Can transparency and public pressure help mitigate environmental externalities and climate change?

In light of the political difficulties of agreeing on more prescriptive emissions regulation or carbon taxation, countries have increasingly turned towards creating transparency over greenhouse gas emissions by asking corporations to provide disclosure of climate-related information. The hope is that public pressure exerted by consumers, investors, and civil society organizations could spur emissions reductions. However, we still have relatively little evidence that targeted transparency for corporate activities with externalities works and how it does so. In a recent study we study these questions in the context of hydraulic fracturing and in particular focus on the role of public pressure in improving environmental outcomes. Specifically, we evaluate whether state mandates requiring transparency for hydraulic fracturing activities are effective when it comes to reducing the impact of fracturing on water pollution.

Hydraulic fracturing, or fracking, is the contentious process where a mixture of water, chemicals, and propping agents are injected into rocks at high pressure to create fractures and allow oil or gas to flow. As a result, it has led to increased production of oil and natural gas in the United States, but it has also raised concerns about potential harm to water quality due to the chemicals used and the large amounts of wastewater produced. In response to these concerns, several US states have begun mandating that newly fractured wells disclose details about their local drilling activity and the chemical composition of the hydraulic fracturing fluids used.

Our study utilizes a large geo-coded database that combined 325,351 surface water-quality measurements with data from 154,324 hydraulic fracturing wells from 16 states and from 2,209 watersheds with and without hydraulic fracturing activity from 2006-2019. We specifically analyse concentrations of salts associated with the fracking process, such as bromide, chloride, barium, and strontium, as these salts do not biodegrade and have been found in high concentrations in flowback and produced water from wells.

We found consistent declines in salt concentrations in surface water after the disclosure mandates went into effect, with declines ranging from 4.4 percent for strontium to 17.8 percent for chloride. We ruled out other changes in water quality that may have occurred around the time the mandates were introduced by studying other forms of surface water pollution that are not specific to hydraulic fracturing activities. We also showed that there are no significant declines in areas with conventional oil and gas development to which the disclosure mandates did not apply.

We found that the rate of new hydraulic fracturing wells being drilled declined marginally by about 5 percent after the disclosure mandate went into effect. This decline contributed to roughly 14 percent of the overall decrease in water pollution in the post-disclosure period.

Furthermore, firms changed their drilling practices such that wells drilled after the disclosure mandates had a smaller effect on salt concentrations than wells drilled before the mandates. Firms also used fewer hazardous chemicals and chloride-related chemicals in hydraulic fracturing fluids after the disclosure mandate. Additionally, the number of hydraulic fracturing-related accidents and spills that could be pathways for wells to affect water quality declined.

Targeted transparency was more successful in producing change in areas where public pressure was stronger.

Looking at the the mechanisms through which disclosure regulations operate, we find that targeted transparency was more successful in producing change in areas where public pressure was stronger. Hydraulic fracturing-related salt concentrations decreased the most in areas with a greater presence of local environmental NGOs and in counties with more local newspapers. We considered the amount of fracking-related news coverage, Google searches about hydraulic fracturing, as well as the number of local anti-fracking NGOs to see whether the results were more pronounced in areas where public pressure is higher and found that water quality improvements after the disclosure mandate were greater in areas where public pressure was higher. Our evidence points to disclosure regulation as a policy tool enabling social movements, environmental groups, local communities, and the media to exert pressure on hydraulic fracturing operators.

Thus, state mandates requiring transparency for hydraulic fracturing activities were effective in improving water quality, spurring improvements in hydraulic fracturing practices, and enabling public pressure.

More generally, the study shows that transparency regulation can be an important piece in the regulatory toolkit for policymakers aiming to address environmental externalities. This is good news for the efforts to create transparency about corporate carbon emissions. However, the link between disclosure, public pressure, and firms’ climate or environmental actions is complex and multifaceted. The effectiveness of mandates depends on the accessibility and dissemination of the information and on how much pressure the public can exert on firms to make changes. Moreover, more transparency on greenhouse gas emissions can have a meaningful and welcome effect, but the challenges of climate change cannot be addressed by disclosure alone. Nevertheless, reporting regimes can make an important contribution, in particular, if they become the bedrock for other carbon policies that require emissions information and data.

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By Christian Leuz, the Charles F. Pohl Distinguished Service Professor of Accounting and Finance at the University of Chicago Booth School of Business.

Research highlights of the study were originally posted by the Energy Policy Institute at the University of Chicago (EPIC) on 13 February 2023

The full paper can be accessed here.

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