Merrill on “Fear of Fracking”

This morning, Columbia’s Thomas Merrill delivered the keynote address at the Case Western Reserve Law Review symposium on “The Law and Policy of Hydraulic Fracturing: Addressing the Issues of the Natural Gas Boom.” His talk, “Fear of Fracking,” sought to addressed four important questions about fracking: 1) Why did fracking technology emerge in the United States rather than somewhere else? 2) Does fracking present any novel environmental risks? 3) Insofar as there are novel risks from fracking, how could they be best addressed? 4) What should a citizen concerned about climate change think about fracking?

These are important questions about an important topic. As Merrill noted, fracking has rapidly emerged as intensely polarizing environmental issue, celebrated by some as an economic and ecological savior and decried by others as a threat to landowners, local communities, and the environment. The Wall Street Journal believes fracking heralds the rise of “Saudi America,” while some environmental groups fear fracking will further feed America’s addiction to carbon-based fuels.

Whatever its ultimate ecological impact, the combination of hydraulic fracturing and horizontal drilling promises to dramatically increase domestic oil and gas reserves, drive down energy prices and fundamentally transform the energy sector. North Dakota now produces more oil than any state but Texas and the oil and gas boom in this state is enriching landowners tremendously. Every president since President Nixon has called for energy independence. Fracking’s rise could make this possible within the next few decades. Beyond that, fracking and the proliferation of cheap gas, Merrill suggested, likely means the end of the nuclear power industry in the United States and has thrown the coal industry into a tailspin. Cheap gas is a bigger threat to coal than any alleged “war on coal” waged by the Environmental Protection Agency. It also threatens the future of alternative energy technologies dependent upon government subsidies for their economic viability.

[My write-up of the rest of Professor Merrill’s remarks is continued below the fold.]

Why did fracking arise in the United States? Contrary to some analysts, Professor Merrill does not believe it is attributable to federally funded research and development. What little funding for drilling technologies the federal government has provided has been fairly tangential. This does not mean federal policy has been irrelevant, however. The federal government has provided special tax credits for the drilling of unconventional natural gas which almost certainly facilitated the early development of the technology as early frackers developed and improved fracking techniques.

Professor Merrill also doubts industry structure has much to do with fracking’s rise either. However much major oil companies like to tout their commitment to innovation, the majors played a minor role in developing this technology. It was largely developed by smaller players in the industry.

A more likely factor is the way U.S. law treats subsurface rights. The U.S. is something of an outlier in that subsurface minerals are the property of the landowner, and not the government. This results in decentralized ownership and control over subsurface rights facilitates experimentation and innovation in figuring out how to exploit and manage subsurface resources.

Further decentralization, and experimentation, results from the federalist regulatory structure. Different states have different regulatory approaches than others, creating opportunities for further innovation and the opportunity for jurisdictions to learn from one another. The existence of a few jurisdictions that will allow a new technology to be tried provides a laboratory from which others may learn, whereas under a more centralized regulatory structure such innovation is unlikely to get off the ground.

The existence of a relatively open infrastructure network – a pipeline system that is subject to common-carrier rules – also plays a role in facilitating entry into the market. These factors have a common theme: decentralization. Taken together, Merrill suggests, they are the most likely source of fracking’s rise in the Unites

Now that fracking is here, does fracking present any novel environmental risks? Insofar as fracking presents the same risks as any sudden surge of production, the traditional regulatory framework would seem up to the task, but is this the case? The biggest environmental risk cited by fracking’s critics is the potential for groundwater contamination by fracking fluid. This may be different in kind from the risks already addressed by existing regulatory programs. Other concerns range from stresses on local infrastructure to increased pollution accompanying development to earthquakes. Fracking has a voracious appetite for water, but this would seem to be manageable, particularly in the eastern United States. Earthquakes, on the other hand, would seem to be a novel concern definitely worth more serious attention, even if it is not unique to fracking.

To Professor Merrill, the potential threat of groundwater contamination is the most serious, and potentially most distinct, environmental threat posed by an upsurge in fracking. While there is little empirical evidence confirming that such contamination has occurred thus far, and energy experts often downplay such risks, concerns about groundwater are understandable. The uncontrolled nature of the subsurface injection in fracking is a source of legitimate apprehension, particularly since many of the potential effects are not fully understood. This counsels the development of some regulatory structure to address these risks.

Accepting that the risk to groundwater posed by fracking is relatively novel, how should it be addressed? In many cases, ex ante regulation of potentially polluting conduct is advisable. In this case, however, the nature and likelihood of the risks in question are not sufficiently known to make such a regulatory approach effective. Over time, consensus views about best practices will likely develop, but they have not yet because not enough is known. Adoption of a precautionary regulatory strategy would likely stop fracking in its tracks, as the problem is lack of knowledge about the technology that will only come from experience.

Under the current circumstances, Professor Merrill thinks the best way to regulate and control the potential groundwater risks from fracking is through an ex post liability system. Professor Merrill would encourage the adoption of a strict liability regime combined with administrative measures to facilitate the identification of and compensation for harms, including mandated baseline testing, bond posting, and the like. Legislative adoption of such a regime is unlikely, Merrill notes, as legislatures are unlikely to enact such a regime absent greater evidence that fracking is, in fact, a meaningful threat, i.e. until real damage is done. Common law tort liability might do, however, particularly if courts impose strict liability, following the lead of Rylands v. Fletcher, and adopt a presumption of causation if producers don’t take adequate ex ante precautions, such as testing water prior to initiating development.

What then about climate change? Does fracking help or hurt efforts to stabilize atmospheric concentrations of greenhouse gases? Over the past five years, GHG emissions in Asia (where coal is the dominant power source) have continued to rise. In Europe, GHG emissions have remained rather stable, despite substantial subsidies and inducement for the use of renewable fuels. In the U.S., by contrast, GHG emissions have fallen. Some of this is due to the economic slump and improvements in fuel efficiency. But some is also due to the dramatic increase in natural gas usage. Declining gas prices, largely due to fracking, have helped displace the use of coal. This is a positive development, but unless similar trends can be replicated elsewhere it will not matter. Unless gas can displace coal overseas as well, the fracking boom will not do much to reduce global emissions, particularly if lower gas prices make it more difficult for renewables to compete.

On the whole, however, Merrill thinks those concerned about climate change should support fracking. While it undermines reliance on nuclear and renewables, cheap gas is a bigger threat to coal, and the displacement of coal is more important to get GHG emissions under control. Further if the development of fracking in the U.S. can be exported to other nations, it could help stem GHG emission increases in other nations with large coal reserves (e.g. China). Ultimately, however, Merrill believes GHG control requires substantial technological innovation, and suggests that a fracking-driven drop in energy prices might facilitate the adoption of policies that could encourage needed innovation, such as the adoption of a carbon tax. Whatever political obstacles there may be to the adoption of such a tax, lower energy prices make such measures more likely, even if only on the margin.