A Market Approach to Regulating the Energy Revolution: Assurance Bonds, Insurance, and the Certain and Uncertain Risks of Hydraulic Fracturing

62 Pages Posted: 13 Nov 2013

Multiple version iconThere are 2 versions of this paper

Date Written: November 11, 2013


The United States faces a critical moment in environmental regulation. As tens of thousands of new unconventional, hydraulically fractured oil and gas wells spring up around the United States, we face a long-term threat of significant soil and water contamination. The current patchwork of state "command and control" regulations fails to prevent this contamination. Even in states with updated rules, sloppy operations have caused contamination events. Furthermore, thousands of abandoned wells, which can leak pollutants, already dot our landscape, and these numbers could rise over time as operators drill and eventually abandon thousands of new wells each year.

Command and control regulations will be an important first step in preventing contamination but cannot address all risks, particularly those for which industry has more knowledge than agencies. These limitations call for a market-based approach of bonding requirements and mandatory environmental liability insurance. An insurance regime will incentivize the party with the most knowledge of risks — industry — to produce risk information, and it will spur third-party monitoring of risks by companies with a powerful monetary incentive to reduce claim events. Assurance bonds and insurance will also provide a pool of money to support later clean-up, which will be particularly important for disadvantaged areas that lack financial resources and political clout. This Article proposes a market-based approach and responds to objections, and then explores the bottom-up, localities-as-leaders political economy by which bonding and insurance mandates are most likely to emerge and ultimately become established as a matter of state law. Without adequate bonding and insurance requirements, we risk creating a new wave of widespread, unaddressed pollution from the current energy revolution. As we stand at that this critical decision point, this Article proposes a better path forward.  

Keywords: environmental law, energy law, oil and gas law, insurance law, bonds, and hydrofracturing or fracking

JEL Classification: K10, K19, K30, K32

Suggested Citation

Dana, David A. and Wiseman, Hannah Jacobs, A Market Approach to Regulating the Energy Revolution: Assurance Bonds, Insurance, and the Certain and Uncertain Risks of Hydraulic Fracturing (November 11, 2013). Northwestern Law & Econ Research Paper No. 13-37, Northwestern Public Law Research Paper No. 13-37, Available at SSRN: https://ssrn.com/abstract=2353061 or http://dx.doi.org/10.2139/ssrn.2353061

David A. Dana

Northwestern University - Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States
312-503-0240 (Phone)
312-503-2035 (Fax)

Hannah Jacobs Wiseman (Contact Author)

Penn State Law – University Park ( email )

Lewis Katz Building
University Park, PA 16802
United States

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