Research / BFI Working PaperJan 18, 2023

Internalizing Externalities: Disclosure 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 mitigate risks from HF, especially with respect to water quality, many U.S. states have introduced disclosure mandates for HF wells and fracturing fluids. We use this setting to study whether targeting corporate activities that have dispersed environmental externalities with disclosure regulation to create public pressure reduces their environmental impact. We find significant improvements in water quality, examining salts that are considered signatures for HF impact, after the disclosure mandates are introduced. We document effects along the extensive and the intensive margin, though most of the improvement comes from the latter. Supporting this interpretation, we find that, after the disclosure mandates, operators pollute less per unit of production, use fewer toxic chemicals, and cause fewer spills and leaks of HF fluids and wastewater. We also show that disclosure enables public pressure and that this pressure facilitates internalization.

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