June 8, 2011

The Fracking Panacea?

Not quite. The new technology is promising, but environmentally risky.

A number of recent reports have indicated that new techniques of "fracking" are able by intense hydraulic pressures to unlock huge amounts of oil and gas reserves from once abandoned sites. Right now a land boom is taking place in the conspicuous locations of yesterday, such as the Permian Basin, in West Texas, the Eagle Ford region in Central Texas, and the Bakken in the Dakotas. The numbers are quite staggering. Production in the Bakken has jumped from virtually nothing a few years ago to 400,000 barrels a day today, with the prospects that better technology will push that total up to a million barrels a day by 2020. Similar gains are reported in both the Permian Basin and Eagle Ford. It is almost as if the laws of scarcity have been repealed. Daniel Yergin, a notable energy expert, puts the point in geopolitical terms: "This is like adding another Venezuela or Kuwait by 2020, except these tight oil fields are in the United States."

Epstein
Illustration by Barbara Kelley

These sites have already been exposed to a great deal of environmental wear and tear, so sensible developments concentrated in these areas could well cause fewer environmental dislocations than fresh explorations undertaken in pristine areas, including sites located close to large population centers or fragile ecological systems, like the Gulf of Mexico. With oil prices again hovering above $100 per barrel, bringing these sites on line quickly could well reduce our dependence on both deep water drilling and Middle Eastern imports. Under some scenarios, the rapid displacement of old energy sources might even reduce pollution levels overall.

The proper response to these new developments, therefore, should be one of guarded optimism. Quite simply, new viable technologies improve the odds of having energy available at lower prices. As I have argued earlier on this site, these technological improvements should be especially welcome today in the face of the increased (if misguided) resistance to new nuclear power in the aftermath of the Fukushima Daiichi plant’s near meltdown in March, 2011—that plant, by the way, was first commissioned in 1971 and stood in desperate need of an upgrade. Nonetheless, public sentiment about improved nuclear energy often runs negative: think of Germany’s recent announcement that it will shut down, not upgrade, its current nuclear facilities.

But just what new energy sources should be used in its place? Most environmentalists respond by saying that fracking should be off-limits, almost as a matter of first principle. In its stead, their instinct is to turn to such energy sources as solar and wind on the ground that those sources are sustainable with few, if any, adverse consequences to human life. Unfortunately, it is expensive to insist, with Hippocrates, that we should first do no harm. This pristine approach presents two major problems, one economic and the other environmental.

Of course fracking will generate pollution, but so will other energy technologies—a point that most environmentalists refuse to grasp.

On the economic front, the high level of subsidies needed to promote wind and solar energy creates large distortions elsewhere in the economy. If the taxes that pay for those subsidies are placed on oil and gas or coal specifically, they will increase prices, lower consumption, and reduce the ability to innovate in these areas. Alternatively, if the subsides are raised from taxes on a broad market basket of goods and services, the tax will exert a general drag on the economy that will jeopardize profitability and reduce innovation across the board.

Second, on the environmental front, it is a mistake to use a narrow pollution metric to evaluate wind and solar energy. If environmentalists insist on a broad definition of pollution for energy sources like fracking, they should also apply that definition to those dangers that arise at all points in the production cycles of so-called clean energy sources. If noise pollution from windmills damages wildlife and inconveniences nearby residences, those losses should be factored in, as should the social losses from visual pollution. Or, if the construction of solar panels requires the preparation and use of toxic substances, those costs must be weighed into the equation as well. Exactly how this complete examination plays out is hard to say in the abstract. But it is clear that any categorical preferences for wind and solar energies ignore the environmental trade-offs that abound.

The question that remains is what should be done with the residual risks of pollution? The question is of the utmost importance because at this point in time, much evidence points to serious risks of substantial water pollution from fracking. It would make little or no sense at all to encourage the willy-nilly use of new sources of energy, if they only aggravate the serious problems associated with fossil fuels.

Now, the discussion turns less on shared social goals and more on sound regulatory technique. On this score, we must beware of any solution that simply condemns the new fracking technology on the ground that it will, without question, generate new forms of pollution. Of course it will, but so will other energy technologies, which is a point that most environmentalists refuse to grasp. The last people to trust on the regulatory front therefore are the committed environmental groups, whose one-dimensional view of the world can lead to the wrong conclusions.

A solution: start fracking in remote regions of Texas and the Dakotas, and hope that improved fracking techniques will allow exploration at a greater range of sites..

By way of illustration consider the public position of EarthJustice, whose stress on justice leads us away from the technical task that lies before us. That task is to figure out a set of legal rules and industry practices that satisfy two key constraints. The first legal rule is the aggregate task of maximizing the net gains from the use of risky technologies. The second rule is to ensure that any small fraction of the population that lies in the path of pollution is not asked to shoulder a disproportionate share of the harm.

Once those two objectives are put on the table, the EarthJustice position, quoted below, is likely to prove wrong:

Fracking . . . is a dangerous way of getting oil and gas and a shortsighted energy strategy. It's poisoning our air and water and on its way to jeopardizing the health of millions more Americans. We can find a better way—one that protects our health and gives us clean, safe energy sources that never run out.

Of course, fracking is dangerous—but so too are other technologies. It is simply not the case that pollution will rise to catastrophic levels under those regimes that do not ban fracking.

The correct strategy, then, is not to ban fracking outright, but to apply the same principles of containment to fracking as are applied to other technologies. Only then can any choice between rival technologies accurately reflect their relative risks.

A comprehensive strategy combines four elements, which should be arrayed in a two-by-two grid. On one axis, the choice is between a) damages after the fact and b) injunctive relief before the harm has occurred. On the other axis lies the choice between 1) government and 2) private enforcement of remedies. It is not likely that any one of these four cells will remain empty in a comprehensive review of the problem.

For starters, EarthJustice is right to insist that individual instances of pollution that can be traced to fracking should be awarded full and generous compensation. Although it has often been suggested that the polluter need not pay whenever it took rigorous precautions to prevent harm, that position should be rejected. As was urged by that great nineteenth century libertarian, Baron George Bramwell, a strict liability—no excuses—system better elicits sound social behaviors. If the responsible parties are unable to pay the damages and stay in business, it is then just as well that the firm withdraw, because the external harms are greater than its private gains. But if the firm is able to pay those damages and remain in business, it is only just on distributional grounds that the loss be borne by the party that created the mischief and not by its innocent victims. Either way, matters will sort themselves out sensibly.

EarthJustice is right: pollution that can be traced to fracking should be awarded full and generous compensation.

The effectiveness of this system of damages does not come solely from the awards in pollution cases. Rather the threat of damages awards reduces the frequency of pollution spills in the first place. Large solvent oil drillers will respond to financial incentives even in the absence of a regulatory scheme.

Damages are of course not the only remedy for individual wrongs. Steps to prevent damages from the same source are also an essential part of the overall plan. But in what form? When simple remediation works, that is great. But when the gains from continued fracking are very large relative to any threatened harms, the sensible strategy might be to buy out the injured individuals on terms that leave them generously compensated for their property losses and personal dislocations. These buy out arrangements should generally be used as a last resort, only when continued operations promise huge gains. Consider, for instance, low-flying aircrafts that create unbearable noise and structural damages to the lands and homes under their glide paths. In many instances, it is better to buy out those homeowners rather than close down key airports. Similarly, mining cannot be shifted easily, given that the oil is embedded in the shale.

In some instances, however, the risks could be too great to rely solely on ex post remedies. In high risk areas, government should ensure that fracking residues do not enter major ground water systems and to fine leakers for the damages their spills cause to the entire groundwater system. Potential sites located near large population centers or key aquifers may have to shut down rather than risk large health and environmental losses. But this is not necessarily so at all sites at all times, for energy gains can easily dwarf water losses. Then, tough precautions to cordon off water supplies from danger may be the better remedy.

The dogmatic stance of some environmental groups is not defensible in light of the potential gains from fracking. But we must proceed cautiously. Here is one intermediate strategy that bears promise. Start fracking in remote regions of Texas and the Dakotas, and hope that improved fracking techniques will allow exploration at a greater range of sites. As with nuclear power, we should not flatly prohibit dangerous technologies. Once blocked, those technologies will be ever more difficult to improve. No one can be sure to get the balance right all the time. But by the same token, no one should be carried away by extreme positions. Euphoric predictions of how fracking offers some magic bullet to solve the energy crisis are suspect, as are doomsday predictions that fracking destroys everything that lies in its path. On this, as other environmental issues, the complexity of the remedial issues should make moderates of us all—even libertarians.


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).


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