Research Brief: Incentives to Emit in Upstream Oil and Gas: Theory, Evidence, and Policy Implications

The Harvard Methane Initiative has released a new research brief, titled “Incentives to Emit in Upstream Oil and Gas: Theory, Evidence, and Policy Implications.” You may preview and download the brief at the bottom of this page.

The authors are Coly Elhai, doctoral student in economics, and Toren Fronsdal, doctoral student in business economics, both at Harvard University.

Summary

Identifying effective policy levers for reducing emissions of methane, a potent greenhouse gas, is a policy priority. This study examines the effect of market incentives and infrastructure constraints on methane emissions from oil and gas production in the Permian Basin of the United States. Using new methods that leverage satellite observations of atmospheric methane concentrations to quantify emissions from oil and gas operations in the Permian, the authors develop a model that relates emissions to variations in oil and gas prices and pipeline transport costs. Applying this model to potential policy interventions, the authors estimate that a $1,500 per metric ton methane tax could reduce upstream methane emissions from oil and gas production in the Permian by as much as 7 percent, though the tax’s emissions benefits are attenuated when pipeline networks are congested, and are also smaller under less favorable assumptions about the efficacy of flaring as an abatement technique. Expanding gas pipeline infrastructure also reduces emissions and generates social returns that substantially exceed pipeline construction costs. Importantly, the two policies are complementary: implementing a methane tax in combination with pipeline expansion achieves greater emission reductions than the sum of reductions from either policy implemented alone.