Research from The University of Texas at Austin highlights the powerful—and sometimes counterproductive—role that very strict regulatory standards and stakeholder pressure can play in driving environmental improvements within the oil and gas industry. The certified market, a place where only firms who meet environmental criteria can sell gas (at a premium price), had the biggest single effect on environmental outcomes in the oil and gas industry.
The energy industry, particularly oil and gas companies, is under increasing pressure to decarbonize because of the increase in extreme weather events associated with climate change. Some of these companies have begun to voluntarily reduce their greenhouse-gas footprint, motivated by social responsibility, pressure from activists, market opportunities, or simply copying efforts of peer firms.
The study, produced by researchers from both the LBJ School and Cockrell School, reveals that, while firms can respond to external pressure by making changes that enhance environmental performance, the nature and type of pressure significantly affect the outcomes. Not all activist efforts yield the same results, even when operating under similar financial constraints, and markets with very high barriers to entry may unintentionally hinder progress. These findings emphasize the need for strategic, well-targeted actions to ensure lasting environmental benefits at both the firm and industry levels.
“Some firms have begun to address the issue of natural gas flaring—whether out of a sense of social responsibility, fear of environmental activists, search for new market opportunities, or an impulse to mimic peer firms,” said LBJ School professor and a study co-author Varun Rai. “However, studying such complex drivers in real-world settings and with highly detailed market and resource data is challenging. To address that, in this paper, we formulate a general framework that captures each of these factors, apply it to build an empirically grounded model, and provide insights into the distribution of outcomes in the oil and gas industry’s flaring performance in the US.”
Researchers developed an agent-based model—an increasingly important computational modeling technique in the artificial intelligence era that relies on resolving the components of a system rather than specifying its aggregate dynamics—to simulate the decision-making processes of energy firms and identifying key influences on firm behavior. The researchers investigated how different pressures—social, regulatory, shareholder, and peer effects—influence firms’ decisions to reduce flaring and participate in emerging markets for certified low-emission natural gas.
The study underscores the complex interactions between social, regulatory, and economic factors in shaping firm behavior in the oil and gas industry. By integrating these influences into an agent-based model, the research provides a nuanced understanding of how firms respond to various drivers and how these responses affect energy market outcomes, particularly in the context of reducing natural gas flaring. The findings highlight the importance of realistic market thresholds, targeted activism, and the potential for certified markets to drive significant environmental improvements in the industry.