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E-MailJoshua Macey is a Professor of Law at Yale Law School, Terra Baer holds a JD from Yale Law School, and Pranjal Drall is a JD-PhD candidate in Financial Economics at Yale University. This post is based on their recent paper.
Too Liable To Regulate, forthcoming in the California Law Review, documents how environmental cleanup and financial assurance rules have produced firms that are “too liable to regulate.” This phrase refers to firms that hold such significant environmental liability that it deters regulators from taking enforcement actions. Regulators, aware that an enforcement action could force too-liable-to-regulate firms into liquidation, decline to enforce reclamation laws, seemingly out of concern that doing so would lead to abandoned wells and mines and thus leave taxpayers and regulators responsible for environmental remediation. This is a version of the judgment-proof problem.
To analyze this phenomenon, we compiled every state and federal coal-reclamation and onshore P&A law, assembled twenty years of bonding and production data for most onshore gas wells and coal mines, and obtained asset-level information through open-records requests. The article then examines two firms—Diversified Energy and Indemnity National—as case studies of a broader pattern in extractive industries. Once environmental liability exceeds a firm’s ability to pay, it stops deterring harm. Firms keep unproductive assets limping along to defer cleanup, and well-capitalized companies sell their dirtiest assets to operators that cannot afford to remediate them. Regulators respond by reducing enforcement, as that would risk pushing a distressed firm into liquidation, leaving abandoned and coal mines and gas wells and potentially forcing taxpayers to bear the costs of environmental remediation.
Diversified Energy
Diversified Energy is a publicly traded company with a market capitalization of $1.14 billion. At the time we collected our data, it owned roughly 68,000 onshore oil and gas wells—more than the next five producers combined. Despite owning far more wells than typical onshore gas producers, Diversified’s business looks quite different from its competitors. Across the United States, the top twenty-five U.S. oil and gas producers average 103,645 barrels of oil equivalent per active well; Diversified averages just 711. About 23,000 of its wells produced no gas at all between 2021 and 2023, and another 15,000 produced less than 1,000 cubic feet annually—below the threshold for conventional economic viability. Multiplying state-specific average plugging costs by Diversified’s well counts yields total asset-retirement obligations of $3.3 to $3.8 billion. The company’s 2023 revenue was just $1.05 billion.
Despite the fact that many of Diversified’s wells are unproductive, environmental regulators have declined to bring enforcement actions. For example, the Pennsylvania Department of Environmental Protection signed a consent decree with Diversified in 2021 under which the firm committed to plug just fifty abandoned wells per year. At that pace, clearing only its existing Pennsylvania portfolio would take roughly 740 years. One explanation for lax enforcement standards is that regulators recognize that Diversified may not be able to cover decommissioning costs.
Indemnity National
Indemnity National offers surety bonds to coal mines and currently underwrites about seventy percent of coal mine reclamation bonds in West Virginia. As of 2022, Indemnity bonded 472 coal mines, but only 49 produced non-trivial amounts of coal. In fact, fifty-one percent of its total bond liability was tied to mines that had not produced since 2015. Like Diversified, Indemnity’s financial fragility appears to have deterred regulators from enforcing cleanup requirements. This became apparent in 2020, when ERP Environmental Fund, a major operator bonded by Indemnity, laid off its workforce. At the time, West Virginia’s Division of Mining and Reclamation declined to forfeit ERP’s bonds, concluding that doing so would likely force Indemnity into insolvency. Ultimately, West Virginia regulators decided not to pursue payment from Indemnity at all.
We argue that too-liable-to-regulate firms create a number of perverse incentives for firms and environmental regulators. First, when cleanup liabilities grow large enough, regulators themselves become reluctant to enforce the law, because aggressive enforcement would push a distressed firm into bankruptcy and ultimately shift cleanup costs onto the state. The practical effect is to remove the threat of enforcement and of any additional liability. The firm, in turn, has every reason to keep marginal wells and mines operating rather than retire them.
Fossil fuel firms have an incentive to drill a well or mine coal and then walk away from the toxic asset when cleanup comes due. Once the asset is no longer productive and cleanup costs money, the firm’s incentive is to liquidate or exit the industry altogether. These “fly-by-night” operators can generate enormous social costs and can even crowd out the efficient allocation of assets to larger, better-capitalized firms.
Once a firm accumulates more cleanup liability than it can pay, three consequences follow.
First, the deterrent value of liability flips. The firm has no reason to retire unproductive assets, because doing so would trigger cleanup obligations it cannot meet. It is better off keeping wells producing a trickle of gas or keeping mines technically active—most states designate a well “idle” only after twelve consecutive months without production. Many of Diversified’s wells appear to produce just enough to stay above that threshold while leaking methane at high rates. Aging, high-emission assets may thus remain in the market longer than they otherwise would, which is the opposite of what cleanup liability is intended to achieve.
Second, the existence of too-liable-to-regulate firms can also benefit well-capitalized firms by allowing them to partition liability from more lucrative assets. Chevron and EQT have sold large portfolios of aging wells to Diversified. Once the assets change hands, neither party expects to pay for cleanup: Diversified cannot, and the original owner, though well capitalized, is no longer formally responsible. Fraudulent transfer doctrine could, in principle, reach these transactions, but the Bankruptcy Code’s two-year lookback period makes intent hard to prove, and the meaning of “reasonably equivalent value” is contested. Roughly a quarter of Diversified’s wells came from major producers, and the transfers have begun to generate litigation—landowners allege that EQT offloaded non-producing wells it knew the buyer could not afford to plug.
Third, it highlights that insurance requirements—especially when not backed by adequate financial assurance rules—may struggle to guarantee cleanup in declining industries. Although most coal operators are required to secure a surety to back their reclamation bonds, as coal production has declined, well-capitalized insurers have left the market, leaving firms like Indemnity National to fill the void. Indemnity’s gross premiums grew from $2.9 million in 2013 to $105 million in 2023. Indemnity now underwrites $620 million of West Virginia reclamation bonds and roughly half the bonds in Kentucky and Virginia. Those bonds are disproportionately tied to mines that have already stopped producing, and it is unlikely that Indemnity will be able to cover the full costs of reclamation if the coal operators forfeit their surety bonds.
We conclude by proposing several reforms aimed at improving environmental performance and supporting the timely, orderly liquidation of too-liable-to-regulate firms. Our primary conclusion is that full-cost bonding is the only reliable way to ensure that firms bear the full cost of remediating the harms they create. A full-cost bond would set aside enough liquid assets up front to cover the full costs of reclamation. When a company becomes distressed, regulators need not compete with other creditors to fund cleanup.
A second option is an industry-wide tax to help fund cleanup obligations, particularly where an industry can no longer afford to remediate the harms it causes. A challenge with this approach is that it could force companies that operate cleaner assets to bear a disproportionate share of cleanup costs, since they would likely be taxed at the same rate as competitors that operate mines or wells that cause greater environmental harm or whose remediation costs are higher.
Other potential reforms include strengthening fraudulent transfer law or imposing predecessor liability on firms that once owned or operated high-liability assets. Finally, regulators should more strictly regulate insurance providers to make sure they are able to honor their financial commitments. In the event that none of these reforms is politically or economically viable, policymakers should consider a supervised-decline mechanism in which the government finances some or all cleanup costs by extending conditional public investment to firms that commit to environmental safeguards, oversight, and the orderly phaseout of fossil fuel infrastructure.
