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?


Dr. Constantinos Charalambous

With the increasing price of gas and the taxes that will be imposed on European countries due to the Troika measures, I am really wondering how governments are planning or rationing public transportation. I wrote an article to that effect, oh and by the way try to locate the driver in the photo.

http://www.everyday-economist.com/2012/09/public-transportation-can-you-locate.html

Ben Meadows

Great article. But it is key to point out that methane, ala, Shale Gas is a greenhouse gas 20x worse than C02. The leak rate is debated between industry and environmentalists, but most point that a 2-3% escape rate negates any tangible benefits to abating global warming.

Solid leaks waste leaks have proved cumbersome (fly ash spills), liquid leaks downright damning (BP-Deepwater Horizon), and I don't even want to know gas leaks, reported and unreported look like.

I definitely agree that natural gas is the way to go economically and environmentally, but I'd hate for everyone to jump headfirst ignorant of consequences. Everything has consequences. Tread carefully.

Mark Bahner

"...in addition to being 30-50% cleaner than coal (even accounting for escaped methane),..."

Natural gas is several orders of magnitude cleaner than coal for the pollutant of most importance to human health: particulate.

Methane and carbon dioxide are not "dirty." Particulate is dirty.

Joseph Huberman

The problem with this thesis is that ultimately we must move to sustainable energy and the cheap gas will stall the migration putting many sustainable technologies out of business for decades.

I would embrace gas if the environmental problems are mitigated AND sustainable technologies are subsidized to compete successfully.

Finally, cheap energy will discourage continued gains in energy efficiency.

When evaluating "growth" I always think, "That which is not sustainable will end."

Charles L.

Shale gas is better, but it isn't good. That being said, if it will help the environment when compared to our current plan, we should exploit it as a natural resource. However, it's still only a short-term solution. We will run out of shale eventually, and before that we'll have to worry about its external costs. We should pass a Carbon Tax first off (duh) and proceed to exploit shale- safely. SAFELY. No earthquakes, no methane in the drinking water. In the long-term, however, we will still need to deal with the consequences of climate change. They are unavoidable. Maybe take the money we get from shale and carbon taxes and invest it into making green energy more efficient and making the grid more efficient. Shale gas is a good investment for the country now, but we also want to make sure it's a good one for the future.

On a final thought, who's going to break the news to West Virginia? Coal is king, and regicide is always ugly.

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Ripudaman Malhotra

Shale gas is helping the US reduce its greenhouse gas emissions as I pont out in my blog ( cmo-ripu.blogspot.com). In a strange kind of way, fracking, which is anathema to the "environmentalists" is helping mitigate the risk of climate change more than wind and solar. At the same time, it must be pointed out that the estimates of total recoverable shale gas in the US are equivalent to only about 5 cubic miles of oil. If we increase the use this resource for power production, refining operations, export as LNG, and so on, the resource will last only a few decades. Given how long it takes to develop alternate sources of energy, we must treat the additional time afforded by shale gas a precious gift and not frit it away, but use it wisely in reducing the cost of truly renewable resources.

ROD

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.

I have read in an article that Natural Gas produced from Shale is refereed to as unconventional which refers to the type of rock being found in it. While conventional is oil and gas refers to hydrocarbons which sought in sandstone, limestones, instaead of tight sands. My question is, if shale is beneficially cheaper and my more economy sounds and no environtmental effect, why does the goverment is not grasping it?