How Shale Gas Can Benefit Us and the Environment

(Photo: Tim Hurst)

It took less than an hour for Apple to sell out the initial supply of its new iPhone 5. It’s thinner, lighter, faster, brighter, taller than its predecessors, and yet it costs the same. That’s called progress.

Elsewhere, progress is met by protest rather than praise.

A suite of technologies has brought vast supplies of previously unrecoverable shale gas within reach of humans, dramatically expanding natural gas reserves in the U.S. and around the world. Horizontal drilling and hydraulic fracturing have produced a fuel that can at once promote a cooler planet and an expanded economy, essentially eliminating the tradeoff between climate change mitigation and the pursuit of other public projects and, perhaps, economic growth. But unlike the iPhone, the productivity gain embodied in shale gas technologies doesn’t attract a cult following and its benefits get obscured.

Among some of the most ardent advocates of climate policy, the growth of shale gas extraction is lamented because, in addition to being 30-50% cleaner than coal (even accounting for escaped methane), it is also (gasp) cheaper than coal. And cheaper than wind. And cheaper than solar.

And that means shale gas not only postpones a day when renewables are competitive with fossil fuels, but also increases carbon emissions concomitant with the economic growth spurred by cheap energy. That’s why Mother Jones’s Kevin Drum recently wrote that the story of shale gas “gets a lot grimmer as you dig deeper.”

According to the International Energy Agency, the carbon emissions from expanded production are sufficient to wipe away nearly all the carbon emissions savings from substituting shale gas for coal. But consultancies estimate shale gas alone drives incremental GDP growth through 2020 and annually contributes between $100 billion and $230 billion to the U.S. economy by 2035. So at no cost to our global warming efforts, the average American household enjoys $2,000 higher annual income by 2035 with robust shale gas production. That is decidedly a good thing, right? Like the iPhone 5?

Not to some environmentalists who mistakenly conflate the high prices that induce energy conservation with high costs that reflect input requirements to produce energy. Low energy costs are good because they free resources for other production, including the production of environmental protection. Even if shale gas were only cheaper than coal, its widespread use would be a boon. But because it’s also cleaner, it becomes a win-win.

If a $100-200 billion larger economy were deemed unimportant, then policy could drive a wedge between the cost of shale gas production and the price paid by consumers. The difference would constitute a tax yielding revenues to the state with which to either reduce other taxes or undertake additional public projects, like clean energy investments. In other words, government could appropriate for its own uses the resources freed by the substitution of shale gas for coal. Carbon emissions would be lower, energy prices, and, therefore, the private economy would be at worst unchanged, and government would have new wealth with which to carry out policy.

Many economists recommend taxing fuels at rates equal to the marginal damages they impose on society rather than at rates that make a politically favored fuel competitive. If the social cost of carbon emissions were internalized to its consumers by the optimal Pigouvian tax, shale gas would still be cheaper than coal, solar, wind, and all alternative sources of fuel.

Based on William Nordhaus’s estimate of the social cost of carbon, the Energy Information Administration’s estimates of the levelized cost of electricity production by fuel source, and Argonne National Laboratory estimates of lifecycle greenhouse gas emissions, shale gas remains the cheapest source of fuel even after the optimal carbon tax is imposed on each alternative. Shale gas is still 20% cheaper than onshore wind on an energy-equivalent basis, and 50% cheaper than solar, even ignoring the costs or intermittent solar and wind power. Shale gas would cost between $67-75 per megawatt hour (MWh) of electricity compared to $96 for onshore wind, $153 for solar, and a $111 for nuclear. Offshore wind costs in excess of $100 per MWh.

These prices internalize the cost of carbon. But other environmental and human health risks are associated with shale gas, too. Though the National Research Council recently determined that shale gas extraction is not causing seismic activity, impacts on water quality are less certain (e.g., here, here, here, here, and here) as the U.S. EPA undertakes a thorough inquiry.

Nevertheless, the IEA predicts that mitigating such risks and safely exploiting shale gas would only raise production costs about 7%. Even then, shale gas is still 17% cheaper than the cheapest renewable fuel. If such cheap energy induces economic growth and an attendant increase in greenhouse gas emissions, so be it. The environmental damages from carbon taxes have already been paid for in full with the Pigouvian tax, revenues from which could be employed to mitigate related or unrelated environmental harm.

The rebuke of shale gas is uneconomic and reflects a penchant of environmentalists to oppose economic growth because of the greenhouse gas emissions that follow. As recent unemployment numbers should remind, however, a stagnant economy means diminishing living standards as the economic pie gets divided among a growing population.

Environmentalists and advocates for climate change mitigation would be wise to remember the environmental Kuznets curve: individuals are unlikely to worry about melting sea ice or the well-being of their great, great, great grand children until they have secured the livelihoods of the children they see at dinner each night. And it’s uncertain whether we make future generations better off by bequeathing them less atmospheric
carbon or a bigger economy with which to battle greenhouse gases using technologies developed between now and then. Shale gas would help us do both.

The iPhone 5, which does more without costing more, is cheered for possibly lifting fourth quarter GDP growth by as much as half of a percentage point, or by $12 billion. Shale gas, which does what coal does while costing fewer dollars and fewer carbon emissions, boosted GDP by an estimated $76-118 billion in 2010 and will annually contribute an incremental $230 billion to GDP by 2035. Where are the throngs to welcome it?