August 7, 2012

Thomas Friedman's Fracking Fallacy

A better way forward on energy.

It is amazing how quickly the technological and political landscape can change over a period of only four years. At this point during the 2008 presidential campaign, then-candidate Barack Obama was touting a promising future that featured scads of new jobs in the green energy business. The United States would be able to solve two problems with one bold stroke. It didn’t quite pan out that way. The Solyndra website leads off with its promise of “Clean and Economical Solar Power from Your Large Rooftop,” only to note that the bankrupt firm has suspended operations in order to evaluate its reorganization options.

This brutal reality reflects one insuperable difficulty with these renewable energy sources. Today, as in 2008, no one has found a way to store them except at a prohibitive cost. Unlike the much maligned fossil fuels, wind and solar power must be used when they are created, whether needed or not. Both wind and solar power sources are highly variable, so that, all too often, they are in greatest supply when they are least needed. In the absence of a seismic technological breakthrough, they are doomed to remain boutique sources of energy that cannot be counted on to power the economy going forward. 

 Illustration by Barbara Kelley

These major difficulties have not stopped the United States government from lavishing extensive subsidies on an industry that is ill-equipped to use them. These subsidies programs have failed for mundane but compelling reasons. No government has ever succeeded in trying to shape industrial policy with state subsidies, for the simple reason that it has neither the knowledge nor the incentives to pick which fields make sense to invest in or which firms in these fields have latched onto a viable technology.

No government should, of course, ban investments in solar and wind energy, but the prudent strategy is to let these investments be made by venture capitalists and other entrepreneurs who might actually know what they are doing. And currently, the smart money seems to be steering clear of renewable energy technologies.

At the same time that renewable energy sources have proved to be a stupendous bust, the fossil fuel business has undergone a mini revolution. I am not speaking of the sorry state of affairs with ethanol, whose huge subsidies, given the current drought, are now wreaking havoc in the food market because of its sheltered status as a “renewable” energy source under current regulation. No, the huge source of the new revolution is fracking, which has transformed the energy market. Huge supplies of natural gas may now be extracted within the United States at a price of about $2 per thousand cubic feet, which is a small fraction of the world price for natural gas.

For many uses, natural gas is a suitable and cleaner substitute for foreign oil, much of which is supplied by the oil-rich nations of the politically unstable Middle East and tin-pot dictatorships like Hugo Chavez’s Venezuela. Oil is often shipped by sea, bringing with it the risk of catastrophic oil spills like those of the Amoco Cadiz, the Exxon Valdez, and The Prestige, each of which poured hundreds of thousands of barrels of crude oil into sensitive locations—the beaches off Prince William Sound on the Alaskan Coast, the Coast of Brittany, and northwest Spain. In addition, natural gas burns cleaner than oil, which reduces the level of carbon emissions into the atmosphere. This, in turn, could help check the rise of global warming.

That last point is one that commands wide support, but which still (even in the midst of the current heat wave across the United States) generates fierce political opposition and public skepticism. For all I know, the threat of global warming may be overstated but for these purposes it does not matter. One key lesson that we should all take away from this current controversy is that it is a mistake to plan energy policy by taking strong positions on either side of the global warming debate.

The more sensible approach is to think hard about ways to tackle the energy problem by taking a two-step approach: First, think hard about ways to improve the energy situation no matter what the ultimate truth on global warming is; second, design incentives to reduce pollution to acceptable levels in light of our best scientific knowledge.

Fracking and the Problem of Pollution

In this regard, it is disconcerting to see the environmental backlash against the expansion of fracking, as was recently defended by Thomas Friedman in a recent op-ed entitled “Getting it Right on Gas.” Relying on a set of recommendations from the International Energy Agency (IEA), Friedman takes the position that what is good news in the short run could in reality spell bad news in the long run. The great fear, we are told, is that the United States could remain “addicted to fossil fuels for decades,” which Friedman denounces as “reckless.”

Friedman’s nightmare scenario has two components. The first is that government regulators could go soft on the pollution that fracking creates in both water and air. The second is that the short-term success of fracking will dull the incentives to invest in renewables, which emit no pollution at all.          

Neither objection leads to a sound energy policy. On the first, the proper attitude toward pollution is not dependent on the novel features of the fracking technology. The correct strategy should apply to all forms of pollution regardless of source, where the goal is to accurately price the environmental harms that could be generated. Put in one sentence, the correct approach either taxes or prohibits outputs, and pays no attention to inputs, which it leaves to the wit and wisdom of private producers.

It is always a difficult task to monetize the appropriate penalties for pollution emissions. But, given this basic insight, the one point that is clear is that the correct set of taxes or penalties must at the very least obey the following simple constraint: The higher the level of emissions for any substance, the greater the level of taxes and penalties that should be imposed. Hence, it is critical to keep these relative prices correct in order to avoid the economic and environmental travesty of creating implicit government subsidies for destructive activities.

Unfortunately, just that upside-down result looks like standard policy under the Clean Air Act, which turns its obsessive regulatory attention to emissions that come from “new” sources of pollution, both stationary and mobile, in the United States. With respect to vehicles, this policy means that little is done to tax, let alone remove, dangerous clunkers with high emissions rates from the highways. Instead, the powerful determination to make new cars as safe as possible drives up their costs, and thus slows down the substitution of new vehicles for older ones. In this determination, the best should never be made enemy of the good. There is no reason to postpone cutting down pollution by 90 percent simply because a 100 percent solution is not politically or technically feasible at the present time.

If relaxing some of the state-of-the-art standards will improve the overall pollution standards, we should encourage private parties to adopt those strategies. Tying taxation to outputs is a far better way for dealing with this subject than seeking to monitor specific types of devices that should be pressed into service for pollution control. Following this policy generally will lead to a reduction in the level of carbon dioxide emissions even if it is not subject to direct regulation.

The same attitude applies with respect to large coal plants. The EPA recently held back on the introduction of its regulations for coal emissions. But in so doing, it signaled the wrong approach when it stated, “The agency’s review will not change the types of state-of-the-art pollution controls new power plants are expected to use to reduce this harmful pollution.”

The state-of-the-art talk sounds good until it is parsed. It is hardly wise to adopt a state-of-the-art technology that removes 1 percent more pollution than a not quite-so-state-of-the-art technology that removes 10 percent. There is a palpable tension between state-of-the-art requirements and sound government policy.

Advice for the EPA

In light of these infirmities, the EPA should take the exact opposite tack. It should hasten the permit approval of any plant that can reduce pollution below that which is emitted by an existing plant. It should then apply the same per unit cost per pollution to both plants, which should lead to the quick shut down of the inefficient source of energy.

This would be a welcome change from the current environmental morass, where it is now standard operating procedure for companies to patch together “modifications” of ill-performing existing facilities in order to escape the greater expense of seeking permits for new facilities. There is no reason why this reordering of priorities should not command universal consent from people on all sides of the global warming dispute, for environmental pollution is one area that obeys the dictum that more is indeed less.

The same point applies with respect to the dangerous claim that efficient use of technology today frustrates the incentives to make extensive investments in renewable energy sources. In dealing with regulatory benefits and burdens, it is always necessary to discount these down to their present value, taking into account the uncertainty of technological improvements. By this standard, the greatest weight should be attached to the immediate and substantial control of emissions that are worth a lot more on any accounting than the speculative prospect of a renewables breakthrough a generation or two down the road.         

In making these judgments, moreover, note that the active deployment of fracking is likely to produce a rapid succession of technological improvements that can address both the leakage and water consumption issues that are rightly in the cross-hairs of fracking opponents. If, moreover, it turns out that revised estimates of global warming point to the reduction in overall carbon dioxide emissions, no major change in policy direction is needed. An increase in the level of taxation on emissions should be able to lower emissions to an acceptable level, without political convulsion.

The truly reckless position in these cases is to commit large public subsidies to unproven technologies in renewables that may never be commercialized.

There are two paths to energy control. By the first, we get immediate gains at the level of, say, 90 percent pollution reduction, followed by further increments. Those improvements allow for the overall growth of the economy, which in turn makes more money available for long-term investments that influence every portion of the energy cycle. Not only does energy get produced at a lower cost, but it gets consumed at a lower rate for any given unit of output.

By the second, we divert expenditures from short-term rationalization of the energy market in the hope that down the road some magic bullet will drive pollution levels close to zero. There is no question that the first approach will produce, in both the long and short run alike, lower levels of overall pollution and higher levels of social welfare. Friedman misses the basic point when he supports a carbon tax to both improve energy and draw down the deficit. The two points should be separated, for an excessive carbon tax distorts as much as one that is set too low.

The overall budget issues cannot be solved on the back of bad energy policy. Indeed, the whole question of energy reform should be separated from these larger political issues. More generally, the energy debate needs to be refocused from ends to means. Folks like Friedman spend too much time at the helm of our ship of state. They need to spend a bit more time in the engine room, to see how the system actually works, before offering definitive advice on how it could be improved.  

Richard A. Epstein, Peter and Kirsten Bedford Senior Fellow at the Hoover Institution, Laurence A. Tisch Professor of Law at New York University, and senior lecturer at the University of Chicago, researches and writes on a broad range of constitutional, economic, historical, and philosophical subjects. He has taught administrative law, antitrust law, communications law, constitutional law, corporate law, criminal law, employment discrimination law, environmental law, food and drug law, health law, labor law, Roman law, real estate development and finance, and individual and corporate taxation. His publications cover an equally broad range of topics. His most recent book, published in 2013, is The Classical Liberal Constitution: The Uncertain Quest for Limited Government (2013). He is a past editor of the Journal of Legal Studies (1981–91) and the Journal of Law and Economics (1991–2001).

Letters to the editor may be sent to Editors reserve the right to reject or publish (and edit) letters.