Joshua 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.
