In Defense of Complex Regulation of Energy Extraction

Posted by & filed under CGR Staff, Rochester Business Journal.

Kent GardnerAfter my last column on hydrofracking, I was asked to participate in a forum at the University of Rochester sponsored by Phi Beta Kappa. In my intro, I quipped that I was the guy invited to defend the despoiling of the earth and destruction of the climate. Nobody laughed.

This issue has stirred a level of religious fervor that is reminiscent of both sides of the abortion debate. Yet common to most consequential policy questions, the hydrofracking issue (like Oscar Wilde’s truth) is neither pure nor simple. I understand the appeal of clarity and simplicity—we would prefer that fracking be either boon or bane. Complexity makes our heads hurt.

Let me make the case for complexity.

Alternative fuels are still expensive. The Cornell professor who was invited to the PBK forum to support a fracking ban, Anthony Ingraffea, asserted that “all power generation added to the nation’s capacity during the months of November and December came from renewable sources.” He didn’t acknowledge that nearly every significant renewable power installation remains heavily subsidized by “we the people” as taxpayers. The U.S. Energy Department’s Energy Information Administration reports that solar photovoltaic power costs 2.4 times that of natural gas; wind costs 50% more. We may be only a few key innovations away from cheap power from algae biofuel, solar PV or nuclear fusion—but for now, natural gas wins the affordability contest by a country mile.

Affordability matters. Anti-fracking campaigners may be willing to pay 50% more to power their cars and tablets, but others would find it hard to spend more. The federal Consumer Expenditure Survey reports that in 2011, the poorest 20% of consumers spent nearly 10% of their income on electricity and over 12% on gasoline. That’s several times the share spent by the top income quintiles. And there is a ripple effect on the economy—more spending on energy means less spending on other goods and services.

Shale gas displaces coal. Over the previous decade, nearly all new baseload power generation has come from natural gas. Despite the abundance and low cost of coal, air quality concerns, embodied in law and regulation, have shifted power generation away from dirtier sources of energy. The response to clean air mandates has been a shift from coal to natural gas.

Shale gas is dramatically better for the environment than coal. Tony Ingraffea and his co-author, Robert Howarth, became anti-fracking rock stars by publishing a paper claiming that shale gas is worse for the climate than coal because of the amount of natural gas (methane) that escapes during the drilling process. As disappointing as it may be to fracking opponents, the preponderance of evidence indicates that Howarth & Ingraffea are simply wrong. Study after study refutes their claims. Just last month, the Environmental Protection Agency cut its estimate of methane emissions from fracking by about 20%. The EPA report (see, p.175), is based on physical measurements at 50,000 wells and asserts: “The data showed far more widespread use of control technologies than EPA was previously capturing in its Inventory . . .” The EPA reported that both changes in technique required by regulation and voluntary compliance by drillers were reducing methane release. Contrary to the claim of my debate opponent, measured methane release from fracking is less than had been assumed, not more.

Don’t forget that coal extraction is demonstrably, provably dangerous. On average, coal mining has killed over 30 people each year over the previous decade. From 2006-10 there were nearly 400 accidents resulting in a permanent disability, either full or partial, from coal mining. Death and injury is not unknown with natural gas drilling, but the impact on workers falls far short of the predictable toll among coal miners.

A maturing shale gas industry is better, not worse, for the environment. In a classic western, we knew that the better the villain dressed, the blacker was his soul. We should welcome big energy to shale gas drilling, however. They’ve been buying up the wildcatters, bringing a longer time horizon and more resources to the extraction process. The Pennsylvania Department of Environmental Protection reported recently that large firms had about 30% of the regulatory violations of small drillers. The lessons of the Exxon Valdez and BP’s Deepwater Horizon have not been lost on these firms: Mistakes are costly. They have a strong incentive to capture as much of the methane as possible and to prevent contamination of groundwater. We need clear regulations and a sheriff to monitor enforcement. Big energy knows that playing by the rules is better for long term profitability.

We need smart laws & regulations. Too often our legislators respond to popular fervor with well-intentioned laws that do more harm than good. The history of environmental regulation is rife with such examples. We are still diverting corn to the production of ethanol in response to a misguided federal quota, despite clear evidence that burning corn ethanol offers no net environmental advantage over gasoline when all the cost of production is captured. The federal renewable fuel standard still calls for an increase in ethanol production to 36m gallons per year by 2022.

Not to be outdone, the Europeans passed a law providing a quite generous subsidy for power generated from renewable sources ($68 per MWh). The power industry responded—incentives matter! Now the top “renewable” fuel in Europe is … wood—yes, wood. Canadian hardwood prices are up 60% since 2011 as wood is diverted from other uses to power homes in Britain and Scandinavia. Wood may be renewable by definition, but not at the rate it is being burned for fuel in Europe.

Back to complexity. There isn’t a clear answer to the fracking question. We need to regulate and tax what we don’t want—that includes carbon emissions from all sources, groundwater contamination by any means, etc. The EPA and New York’s Department of Environmental Conservation should be empowered to establish sound policy guidelines, not directed by hysterical populism to favor or ban specific energy sources.

The shift to natural gas has improved our environment and will continue to do so as coal continues to wane. Let’s support clean fuels research through a competitive process that is science-based, not politically driven. And let’s end the big subsidies to large scale renewable installations. Isn’t it time to find out if wind can be cost effective without subsidies? And it is surely time to level the playing field between tortillas and ethanol: Let’s repeal those fuelish ethanol quotas.