2017 | Catherine Hausman, Lucija Anna Muehlenbachs

Summary

Using data from natural gas distribution utilities on expenditures and volume of methane leaked, this paper estimates the amount of money utilities are spending to abate leaks. Expenditures are suboptimal at less than the cost of gas itself.

Key Findings

  • For decades, the Energy Information Administration has kept records of lost and unaccounted for gas, yet the data's usefulness has been criticized. However, there are empirical strategies to overcome the data quality issues.
  • Natural gas distribution is a price-regulated industry and this can introduce distortions. This paper examines the outcome from allowing utilities to pass the cost of lost gas on to customers.
  • Utilities are spending between $0 per Mcf to $0.48 per Mcf on leak detection and repair; this is considerably lower than the sample average cost of natural gas of $5.67 per Mcf.

Abstract

We estimate how much US natural gas distribution firms spend to reduce methane leaks. Methane is a significant contributor to climate change, so the wedge between the private and social benefits of abatement is large. Moreover, incentives to abate leaks are additionally weakened by this industry being a regulated natural monopoly: current price regulations allow many distribution firms to pass the cost of any lost gas on to their customers. Our estimates imply that too little is spent repairing leaks. In contrast, accelerated pipeline replacement cannot in general be justified by climate benefits alone.