When Externalities are Taxed: The Effects and Incidence of Pennsylvania's Impact Fee on Shale Gas Wells

55 Pages Posted: 26 Aug 2016  

Katie Jo Black

Kenyon College

Shawn McCoy

University of Pittsburgh - Department of Economics

Jeremy Glenn Weber

University of Pittsburgh - Graduate School of Public & International Affairs

Date Written: August 25, 2016

Abstract

Drilling in shale formations rich in oil and gas has caused the U.S. to become the global leader in hydrocarbon production, but the growth has come with environmental and public infrastructure costs. States have been slow to introduce taxes to pay for impacts, fearing a decline in drilling-related investment. An exception is Pennsylvania, which introduced a per-well Impact Fee in 2012. Using a difference-in-differences quasi-experimental design and data that nearly cover the universe of leases and wells in Pennsylvania and West Virginia, we find that well drilling, which can require a year or more of preparation, saw modest, if any, declines in the ten months after the Fee's enactment. In contrast, acreage being leased by energy firms declined dramatically. The decline likely reflects a liquidity-crunch caused by retroactive application of the Fee in a time of low natural gas prices and the limited pass-through of the Fee to resource owners. Firms could not change the terms of leases signed before the Fee, and for new leases, we estimate that only half of the Fee was passed to resource owners, 80 percent of which occurred through a lower royalty rate and 20 percent through a lower signing bonus. The findings suggest at least a short-term trade-off between investment and taxes to pay for externalities, even in an industry dependent on a geographically-fixed resource.

Suggested Citation

Black, Katie Jo and McCoy, Shawn and Weber, Jeremy Glenn, When Externalities are Taxed: The Effects and Incidence of Pennsylvania's Impact Fee on Shale Gas Wells (August 25, 2016). USAEE Working Paper No. 16-272. Available at SSRN: https://ssrn.com/abstract=2829409

Katie Jo Black

Kenyon College ( email )

Gambier, OH 43022
United States

Shawn McCoy

University of Pittsburgh - Department of Economics ( email )

Pittsburgh, PA 15260
United States

Jeremy Glenn Weber (Contact Author)

University of Pittsburgh - Graduate School of Public & International Affairs ( email )

Pittsburgh, PA 15260-0001
United States

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