This exercise is about the the extra costs that fracking can have on the environment, resources and personal health. These extra costs are not currently being included in the price of "fracked" gas and this may lead some to believe it is cheaper than processed gas or other fuels. Below is my position on "fracking".
Gabriella Barnes Public Finance
Exercise #1 Fracking
Hydraulic fracturing, commonly known as “fracking,” is the process in which water, chemicals, sand and other materials are put under high pressure into shale formations. This process helps to break apart the shale rocks. When broken the rocks emit natural gas. Many claim fracking is safer and more environment friendly alternative when compared to other fuels like oil and coal. Others have found that fracking has many external costs like foul drinking water, emission of hazardous gases like methane, chemical spills and dumping complications (McGlynn).
Some even argue that the external costs may outweigh the positive outcomes of fracking. Daniel McGlynn (author of Fracking Controversy, Are new natural gas drilling methods safe?) writes, “...reports of underground water contamination, chemical spills and other problems have been frequent...”(McGlynn). Furthermore, many are documenting unsafe methane leaks into the air, as well as, a growing concern “fracking” may be setting off earthquakes (McGlynn).With all these negative affects of “fracking,” many are trying to figure out the cost of these externalities the industry isn't taking responsibility for. In terms of efficiency, I have devised several government involvement strategies to ensure maximum optimum quantity of each good, least- cost of production and optimum distributions of the output.
To begin, the process of hydraulic fracturing requires large amounts of water and chemicals to be added under high pressure to break the rocks and release the natural gas. These chemicals are predominately used as lubricants for underground drilling equipment. The chemicals are vital to the “fracking” process because they help get the equipment into the ground and essentially aid in the collection of natural gas (McGlynn). After the natural gas has been collected the chemicals are then pumped out of the well. Barrels of the chemical water is then sent to be filtered. During transportation chemical spills can occur causing even more damage to the environment and pose health problems. Scientist are now finding that some of filtration methods aren't good enough and firms are dumping radioactive and or chemical poisoned water into waterways. Chemicals, including contaminants linking to cancer, are indirectly being put into other wells used by the public (McGlynn). Although, the drilling sites are sealed through cement casing, sometimes the chemical water can leak into the ground and into nearby wells (McGlynn). In this case, the drinking water is being affected through contamination and is considered an external cost. In some examples of water contamination, water from the faucet has been so flammable it can be set on fire. Sometimes drinking water has found to be radioactive and this water is being dumped into rivers and ultimately wells (McGlynn). Everyday more scientific links are uncovering the negative reality between foul drinking water and nearby “fracking” sites. (McGlynn). To cover these external costs of the drinking water I would propose a government tax on the natural gas. In calculating the costs of the total amount of water being contaminated each year, the tax would equal the external cost of the water contamination. If the tax is calculated correctly, there should be no inefficiency. Ideally the tax would allow the firm to
feel the external cost of the contamination and force the firm to be more efficient when using their resources. This would make the firm use some of their resources elsewhere causing a change in market price, quantity supplied and total amount of resources used for “fracking.” The tax should also include other external cost of the chemicals to the environment like chemical spills and clean up methods. This is demonstrated in the graph shown below:
For this externality I choose the government tax because the taxes could be used to drill other wells for drinking water further from the “fracking” sites, eliminating the possible water contamination. If the other wells cannot be built the money can be used for an advanced filtration system and new technology to detect radioactivity in the water. In addition, if these two solutions are enough of an option, the government can choose to set up a budget for people in the towns with flammable drinking water and ship them clean water. The tax can also aid in chemical spills and compensate people who have been directly affected by the damage. Taxing the actual product, the government can control how much tax they receive for this project and which solution would be best for each situation. In some cases a mixture of these solutions may provide to be the best plan. I predict a tax would increase the efficiency of the “fracking” market and shift the market closer to the optimum quantity and price. Government can also use the funds like Ohio for example:
“In 2000, Ohio voters established the $400 million Clean Ohio Fund to conserve greenspace and natural areas, preserve farmland, create recreational trails, and revitalize blighted neighborhoods by cleaning up and redeveloping polluted properties.
Using these funds, the State of Ohio will be able to award matching grants to deserving local projects in four program areas: greenspace conservation, farmland preservation, recreational trails, brownfield revitalization” (Ohio Environmental Council).
The release of methane from “fracking” is becoming increasingly alarming. In many cases, researchers are starting to take a closer look at the total amount of methane that is being released into the air by this process.
“...Scientist have begun to document the release of methane-another greenhouse gas and a major component of natural gas-during drilling, extracting and transportation phases of natural gas production. If not contained properly during drilling, methane can migrate through the ground to water sources or be released into the atmosphere...”(McGlynn).
The emission of methane is very important to point out because methane has “105 times more [global] warming impact pound for pound than carbon dioxide” (McGlynn). Researchers have also found the a fractured well also emits eight times the more methane levels than a traditional drilled well (McGlynn). Methane gas also becomes another external cost that the industry for natural gas isn’t feeling. In the case of methane emission into the air, I purpose the government should set up pollution rights. Because no one owns the air, it would be hard for government to tax the air being polluted, however, their are external costs of polluting the air like health costs and damage to the ozone. Shown on the next page:
When government sets up pollution rights they set up a certain amount of pollution they want reduce by each firm. Every firm is given an abatement level they can then sell off to ensure maximum efficiency. Due to the fact, some firms may have been built with pollution in mind, some may be more efficient to handle the abatement more easily then others. Although, this method would set up a pollution market for methane, I believe firms would be able to work it between themselves in the long-run to increase efficiency. This would immediately lower the amount of methane in the air and provide an incentive for more filtration and better technology to decrease the pollution by a firm. Ultimately, this method would prove most efficient for the methane externality. Furthermore, research shows the global methane budget to be insufficient compared to the overall pollution. Only recently has methane been described as more hazardous than carbon dioxide to the atmosphere. According to the Methane and the greenhouse-gas footprint of natural gas from shale formations by Robert W. Howarth, Renee Santoro and Anthony Ingraffea,
“Methane emissions during the flow-back period in theory can be reduced by up to 90% through Reduced Emission Completions technologies, or REC (EPA 2010). However, REC technologies require that pipelines to the well are in place prior to completion, which is not always possible in emerging development areas. In any event, these technologies are currently not in wide use (EPA 2010)” (Howarth).
As you can conclude, taxing the product would only leave the government with insufficient funds and limited capabilities to clean the air. It would be better if the methane leaks were fixed by companies. This way technology can be used right away to lower the emissions into the air. In addition, it would be easier for government to regulate the amount of pollution firm by firm rather than in general. Abatement's would serve more efficient for the methane externality.
Another negative impact associated with “fracking” is the increase in earthquakes. More studies are finding a connection to “fracking” sites and earthquakes more common. Geologists in Arkansas are observing a recent spike in seismic activity at fault lines near drilling sites (McGlynn). “... the United Kingdom said “fracking” near Blackpool...probably caused two minor earthquakes” (McGlynn). Research shows it is not uncommon for “fracking” to cause earthquakes, most are even too small to feel. However, research has shown that “fracking” can cause up to a magnitude 5.0 earthquake. Dr. McGarr's team has,
“...uncovered a link between the volume of fluid injected and a quake's magnitude. Every time the volume of fluids doubles, the quake magnitude increases by about 0.4.
So far, the model says nothing about the likelihood of a quake occurring -- just a maximum potential magnitude, given the key assumptions” (Spotts).
The external cost for earthquakes is a very big range depending on the size and location of the earthquake. The lack of information and research on the problem leads me to believe taxing natural gas may be the best solution since it seems the most realistic and plausible. On the next page is a graph to illustrate:
Government can set up emergency funds starting now. Early preparation for a disaster like an earthquake can only benefit the public. Trying to get funds from firms may call for legal action that may need years of scientific research to prove the firms are the main cause of the earthquake. To recapitulate, a tax on natural gas seems the most efficient. If the external cost was calculated correctly and the tax was set at optimum price, the tax would cause quantity and price of the market for natural gas to hit optimum levels.
In response to the advocate, I would state the external cost as still costs, whether the firm feels them or citizens, no the less money is being spent on the problem. It is only right that the market should pay for the external cost since they are the ones creating the external problems affecting millions of people. Hopefully, through the methods I just described, the cost of these externalities will be significantly less and produce a more efficient market, leading to a better usage of our resources. The quantity of natural gas may be decreased but it only because the cost of the extra quantities weren't profitable to begin with. Just because the firm is now feeling the external cost doesn't mean they weren’t there before and now our resources are being used to their full potential.
McGlynn, D. (2011, December 16). Fracking controversy. CQ Researcher, 21, 1049-1072.
Retrieved from http://library.cqpress.com/cqresearcher/
Ohio Environmental Council http://www.theoec.org/Fracking.htm
Howarth, R. Methane and the greenhouse-gas footprint of natural gas from shale formations http://www.sustainablefuture.cornell.edu/news/attachments/Howarth-EtAl-2011.pdf
Spotts, P. How fracking might have led to an Ohio earthquake http://www.csmonitor.com/ Science/2012/0102/How-fracking-might-have-led-to-an-Ohio-earthquake