Conference Agenda

Flaring is the practice of burning associated gases obtained while producing oil. Following the World Bank Zero Routine Flaring Initiative, many countries have proposed bans on routine flaring. We demonstrate that routine flaring is fundamentally caused by insufficient demand for natural gas, a low-valued by-product recovered while extracting the higher-valued main product, oil. The economic consequences of reducing flaring, therefore, are primary observed in oil markets rather than natural gas markets. To demonstrate this, we build a conceptual model that matches price behavior in both oil and gas markets and test it. Theoretical and empirical results show that both gas and oil prices affect flaring and venting, but in \emph{opposite} directions. Higher gas prices reduce releases, whereas higher oil prices increase them. We then test the policy implication of the insufficient demand mechanism and estimate the costs of regulating flaring, using a policy experiment in the Canadian province of Alberta. We find that emission reductions come with oil output losses. The loss in the main product, oil, illustrates why firms may strongly oppose to zero routine flaring restrictions. We provide further evidence that most output losses occurred at sites with legacy capital.