Edward Lotterman

Earlier this year, based on federal natural resource and environmental laws, the Biden administration issued a ban on any venting or flaring of natural gas at gas or oil wells.

The specific objective was to reduce greenhouse gas emissions. Several states, including Texas and North Dakota, objected to the ban and challenged it in federal court.

This past week a federal judge in a North Dakota district temporarily stayed the ban writing that “plaintiffs … are likely to succeed on the merits of their claim the 2024 Rule is arbitrary and capricious.”

Legality aside, the underlying economic issue here is whether the ban makes us better off or worse off.

It is intended to prevent what economists call an “external cost,” or costs not incurred by the persons causing them. In this case, the costs are collateral damage to the environment from extracting oil and gas, such as a changing climate that will make people’s lives worse. Meeting household and business needs and wants to heat, cook and drive are the benefits — these things make people’s lives better.

Two issues are at play here: At the micro level, do the benefits to society from banning flaring exceed the costs? More broadly, how should a nation makes decisions balancing these questions?

Virtually all economists agree that our current system of regulation is defective and that there are superior alternatives. The ones we have reduce our collective well-being by an amount equaling 4% of the value of all the goods and services we produce. That would be $1.2 trillion in the coming year.

Coincidentally, that is about the same amount to which U.S. health care costs compare to other nations with similar or better health systems. We shoot ourselves in the left foot, then the right, then wonder why it is so hard to move forward.

As to the macro question of why economists dislike our current regulatory approach, consider the gas flares at oil wells across North Dakota and elsewhere.

The number of gas flares is way smaller than it was 12 years ago when North Dakota’s oil patch boomed. Many of the geologic formations in which oil was found also contained natural gas of varying purity. It was impossible to get oil out of wells without this “associated gas” coming also. It is a problem even in initial drilling of the well.

Unwanted gas can be vented from drilling rigs or from a finished oil well. But it is dangerous to work in a cloud of flammable gas. Such gas also has contaminants commonly including nitrogen, hydrogen sulfide and volatile organic compounds. These could cause damage downwind. And methane, the key component, is a greenhouse gas many times more powerful than carbon dioxide

Flaring gas was an obvious alternative to venting it. Burn it off from a pipe at a safe distance from other activities. This has been done for decades. At its peak boom, North Dakota’s gas flares stood out brightly in satellite photographs.

But that has largely been reduced, partly by market forces and partly by existing government regulation. Only 5% of gas is now flared. The rule stayed by the federal judge aimed at that last fraction. So the costs clearly have regulated themselves, without additional government action.

Here is where we get to some microeconomics. The key principles here are those of “decreasing marginal returns” and its flip side of “increasing marginal cost.”

These appear without money involved. The first hour cramming for an exam increases one’s score. So does the second, but by a smaller increment. After several hours, it is more productive to sleep. Calling a hot new love interest in the evening may advance the relationship. Calling five times every night sets it back; calling 10 times may bring the police to your door.

Natural gas obviously has value, creating a market force to capture and use.

But the cost of reducing harmful emissions by connecting a high producing well to a gas pipeline system is large. There also is great variation between wells. Some are near, some far. Some produce large quantities and some small. Some have pure gas and some “sour.” At the other end of the spectrum is a well whose oil produced goes into tanks emptied by trucks every other day, capturing small amounts of associated gas here has tiny environmental benefits.

Where many wells are located in close proximity, and oil flows in pipelines, parallel pipes to channel gas to treatment plants are lot of cost per thousand cubic feet. If an identically producing well is 20 miles from the next, connecting to a pipe network is far more expensive per unit. Gas is compressed before being piped and compressed gas can be moved by truck. But the unit cost is orders of magnitude higher. Some gas is highly acidic and will corrode pipes or truck tanks. It can be treated, but here is a substantial base cost for even small treatment plants. So there are increasing marginal costs in mitigating the waste gas and recycling it for practical use.

Estimates are that gas vented, flared or lost through leaks would have a market value of $680 million at a point where it could enter the national pipeline system. Lost royalties that would be paid to property owners come to $43 million, including $18 million to Native nations on the Fort Berthold Reservation in North Dakota. The state itself would gain about $1 million more in state taxes and $11 million more in a share of royalties from wells on federal lands.

Thus a lot of money is involved, but the cost of capturing, treating and transporting that last 5% is high. Well owners need further motivation. Traditional command-and-control regulation can get us from the point where potential profits to the oil company are zero to the current 95% capture. The new rule is intended to take us the rest of the way. Yet the environmental improvement will come at high cost.

Importantly, there is no weighing the relative costs and benefits of such a move to the costs and benefits of other ways in which emissions might be reduced. That is what bothers economists.

They would prefer systems that use market incentives. Tax harmful emissions from any source equally and let emitters figure out how to save money by abatement. Or give existing emitters permits to emit, ones that ratchet down over time. Let these permits be bought and sold. Emitters with high abatement costs will buy them from those who can reduce emissions easily.

Economists across the political spectrum agree on these alternatives. They have not yet convinced the general public and the phrase emissions “taxes” dooms it in one major political party.

All this is in the background of an activist federal judiciary that is actively grabbing powers from the other two branches of government. So expect the judge’s temporary stay to become a permanent overthrow of the regulation. And expect our bad approach to curbing external costs to implicitly tax us by an amount nearly equal to our federal budget deficits.

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St. Paul economist and writer Edward Lotterman can be reached at stpaul@edlotterman.com.