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Coauthor: Wenfeng Qiu
Abstract: 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 large 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 and simulate policies under realistic constraints. We focus on audit policies, varying the information the regulator uses in choosing wells to audit. These simulated second-best audits become more effective when they can target on well covariates, detect leaks remotely, and charge higher fees for leaks. A policy that audits 1% of wells with uniform probability may achieve less than 1% of the gains of the infeasible first best. Using the same number of audits targeted on remotely sensed emissions data could achieve gains of 30–60% of the first best. These simulation results demonstrate that because leaks are rare events, targeting is essential for achieving welfare gains and emissions reductions. The results also show that auditing a small fraction of wells can have a large impact when properly targeted.
Coauthor: Stephen Jarvis
Abstract: Utility companies recover their capital costs through regulator-approved rates of return on debt and equity. The US costs of risky and risk-free capital have fallen dramatically in the past 40 years, but these utility rates of return have not. We estimate the gap between what utilities are paid now, and what they would have been paid if their rate of return had followed capital markets, using a comprehensive database of utility rate cases dating back to the 1980s. We estimate that the current average return on equity is 0.5–4 percentage points higher than historical relationships would suggest, and consumers pay an average of $2–8 billion per year more than they would otherwise. We then revisit the effect posited by Averch–Johnson (1962), estimating the consequences of this incentive to own more capital: a 1 percentage point increase in the return on equity increases new capital investment by about 5% in our preferred estimate.
Coauthors: Oliver Browne, Alyssa Neidhart, and David Sunding
Abstract: Floods destroy crops and lower the value of agricultural land. Economic theory implies that the hedonic discount on the value of a parcel of flood-prone land should scale with the probability of flooding. Existing empirical studies of flood risk on property values in the United States typically focus on the risk posed to residential properties by 100-year floodplain as reported in Federal Emergency Management Agency (FEMA) maps. However, agricultural land in the 100-year floodplain often floods much more frequently. For example, on the Missouri River, 48% of agricultural land in the 100-year floodplain is also in the 10-year floodplain. We estimate the hedonic discounts on the sale price of agricultural land that floods at these higher frequencies along the Missouri River. As flood frequencies increase, the value of flood-prone land decreases, with a discount increasing from −2.4% in the 100-year floodplain to −15.8% in the 10-year floodplain; however, these differences are not statistically significant. To illustrate the importance of damages from higher frequency floods, we simulate the loss of property values resulting from changes in flood patterns that are expected to occur under a central climate change scenario between now and mid-century. We find that most of the future reductions in property value do not result from changes in the 100-year floodplain, but rather from increased flood frequency on land that is already within the 100-year floodplain, highlighting the value of adaptation and mitigation on these already flood-prone properties.