Allocating Damage Compensation in a Federalist System: Lessons from Spatially Resolved Air Emissions in the Marcellus

The benefits and impacts of unconventional natural gas development are realized at different spatial scales, calling into question the appropriate jurisdictional level at which to set and enforce environmental policy. This paper evaluates impact fee allocation under Pennsylvania Act 13, which authorizes Commonwealth payments to Pennsylvania counties to offset damages from unconventional natural gas extraction in exchange for consolidated state-level regulatory authority. We evaluate the adequacy of damage compensation allocation for impacts that are spatially and temporally removed from the well site, using the air emissions associated with natural gas wastewater transport as a case study. Wastewater transport from wells eligible for 2011 impact fee disbursement calculations generated an estimated $11.6 million in air emission damages from 2004 to 2013, with 35% of damages occurring out-of-state and an average of 94% of damages occurring out-of-county. We find that compensatory payments from Pennsylvania Act 13, which are based upon the number of wells drilled in a county in a single year, inadequately account for spatially and temporally distributed impacts from wastewater transport. This case study of Pennsylvania Act 13 highlights potential issues associated with central regulators using compensatory payments as a means of resolving jurisdictional conflict. In cases where the central regulator benefits from the polluting activity, we argue that there is incentive to focus compensation on local damages and undervalue regional and spatially distributed damages in compensation algorithms.