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.