A Market Approach to Regulating the Energy Revolution: Assurance Bonds, Insurance, and the Certain and Uncertain Risks of Hydraulic Fracturing

Author:David A. Dana & Hannah J. Wiseman
Position:Kirkland & Ellis Professor of Law, Northwestern University Law School/Assistant Professor, The Florida State University College of Law
Pages:1523-1593
1523
A Market Approach to Regulating the
Energy Revolution: Assurance Bonds,
Insurance, and the Certain and Uncertain
Risks of Hydraulic Fracturing
David A. Dana & Hannah J. Wiseman
ABSTRACT: The United States faces a critical moment in environmental
regulation. As tens of thousands of new unconventional, hydraulically
fractured oil and gas wells spring up around the United States, we face a
long-term threat of significant soil and water contamination. The current
patchwork of state “command and control” regulations fails to prevent this
contamination. Even in states with updated rules, sloppy operations have
caused contamination events. Furthermore, thousands of abandoned wells,
which can leak pollutants, already dot our landscape, and these numbers
could rise over time as operators—the individuals and companies
responsible for well development—drill and eventually abandon thousands
of new wells each year.
Command and control regulations will be an important first step to prevent
contamination but cannot address all risks, particularly those for which
industry has more knowledge than agencies. These limitations call for a
market-based approach of bonding requirements and mandatory
environmental liability insurance. An insurance regime will incentivize the
party with the most knowledge of the risks—industry—to produce risk
information, and it will spur third-party monitoring of risks by companies
with a powerful monetary incentive to reduce claim events. Assurance bonds
and insurance will also provide a pool of money to support later clean-up,
which will be particularly important for disadvantaged areas that lack
financial resources and political clout.
This Article proposes a market-based approach and responds to objections,
and then explores the bottom-up, localities-as-leaders political economy by
which bonding and insurance mandates are most likely to emerge and
Kirkland & Ellis Professor of Law, Northwestern University Law School. B.A., Harvard
University; J.D., Harvard University. Our thanks to Dan Faichney for excellent research
assistance and to Dan Schwarcz and Tom Merrill for very helpful comments.
 Assistant Professor, The Florida State University College of Law. A.B., Dartmouth
College; J.D., Yale Law School.
1524 IOWA LAW REVIEW [Vol. 99:1523
ultimately become established as a matter of state law. Without adequate
bonding and insurance requirements, we risk creating a new wave of
widespread, unaddressed pollution from the current energy revolution. At
this critical decision point, this Article proposes a better path forward.
INTRODUCTION .................................................................................... 1526
I. WELL CONTAMINATION OVER TIME ..................................................... 1534
A. THE LIFE OF OIL AND GAS WELLS AND ASSOCIATED
CONTAMINATION ........................................................................... 1534
B. THE EXTENT OF LIKELY CONTAMINATION: WELL NUMBERS ............. 1541
C. SHORT-, MEDIUM-, AND LONG-TERM CONTAMINATION RISKS .......... 1542
D. CERTAIN AND UNCERTAIN RISKS ..................................................... 1545
II. THE THEORETICAL CASE FOR MANDATORY INSURANCE: FRAMING
UNCONVENTIONAL OIL AND GAS REGULATION AND INSURANCE
REFORMS IN TERMS OF THREE DICHOTOMIES ..................................... 1546
A. COMMAND AND CONTROL REGULATION VERSUS MARKET-BASED
REGULATION .................................................................................. 1547
B. EXCLUSIVE VERSUS MULTIPLE REGULATORS .................................... 1552
C. REGULATION BY REGULATORS VERSUS REGULATION BY COMMON
LAW TORT LIABILITY ..................................................................... 1556
D. PLACING FINANCIAL ASSURANCE BONDS AND MANDATORY
INSURANCE WITHIN THESE DICHOTOMIES: COMMAND AND
CONTROL VERSUS MARKET REGULATION ........................................ 1561
E. SINGLE REGULATOR VERSUS MULTIPLE REGULATORS ...................... 1568
F. MANDATORY INSURANCE AND EX ANTE REGULATION VERSUS EX
POST LIABILITY ............................................................................. 1569
III. OBJECTIONS TO MANDATORY INSURANCE AND RESPONSES ................. 1571
A. WHETHER INSURANCE WILL BE COMMERCIALLY UNAVAILABLE ....... 1572
B. WHETHER PREMIUMS WILL BE TOO HIGH AND CHILL ECONOMIC
ACTIVITY ....................................................................................... 1575
C. WHETHER THE PREMIUMS WILL BE TOO LOW AND INVITE MORAL
HAZARD ........................................................................................ 1579
D. WHETHER INSURANCE REQUIREMENTS WILL UNFAIRLY
DISADVANTAGE SMALL BUSINESSES ................................................. 1580
E. WHETHER INSURANCE IS UNNECESSARY BECAUSE EX POST
INDUSTRY TAXES WILL ENCOURAGE EX ANTE SAFETY AND (ALONG
WITH TAX REVENUES) FUND ANY NECESSARY CLEANUPS .................. 1582
2014] REGULATING THE ENERGY REVOLUTION 1525
IV. THE POLITICAL ECONOMY OF ENACTING UNCONVENTIONAL OIL
AND GAS INSURANCE MANDATES ......................................................... 1586
CONCLUSION ....................................................................................... 1591

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