In chapters 3 and 4 we indicated that, for the government to derive the maximum of pure economic rent from federal lands, there should be regulation of lessees to internalize externalities such as environmental damage from minerals production. This means some sacrifice in revenues from leasable lands, but a gain in social welfare. To ignore environmental damage in the interest of maximizing revenues is the equivalent of levying a differential excise tax on environmental amenities, with a consequent distortion of production at the expense of such amenities in favor of minerals production.
In this chapter we examine the different kinds of environmental regulation of federal lessees in minerals production with a view to evaluating them as means of efficiently internalizing externalities. It will be sufficient to indicate the nature of such regulation if we confine ourselves to outer continental shelf oil and gas regulations, coal regulations, and shale oil regulations. The first two are set out in general operating regulations; the third in the lease contract for shale oil production. In presenting these regulations we shall employ quotations extensively, for paraphrasing introduces the risk of misinterpretation of some very precise stipulations.
In general, environmental regulations for outer continental shelf oil and gas are designed to prevent the interchange of fluids between strata in the drilling, operation, or abandonment of wells, to prevent oil spills;