Assistant Professor Judd Boomhower on Environmental Damage Regulation

What happens when oil well owners can avoid cleanup costs through bankruptcy? Can regulations avoiding this type of behavior improve economic outcomes? Econ professor Judd Boomhower has some answers.

In the February 2019 volume of the American Economic Review, UCSD Economics professor Judd Boomhower examines regulations on Texas oil wells in his paper “Drilling Like There's No Tomorrow: Bankruptcy, Insurance, and Environmental Risk”.

More than 15.3 million Americans live within a mile of an oil or gas well. In this industry many oil wells are operated by small firms often managing a single or very few wells. These firms need to invest to avoid damage to the environment, typically through contamination of groundwater. Bankruptcy allows firms to avoid the costs of cleanup. Professor Boomhower measures the effects of bankruptcy protection on industry structure and environmental outcomes in oil and gas extraction, and finds that corrective policies can mitigate these effects.  Using administrative data from Texas, the paper exploits variation in an insurance requirement that reduced firms’ ability to avoid liability through bankruptcy. Essentially firms were required to have insurance that covered cleanup costs that exceeded the firm’s own assets. Among small firms, the policy substantially improved environmental outcomes and reduced production. Professor Boomhower notes that  “The results imply that so-called `financial assurance’ policies that ensure accountability for clean-up costs are an important regulatory tool in dangerous industries”