Shareholder, regulatory, and social influence on firm behavior and energy market outcomes

Abstract

The energy industry is facing pressure from investors, policymakers, consumers, and activists to reduce greenhouse gas emissions across the value chain, but how oil and gas firms will fit into this evolving landscape is an open question. Despite a paucity of regulatory interventions, some firms have begun to address the issue—whether out of a sense of social responsibility, fear of environmental activists, search for new market opportunities, or an impulse to mimic peer firms. We formulate a general framework that captures each of these factors, apply it to build an empirically grounded agent-based model, and provide insights into the distribution of outcomes in the oil and gas industry’s flaring performance in the US. We first examine possible drivers of differences between top-down and bottom-up estimates of flaring. Then, projecting future scenarios, we evaluate which market constructs and types of activism can drive further improvements.