Course:ECON371/UBCO2010WT1/GROUP2/Article8
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Group 2: The Environmental Impacts of Natural Gas Extraction
Article 8: E.P.A. Considers Risks of Gas Extraction
Summary
Residents in Pennsylvania are becoming increasingly concerned about groundwater they believe is being contaminated by the hydraulic fracturing process that gas companies use to extract natural gas from the ground. The culprit is supposedly the chemical additives in the mixture of water and sand that companies use to fracture rock to enable natural gas extraction. However, gas companies say that the chemicals make up only a small fraction of the solution and thus shouldn't pose a health risk, but have kept the specific ingredients away from public knowledge in the past as a 'trade secret'. In addition, residents are also concerned about the integrity of well casings and the potential for chemicals to be spilled. Gas companies argue that the Marcellus Shale that stretches from West Virginia to southern New York could potentially yield $6 billion in government revenue and create 280,000 jobs. As a result, the E.P.A. is conducting a $1.9 million study on the effect of hydraulic fracturing on ground water supplies to help influence future regulations on the natural gas industry.
Analysis
The allegations of polluted well water and streams are issues of liability, in which the public and environmental groups are claiming that the responsibilities are on the gas extraction companies. However, the gas companies argue that the allegations are “either fictions or not the companies’ fault” so burdens of proof arise. Here, the injured parties are unable to prove the direct link between the damages and the supposed source, the gas companies, because of the lack of adequate studies done. In addition, they are unable to prove that the chemicals used are damaging because the gas companies do not reveal much information about the chemicals they use.
Recently, however, gas companies have been increasing their efforts to stave off government oversight. As a result, some have started voluntarily revealing information on chemicals used. However, since the data is not checked for accuracy, companies are able to understate the concentrations of chemicals used. In other cases, lobbying is taking place, in which natural gas companies will donate large sums to election candidates who promise to not impose strict regulation on the gas industry.([1]) From an economic standpoint, companies will undertake lobbying as long as the amount donated to politicians in return for maintaining loose regulation is less than or equal to the abatement costs they'd have to pay under tighter regulation. This will divert resources away from research and development efforts, which may have helped to lower producers' MAC curves and emissions.
Following the public hearings by EPA, the government is expected to introduce tighter regulation, at least until the potential health risks can be fully evaluated. It will do so using the second-best decision rule. When there is an uncertainity about the MAC or MD curve, the rule is to minimize the social loss associated with the chosen regulation. Since the health and environmental risks associated with natural gas extraction are not yet known with certainty, the regulators are uncertain about the marginal demage curve of this industry. The graph below shows the uncertainity of MD curve, where MAC is known. The efficient level is the intersection of true MD and MAC. However, the regulators will use their estimated MD to introduce regulation, thus assuming the efficient point to be the intersection of estimated MD and MAC. An emission tax or standard set by the regulator will lead to inefficient emissions, resulting in a social loss indicated by the shaded triangle.
After a thorough study is conducted by the EPA or the national congress, the shape of the MD curve will be known. This will enable the regulators to use a variety of tools to arrive at the efficient point. In regulating the large and growing natural gas industry, a policy that makes sense will make use of technology and input standards. By forcing all companies to build wells using some approved design and use a specific combination of chemicals in the fracturing process, the marginal abatement curves of all wells will be made essentially identical. Procedures for disposing of waste water could also be standardized to arrive at efficient emissions, where MAC = MD. However, standards remove the incentive to innovate. In addition, standardizing the industry will be expensive for the existing companies, which would likely engage in lobbying, thus shifting their resources away from R&D, resulting in even less innovation. In addition, if an accident were to happen, the responsibility will be entirely on the regulating agency to compensate those injured. As such, there must be a legislation in place that protects the health of nearby-living people.
Prof's Comments
I think that your suggestion that standards are the best approach is probably right. The alternative is to rely on liability. The latter is very expensive and uncertain. Tradable permits and taxes require measurement of emissions, which is pretty much impossible give that the stuff is pumped deep into the ground.