Dunkle Werner, Karl, and Qiu, Wenfeng “Hard to Measure Well: Can Feasible Policies Reduce Methane Emissions?” (November 2020) | WP-310 | Blog
Oil and gas wells emit large quantities of methane, a greenhouse gas 34 times more potent than carbon dioxide. Methane emissions are rarely priced and lightly regulated—in part because they are hard to measure—leading to a large climate externality. However, measurement technology is improving, with remote sensing and other techniques opening the door for policy innovation. We present a theoretical model of emissions abatement at the well level and a range of feasible policy options, then use data constructed from cross-sectional scientific studies to estimate abatement costs. We simulate audit policies under realistic constraints, varying the information the regulator uses in choosing wells to audit. These policies become more effective when they can target on well covariates, detect leaks remotely, and charge higher fees for leaks. We estimate a policy that audits 1% of wells with uniform probability achieves less than 1% of the gains of the infeasible first best. Using the same number of audits targeted on remotely sensed emissions data achieves gains of 30–60% of the first best. These results demonstrate that because leaks are rare events, targeting is essential for achieving welfare gains and emissions reductions. Auditing a small fraction of wells can have a large impact when properly targeted.