Policy Monitor—Bonding Requirements for U.S. Natural Gas Producers

Natural gas producers are constantly making tradeoffs between money, time, and environmental risk. The private costs and benefits of drilling are realized immediately, but the external costs are not. This means that by the time external costs are well understood, producers may no longer exist or may not have sufficient resources to finance necessary cleanups or to compensate those who have been adversely affected. Because producers do not face the total cost of potential external damages, they may take too many risks. This article discusses alternative regulatory approaches for mitigating moral hazard in U.S. natural gas production. Particular emphasis is given to bonding requirements, which have tended to receive less attention from policy makers than other approaches but have a long history. Although the use of bonding has important limitations, this approach is quite well suited to addressing many of the environmental risks in this market. (JEL: K32, L71, Q48, Q58)