Fracking’s externalities

January 13, 2012

Fracking is under increased scrutiny in the U.S. and in Australia, in the state of New South Wales. Both nations have undertaken studies to examine the effect of fracking on groundwater supplies. But there are other potential socialized costs that need to be included in these public studies, including the possible cost of wastewater treatment plants, damage to local roads, air and water pollution and the linkages to earthquakes. The costs of these possible side effects to local communities may exceed the gains they’ll receive from extraction royalties and increased tax revenues. We need some accounting.

In the U.S. the Environmental Protection Agency has begun a study on fracking and water supplies, and it released a status report in December 2011. The EPA anticipates a first round of results by the end of 2012 and a final report to be released in 2014. The agency has conducted literature reviews, requested data from manufacturers of fracking fluids and scheduled case studies with landowners. It also released a startling preliminary report on possible groundwater contamination in Wyoming.  From USA Today:

The EPA found that compounds likely associated with fracking chemicals had been detected in the groundwater beneath Pavillion, a small community in central Wyoming where residents say their well water reeks of chemicals. Health officials last year advised them not to drink their water after the EPA found low levels [of] hydrocarbons in their wells.


The fracking occurred below the level of the drinking water aquifer and close to water wells, the EPA said. Elsewhere, drilling is more remote and fracking occurs much deeper than the level of groundwater that would normally be used.

In Australia the national government has moved much more decisively and imposed a temporary ban on fracking that lasts through the end of April. The national government also allocated about $150 million to conduct an independent review of the health, safety and environmental risks of the process. From Bloomberg:

Prime Minister Julia Gillard said Nov. 21 that the government will allocate A$150 million ($153 million) to establish an independent committee to provide scientific advice on the impact of coal-seam gas projects on water supplies.

“The framework is not designed to add extra work or increase the regulatory burden for upcoming projects,” Gillard said in a statement. “It does mean, however, that their applications will be subject to rigorous and independent scientific assessment before states grant an approval.”

The efforts of both nations are a good start, but government oversight needs to be broadened to account for other environmental and social costs. There is already academic work that creates a framework for enviromental costs for the economy. In 2009, economists Nicholas Muller, Robert Mendelsohn and William Nordhaus published a methodology that weighed both costs and benefits to the economy from air pollution (page 3). Their work focuses on measuring damages and the value added from various industrial processes.

[W]e compare Gross External Damages (GEDs) to value added (VA). The purpose is to determine whether correcting for external costs has a substantial effect on the net economic impact of different industries. We find that the ratio of GED/VA is greater than one for four industries (stone quarrying, solid waste incineration, sewage treatment plants, and fossil fuel power plants). This indicates that the air pollution damages are greater than their net contribution to output of these industries. Several other industries also have high GED/VA ratios.

Modeling for the “gross external damages” from possible earthquake damage would be very hard, but we’ve already had reports of the mayor of Youngstown, Ohio buying insurance for his community against the risk, and the insurance company that sold him the coverage must have done modeling to estimate the possible damages. Modeling costs to local communities for road damage has already been done for the state of New York, a relatively small player in the fracking industry. In a comment letter to the NYS Department of Environmental Conservation the New York State Department of Transportation was cited as having estimated annual costs to upgrade or repair roads and bridges at between $90 million and $156 million for state roads and between $121 million and $222 million for local roads.

Natural gas is an important energy source for the United States, and it presents a good opportunity to weigh environmental costs for state and local economies against their benefits. If studies determine that fracking does pollute groundwater systems, then it should be shut down. But if it is deemed safe for groundwater, then the other public costs should be understood and borne by the parties that profit. Fracking should not be another industry where profits are privatized and costs are socialized.


The Municipal Analysts Group of New York will be holding a luncheon entitled Hydraulic Fracturing (Fracking) — What Municipal Bond Analysts Need to Know on Jan. 20, 2012 in New York City.


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Residents of a small northeastern Pennsylvania town at the center of the political fight over natural gas drilling are disappointed that they traveled to Philadelphia but did not get to make their case directly to the head of the federal Environmental Protection Agency.

A handful of residents of Dimock joined about four dozen environmental activists Friday to protest well water contamination that came after natural gas drilling began in the Susquehanna County town in 2008.

The residents want the federal government to truck in fresh water. The EPA last week agreed to do so but reversed course within 24 hours.

The protesters are hoping the federal government will be their ally on an issue they believe state officials are ignoring.

EPA Administrator Lisa Jackson left the forum at Philadelphia’s Academy of Natural Sciences before protesters could talk to her. sf/2012/01/residents_of_pennsylvania_tow n.html

Posted by Cate_Long | Report as abusive

It’s working..If NIMBY prevails, oily states benefit.

Posted by Nickers | Report as abusive

Kroll Bond Rating Agency (KBRA) published a report today on the potential impact of shale gas development on municipal bond issuers. The goal of this preliminary report is to alert investors to a new dynamic in the market, the potential development of trillions of dollars of unanticipated, domestic shale gas reserves over the next few decades. While there are significant environmental challenges, particularly contamination of groundwater and aquifers, the focus of this report is the potential impact on municipal credit quality if these shale gas reserves are developed on a large-scale.

It has been known since the 1950s that North America has tremendous quantities of gas and oil trapped in shale formations, but until recently, almost all of this was deemed non-recoverable. Recent advances in combining hydraulic fracturing and horizontal drilling have materially reduced the cost of recovering shale gas and dramatically increased projected reserves.

This report provides estimates of these new reserves by state and metrics to help investors determine how their development could affect credit quality of “taxed-backed” municipal issuers. It also explains how the further expansion of shale gas development in the United States could benefit many public power utilities by:

— Reducing financing, operating, and construction risks associated with multi-billion dollar projects;

— Providing a low cost, relatively clean fuel with ample supply and expected price stability;

— Significantly reducing future capital costs and forecasted bond issuance; and

— Allowing an inexpensive way to reduce plant emissions of CO2, mercury, and sulfur oxides.

Although estimates surrounding many key factors are in flux, and concerns over health and environmental issues have still not been adequately addressed, we believe investors need to be cognizant of the potential credit impact shale gas development could have on securities issued on behalf of states, localities, and utilities.

On a macro level, the development of this resource has the potential to materially increase the nation’s GDP, lower energy costs, create a large number of new jobs, and enhance national security. However, significant environmental challenges must be overcome. ond-rating-agency-releases-report-on-the -potential-impact-of-natural-gas-frackin g-on-municipal-bond-issuers-2012-01-13

Posted by Cate_Long | Report as abusive

You focus on “social cost potential” and ignore the overriding factor that America NEEDS meaningful access to the energy this process makes available. Yes, there should be “cost-benefits” analysis, and those companies that profit from such extraction should pay and write off the cost of getting associated “social costs” competently underwritten.

We need to move ahead with caution and courage, NOT stop as the environmental radicals would have us do in order to delay and run up associated expense to an unprofitable level.

Posted by OneOfTheSheep | Report as abusive

Nice contribution, @Cate_Long. As a pro-business green party member, I am all for this clean new resource… as long as it is clean. One thing that America needs to do is employ the precautionary principal ( ary_principle).

As Kate Long astutely titled this piece, “externalities” should be born by the risk taker, not society at large. It is telling that a bond rating agency is advising investors of the potential risks being undertaken.

Most local governments are not sophisticated enough to manage this risk so it gets born on local residents and taxpayers. My pro business side says yay for more profits. My Green Party side says sneaky corporations are the scourge of the earth. Both are right. Finding the balance requires the inclusion of external risks in the analysis.

Posted by LEEDAP | Report as abusive

And then you have the likes of Rick Perry screaming for the destruction of the EPA, presumably to limit the government’s ability to monitor, regulate and mitigate the potential risks and long term damages this relatively new and unproven technology may pose.

I’d love to see America become energy self sufficient and natural gas looks like a great source, but not at the cost of water resources that irrigate our crops and supply our drinking water needs.

Posted by NobleKin | Report as abusive

@ Cate Long: Thank you. And thank you, and thank you again. It is nice to see a balanced piece of journalism appear here, in the MSM.

The reality is that regardless of the size of LP/NG reserves in the U.S. (and contrary to the narrow and limited understanding of OneOfTheSheep, above), the resource is finite, and the U.S. will never, ever achieve “self-sufficiency” in energy production at the present (or foreseeable) rates of consumption.

The undeniably valid point you make in this piece is that if the costs are socialized and the profits taken privately, the American public are NOT served by permitting these practices. That American citizens do not, or cannot, understand that their support of such practices harms them in far greater measure than the curtailed/reduced production that may result. They don’t understand that in order to keep their fuel costs a dollar lower, they are handing three dollars to the producers.

Posted by BowMtnSpirit | Report as abusive