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?


Oliver

If I am reading this correctly, the writer is assuming that the price of natural gas will remain low over time, as if there is something inherently cheap about natural gas. My understanding is that the current price is so low because production is far outpacing demand. That is not a sustainable business model. Here in PA, natural gas companies have been cutting production because the price is too low. If we take full advantage of natural gas, demand will grow and so will the price. In time, won't the economics compare to coal?

As for taxing production enough to pay for the environmental impacts, our experience in PA proves that it is a hopelessly idealistic idea. Natural gas companies spent a fortune on lobbying to minimize the 'impact fees' they will pay the state.

Stan

There is a lot of misinformation out there, with journalists quoting "geologists". Well, I happen to be a real geologist. The claim that it requires thousands of wells to release shale gas is wrong, because horizontal drilling eliminates that need. Horizontal drilling is the paradigm technological advance. Secondly, the very anti-fracking Guardian in UK accuses Lord Browne of Caudrilla Resources of having a vested personal interest in shale gas, and therefore his word is not to be trusted. Well, he was a very capable petroleum engineer who calculated all BP's oil reserves long before he joined the board of BP. His professional opinion, as a petroleum engineer, is as reliable as anyone's. Thirdly, in the UK debate, fear and misinformation are being used to prevent the gathering of the essential engineering and geological facts on which intelligent policy can be based. Surely it is qualified technical expertise which should drive the debate and not the fear and ignorance of which Greenpeace is regularly so often guilty.

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Enter your name...

"a stagnant economy means diminishing living standards"

Diminishing living standards *is* a major goal for some radical environmentalists. In my area, highway widening was explicitly opposed by one group because the study showed it would actually (for once) work to relieve congestion and improve the ability of people to get from point A to point B.

Congestion relief was opposed, because locally, it is only pain and poverty that makes people use mass transit instead of driving their shiny new zero-emission single-occupant cars to and from work, and the opponents are convinced that riding the bus or a bike is so morally superior that they should design in traffic jam-inducing features to make commuting so painful that people would get out of their cars and onto the bus. The quality-diminishing facts, like walking several blocks to the bus stop or waiting around in the rain or snow for a bus or sitting next to the occasional smelly drunk, were seen as socially valuable features.

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James

Unfortunately, there's a considerable degree of subjectivity in what constitutes improved living standards. From my own POV, not having to spend an hour or more each week driving getting from point A to point B to earn a living seems like a distinct improvement (I telecommute). From the POV of someone living in the vicinity of the proposed new roads, the noise and smell would probably not be seen as improvements. And so on...

texcis

Liberal /"Progressives" are anything but progressive. They'd rather take us back to the "green" horse and buggy days.

Gkm

One of the biggest issues with economics nowadays is the oversimplification necessary to fill a sound bite with something meaningful to the general population. I will surmise the author falls for this.

There have been so many "innovations" that have ultimately resulted in huge externalities that weren't initially factored. I going to guess there were many supporting articles maximizing the benefits and minimizing the risks long before Fukishima.

We have many alternatives to energy creation and level of use but no alternatives to water. I do hear there might be some in Mars though. Forgive the hyperbole but going too far with an unstudied process by those who are incented to make as much money as possible and then live in leisure elsewhere is foolhardy.

I think senior executives should be made to demonstrate the safety of the environment they are so happy to put others in by living in said environment.

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JonnyFive

Great article Steve.

Can you help me out with one thing please? I'm a regular engineer, not an economist, but keenly interested in this topic.

In the tenth paragraph, you call up Nordhaus' SCC estimate, EIA's electricity production estimates, and Argonne's greenhouse gas estimates. How are you working Nordhaus into your conclusion that "shale gas remains the cheapest source of fuel...?"

Nordhaus estimates an SCC of $44/ton of carbon and does not break out carbon cost by source. In Nordhaus' model, by what mode do you claim shale gas will decrease the SCC-- by increasing equity weighting, I guess?

Fittstim

" And cheaper than wind. And cheaper than solar."

Standard lies from the energy industry.

It is in no way cheaper than wind or solar when one takes into account the environmental costs of extracting the shale oil, transporting it, cleaning up the soil, water and air pollution and the increase in CO2 in the atmosphere.