A Sampling-Based Approach to Emissions Pricing

Methane emissions from the natural gas supply chain have recently been recognized as a major source of anthropogenic greenhouse gas emissions. A wide array of potential abatement measures suggests strong efficiency benefits of employing emissions pricing to mitigate them. However, comprehensively monitoring methane emissions from natural gas infrastructure is prohibitively costly at this time. This presentation outlines a novel sampling-based approach to applying emissions pricing in a setting where pollution is costly – but not impossible – to measure. Rather than monitoring emissions at all facilities continuously, the regulator randomly selects a subset of each firm’s facilities at which to perform measurements. These measurements are then used to develop a firm-level estimate of emissions, which is then used to apply an emissions tax or account for the use of permits. A theoretical model demonstrates that this approach preserves the efficiency benefits of emissions pricing with comprehensive measurements. Furthermore, a simulation calibrated to be representative of the U.S. natural gas industry predicts that this approach can achieve climate mitigation benefits roughly two orders of magnitude greater than the cost of measurement.