Regulatory Capture: An Obstruction To Change

Is regulatory capture hindering the advancement of energy and climate policies?

Originally coined by George Stigler (Nobel laureate and economist), regulatory capture theory has controlled discussions of economic regulation and regulatory reform for decades.  Regulatory capture theory is broadly defined as the process by which regulatory agencies, originated to act in the public’s best interest, become subjugated by the very industries they are supposed to be regulating.  The ultimate consequence – benefits meant to be conferred to the public are ultimately bestowed upon the industry that is meant to be regulated.

Consider hydraulic fracking.

Hydraulic fracking, the process of drilling for natural gas and oil from shale rock levels below the earth’s surface, has played an imperative role in the development of America’s oil and gas industries in recent years.  Fracking triggers tremendous negative externalities as methane gas and toxic chemicals percolate from the system and contaminate nearby groundwater.  Studies have observed methane concentrations are 17x greater in drinking-wells near fracking sites than in normal wells.  There are thousands of documented cases of ingested water contamination causing neurological, sensory, and respiratory damage.   Furthermore, wasted fluid releases harmful compounds into the atmosphere, creating contaminated breathing air and acid rain.

As fracking is relatively new, the scientific evidence merely yields provisional conclusions.  Those who “frack for profit”  deny its harm.  But the preliminary evidence points to severely negative outcomes for public health and local ecology.  The question thus becomes – why hasn’t the Environmental Protection Agency (EPA) done more to limit or regulate fracking operations?  Congress first directed the EPA to investigate fracking in 1980 and the conclusion was “hazardous and should be tightly controlled” (Times).  However, the final report back to Congress eliminated these conclusions.  An agency scientist commented on the matter, “It was like science didn’t matter…the industry was going to get what it wanted and we were not supposed to stand in the way”

The first formal EPA examination of fracking found “little or no threat to drinking water”.   This was a suspicious assertion, given the scientific evidence, and the fact that five of the seven review members had current or former energy industry affiliations.

In 2010, the New York State legislature actually voted to ban fracking, but Governor Paterson vetoed the bill and instead issued a temporary suspension.   In 2012, the EPA required methane gas emission reduction from wells and storage pits to limit air pollution.  But not-surprisingly, those actions did not cut into industry profits.  In fact, capturing fleeting methane was estimated to save the industry $11 – $19 million annually.  This begs one to ponder – is the EPA only implementing actions that have a positive effect on the industry?  The loose regulation of fracking is favorable for corporate America.  Hyradulic fracking is just one example of the power an industry can have in influencing its own regulators.

Although impossible to definitively conclude, it is very plausible that regulatory capture is an impediment to change.

Categories Behavioral Finance, Climate Change

3 thoughts on “Regulatory Capture: An Obstruction To Change

  1. Well, if the regulators put an industry out of business, then the regulators would have nothing to regulate, and the regulators would lose their jobs as well. Regulators form rules of procedure… Rules perpetuate an industry and provide a framework of legal security for those who are regulated. Great post.


  2. Ditto on the post. Fugitive methane is a significant problem in the Fracked Nat Gas world, one that is only being scrutinized more tightly in the last couple of years. The findings have, for the most part, not been favorable to the industry. Let’s see if/how/when EPA acts.


  3. Obama is in charge of the EPA.


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