Research / BFI Working PaperJan 18, 2023

Internalizing Externalities through Public Pressure: Transparency Regulation for Hydraulic Fracturing, Drilling Activity and Water Quality

Pietro Bonetti, Christian Leuz, Giovanna Michelon

The rise of shale gas and tight oil development has triggered a major debate about hydraulic fracturing (HF). In an effort to bring light to HF practices and its potential risks for water quality, many U.S. states have mandated disclosure for HF wells and the fracturing fluids used. We employ this setting to study whether targeting corporate activities that have dispersed environmental externalities with transparency regulation reduces their environmental impact. Examining salt concentrations that are considered signatures for HF impact, we find significant and lasting improvements in surface water quality between 9-15% after the mandates. We document that most of the improvement comes from the intensive margin. Consistent with this interpretation, we show that operators pollute less per unit of production, use fewer toxic chemicals, and cause fewer spills of HF fluids and wastewater. Turning to the mechanism of transparency regulation, we find that it enables public pressure, for example from NGOs, and that this pressure facilitates internalization.

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