Who Bears the Burden of Fracking?

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Erick Gustafson
A recent EPA report revealed that there remains significant uncertainty about the impacts of fracking.

The U.S. Environmental Protection Agency (EPA) released a report in June 2015 about the environmental impacts of hydraulic fracturing (fracking) on water resources.1 Fracking is a technique to extract oil and gas from shale deposits. While the report appeared to give the industry a clean bill of health as far as water quality is concerned—the report found “no evidence that fracking led to widespread, systematic pollution of water”—there are enough uncertainties in the data and its interpretation to raise concerns, many of which relate to specific, local pollution, as well as other impacts. The report’s ambiguous conclusions have been seized upon by both sides of the debate, due to the huge remaining uncertainties. While the report seems to vindicate fracking as basically safe, it can also be interpreted as confirming specific cases of impacts and a call for more research and better oversight. Just because no evidence was found of widespread pollution, does not mean that no evidence will ever be found. In addition, even if fracking does not lead to widespread pollution, it can and has led to specific, local pollution.

The amount of fracking going on in the US and around the world is huge, and the risks are mounting. The EPA report says:

“We estimate 25,000-30,000 new wells were drilled and hydraulically fractured annually in the United States between 2011 and 2014.”

The report goes on to conclude that:

“Of the potential mechanisms identified in this report, we found specific instances where one or more mechanisms led to impacts on drinking water resources, including contamination of drinking water wells. The number of identified cases, however, was small compared to the number of hydraulically fractured wells.”

So, of the 100,000 to 120,000 new wells drilled in the US since 2011, only a ‘small’ number led to the contamination of drinking water wells. For example, in terms of the frequency of spills of hydraulic fracturing fluids—only one of the several possible routes of contamination—it was estimated that: “the number of spills nationally could range from approximately 100 to 3,700 spills annually.”

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The Weekly Bull
Protestors opposing fracking in London in January 2015.

In addition, there is admittedly poor data on the impacts of fracking, so the ‘no evidence’ caveat is important. The EPA says:

“There is insufficient pre- and post-hydraulic fracturing data on the quality of drinking water resources. This inhibits a determination of the frequency of impacts. Other limiting factors include the presence of other causes of contamination, the short duration of existing studies, and inaccessible information related to hydraulic fracturing activities.”

So, while there are several known cases of drinking water contamination from fracking, most wells do not seem to cause these problems, with the important caveat being that the data that would allow us to see the impacts is very poor.

In addition, the report does not mention what may be the gravest danger to arise from fracking: the connection between increased wells and earthquakes. Between 1973 and 2008, before fracking, there were, on average, 21 earthquakes of a magnitude three and larger in the central and eastern U.S. In contrast, in 2014 alone there were 659. The U.S. Geological Survey (USGS) is conducting a study into the surge in quakes.

The bottom line is that there remains a lot of uncertainty about the impact of fracking.

What are government agencies doing to manage this situation? Currently, individual states are permitting fracking with some regulations attached, with the assumption that there will be no adverse impacts. If impacts are found, individuals or environmental groups can take legal action, but the burden of proof is on the injured parties. These parties are often property owners who do not have the financial resources to battle the drilling companies in court, and even if they did, the legal process is long and tedious, with little guarantee that damages will ultimately be awarded.

This unbalanced arrangement that rewards risk-taking by companies in relation to the environment can be devastating. For example, the Deepwater Horizon oil spill incident resulted from inadequate attention to the risks that the public was left to bear. Precautionary measures were known, but not taken. Investments in safety devices (like the acoustic blowout preventer) were not made. Corners were cut. The pursuit of short-term private profits motivated taking high risks with public assets.

Fracking, like deep water drilling, could be better managed by reversing the burden of proof.2 This implies requiring corporations and other private interests to internalize and monetize their risks to public goods. In many other parts of society, we require private interests to buy insurance to deal with the risks they impose on the public. For example, purchasing automobile insurance is now mandatory, and assurance bonds are often required from building contractors and mine operators for reclamation. Requiring assurance bonds or insurance forces private interests to internalize the risk of their activities before any damages occur. It gives them strong financial incentives to reduce risk, since it is their own money that they stand to lose.

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Adam Welz / CREDO Action
An anti-fracking demonstration in New York.

One way to monetize the risks of fracking would be to require private interests to post an ‘assurance bond’ large enough to cover the worst-case damages.3 Portions of the bond (plus interest) would be returned if and when the private interests could demonstrate that the suspected worst-case damages had not occurred or would be less than was originally assessed. If damages did occur, portions of the bond would be used to rehabilitate or repair the environment and to compensate injured parties. The critical feature is that the risk to the public asset is apparent to the private interests in financial terms before the fact, and not as a liability that may or may not be enforced after the damage occurs.

The EPA and State environmental management agencies have it within their power to require assurance bonds for fracking. Good, safe operators should have no problem with this requirement, and it could also reduce the time needed for approval. Posting a large enough bond would convince management agencies that the operators would do everything possible to prevent impacts, reducing the need for other regulations. Sloppy operators would be quickly driven out of the market. In all cases, the fracking operations would be performed more carefully, with strict attention to protecting the public asset. If damages did occur, there would be ready access to the financial resources to rectify the problem and compensate those affected. Two important considerations are that: (1) the size of the bond must be large enough to cover the worst case damages, and (2) the financial burden for monitoring the before and after environmental conditions should be on the operator, not the public.

Assurance bonds, properly applied, can shift the burden of proof for the impact of fracking to the parties that stand to gain from the activity, which is where it belongs. These bonds can internalize the risks of the activity and allow market incentives to work to protect the environment and the public.