Performance of a cap and trade system for managing environmental impacts of shale gas surface infrastructure

• We quantify cost savings of cap and trade to avoid shale gas environmental impacts.
• Cap and trade saves up to 32% of costs compared to command-and-control.
• Cap and trade's performance depends on the regulator's information.
• Poor information could make cap and trade perform worse than command-and-control.
• Cap and trade should be explored as an option for future shale gas regulation.

Governments across the globe are exploring ways to reduce the environmental and human health impacts created by shale energy production. In active areas, environmental regulations tend to be limited. We apply established instruments to empirically estimated environmental impact abatement cost curves for the development of 56 sites in Pennsylvania, USA. We compare the cost to industry of setting a cap on environmental impacts from land-clearing and building of surface infrastructure under two regulations: cap and trade versus a uniform, inflexible regulation. Greatest differences in cost are achieved when firm-level permits are allocated to reduce market-wide potential impacts by 36%. Cap and trade achieved this cap at a cost of 0.05% of not developing and allowed all development to proceed. The uniform, inflexible regulation cost 32% of not developing for a similar outcome and prevented 18% of firms from developing. Cap and trade's performance depended on the regulator's ability to accurately allocate firm-level permits that reflect developers' options. In extreme cases, inaccurate allocations made cap and trade perform worse than other the approach. We conclude that, where developers differ in their ability and cost of minimizing impacts, cap and trade should be explored as an inexpensive alternative to traditional approaches.