THE ECONOMICS OF FRACKING: THE UNCUT

MATERIAL OF DR. MICHAEL BRADFIELD

Posted on October 24, 2014 by Nofrac Leave a comment
Dr. Michael Bradfield is an economist ho served on the Nova !cotia "nde#endent
$evie of %ydra&lic 'ract&rin(. )et his name does not a##ear on any of the
cha#ters in the %ydra&lic 'ract&rin( $evie 'inal re#ort.
*t a #&blic tal+ at ,hin+er-s Lod(e in P&(ash, a&dience members as+ed Dr.
Bradfield hy he had not a&thored a cha#ter of the $evie-s 'inal $e#ort.
Bradfield e.#lained that the material he had s&bmitted for the re#ort had not
been acce#table to some #anel members, and as either heavily edited or not
incl&ded in the introd&ctory or the s&mmary and concl&sions cha#ters for hich
they ere intended.
NO'$*/ re0&ested and received #ermission from Dr. Bradfield to ma+e his
&n#&blished material available to the #&blic.
,he 1conomic, !ocial, and 1nvironmental "ss&es of %ydra&lic 'ract&rin( by Dr.
Michael Bradfield as #re#ared by Dr. Bradfield in May 2014 to #rovide an
economic bac+(ro&nd for the $evie re#ort, to be #art of the introd&ctory
cha#ter.
,he 1conomic /onte.t as #re#ared to o&tline economic iss&es in Nova !cotia for
the introd&ctory cha#ter of the re#ort, and to #rovide an economic s&mmary for
the concl&din( cha#ter. The paper was circulated to the other panel
members in July 2014.
Dr. Bradfield is an internationally cited economist ho ta&(ht at Dalho&sie
2niversity for 34 years. %is s#ecialty is $e(ional 1conomics. %is many articles
cover a ran(e of to#ics incl&din( forei(n investment and /anada-s ener(y
#olicies.
Bradfield has #re#ared briefs for civil society (ro&#s on iss&es relatin( to ener(y,
social 5&stice, and the environment for $oyal /ommissions and all levels of
(overnment incl&din( the National 1ner(y Board, the Ontario 1ner(y Board and
the %o&se of /ommons.
Bradfield ,he 1conomic, !ocial and 1nvironmental "ss&es of %ydra&lic 'ract&rin(
May 2014
Bradfield ,he 1conomic /onte.t of %' in N!
http://www.nofrac.com/the-economics-of-fracking-the-uncut-material-of-dr-michael-bradfield/
The Economic, Social, and Environmental Issues of Hydraulic Fracturing
by Dr. Michael Bradfield, May 2014, for the Nova Scotia Hydraulic
FracturingShale !a" #evie$ led by Dr. David %heeler.
&t i" difficult to "e'arate the econo(ic fro( the "ocial and environ(ental i""ue" a" they are
co('letely intert$ined. )ur *econo(ic+ activitie" occur $ithin "ocial and environ(ental conte,t"
$hich are the("elve" affected by the "tructure and nature of our econo(ic activitie". -he ba"ic
i""ue of econo(ic" i" ho$ our 'roduction and con"u('tion activitie" u"e re"ource" directly but
al"o have "ignificant effect" on hu(an health and on $ell.being directly, on "ocial "tructure",
and on the environ(ent $hich "u''ort" all life.
/cono(ic" "tudie" ho$ $e organi0e our activitie" and u"e our re"ource" 1hu(an, built, and
natural2 to deter(ine $hat good" and "ervice" $ill be 'roduced and in $hat 3uantitie", ho$ they
$ill be 'roduced, and ho$ they $ill be "hared.
)ne $ay to do thi" i" through the *free+ (ar4et, free of govern(ent interference becau"e the
*'erfectly co('etitive+ (ar4et of econo(ic theory 'redict" that individual "elf.intere"t $ill be
controlled by co('etition in the (ar4et 'lace to allocate re"ource" to tho"e good" $hich are in
the 'ublic intere"t 1ulti(ately defined in a (ar4et econo(y a" con"u('tion good"2.
Ho$ever, the condition" re3uired for (ar4et" to even a''ro,i(ate the theoretical (odel are
"tringent5 for e,a('le, no one ha" (ar4et 1or 'olitical, legal, or "ocial2 'o$er, there are no
barrier" for fir(" to enter an indu"try, everyone ha" full technical and (ar4et infor(ation, all
'rice" reflect the true co"t" of a 'roduct and of it" con"u('tion. -he"e condition" are "eldo(,
if ever, "ati"fied in the real $orld. /,ce'tion" to the"e condition" in a 'rivate (ar4et are the
"ource of *(ar4et failure+ and re3uire intervention. -o believe that unre"tricted "elf.intere"t $ill
lead the (ar4et to efficient outco(e" i" a4in to believing that $e can build a $orld ba"ed on a
theory of 'hy"ic" in $hich friction doe" not e,i"t. Nonethele"", (any dro' the *'erfect+ and
ignore the *co('etitive+ and 'ut their faith in *the (ar4et+.
Becau"e of (ar4et i('erfection", $e need a *(i,ed+ econo(y $ith the (a6ority of activitie" in
'rivate (ar4et", but govern(ent" 'roduce "o(e good" and (any "ervice", levy ta,e", and
(a4e 'urcha"e" fro( the 'rivate "ector. &n addition, govern(ent" (a4e and enforce
regulation" for 'er"onal and co((ercial activitie", "uch a" the rule" of o$ner"hi' and contract".
Few economic activities do not involve some degree of market failure. Hydraulic
fracturing is a concern because it does not meet many of the necessary conditions of the
idealized erfectly cometitive market. )ne of the indu"try7" (o"t i('ortant li(itation" i" the
'o""ibilitie" for e,ternalitie" 8 co"t" that are not borne by the "eller and buyer but are i('o"ed
on "o(eone 1or *thing+ in ter(" of the environ(ent2 out"ide a (ar4et tran"action. %hile
e,ternalitie" i('o"e real co"t" 1de"troyed re"ource" or the u"e of re"ource" to avoid da(age or
to (itigate it2, they are not reflected in the 'rice of the activity creating the"e e,ternal co"t".
-hu" the 'rice . the (ar4et7" (ea"ure of value . fail" to reflect the co"t" to all tho"e affected by
a tran"action.
1
-o u"e %ilde7" definition of a cynic, the (ar4et (ea"ure" *the 'rice of everything and the value
of nothing+. -hi" vie$ "ugge"t" that if "o(ething cannot be (ea"ured, it i" not i('ortant9 no
'rice : no value. ! strictly market transaction ignores the health, social, and
environmental imacts it may imose on others, even though "ociety (ay 'ut a very high
value on the affected area".
E"ternalities
%hen e,ternalitie" e,i"t, (ar4et 'rice" no longer reflect the full co"t of a good. ;" (o"t of our
econo(ic (ea"ure" are ba"ed on 'rice", $e cannot "ay that "o(ething i" *efficient+ "i('ly
becau"e the 'roducer (a4e" a 'rofit and the con"u(er i" "ati"fied $ith the 'rice 'aid. %hen
e,ternalitie" are 're"ent, "ociety bear" additional co"t" $hich (u"t be recogni0ed and factored
into the 'rice for an activity to truly (a,i(i0e the benefit" for "ociety.
%ith hydraulic fracturing, there are 'otential e,ternalitie" at each "tage, fro( e,'loration to
develo'(ent to 'roduction to deco((i""ioning. -he co"t" of "uch e,ternalitie" (u"t be
e"ti(ated to decide if thi" i" a viable $ay to acce"" an energy "ource. -he"e co"t" vary $ith
re"'ect to their geogra'hic i('act, their duration, and ti(ing, e.g., at the ti(e of an activity or
(uch later, 'erha'" long after 'roduction of unconventional ga" ha" cea"ed at a given "ite.
For in"tance, the develo'(ent "tage (ay affect the i((ediate area 8 bla"ting and the
(ove(ent of truc4" and e3ui'(ent affect the en6oy(ent 'eo'le have fro( their ho(e" along
the high$ay or near the $ell "ite. &n addition, the (ore ra'id deterioration of the road and other
co((on infra"tructure generate increa"ed con"truction or (aintenance co"t". <onge"tion on
road" (ay i('o"e "ocial 1ti(e2 rather than direct financial co"t" on it" u"er", but the"e are
co"t" nonethele"".
-he o'eration of a $ell "ite involve" bringing $ater and che(ical" in and ta4ing 'roduct and
$a"te $ater out. -hi" generate" increa"ed truc4 traffic $ith e,ternal co"t", including "afety
concern". -he 'roduction "tage (ay (ean the flaring of *"our ga"+ $hich (ight affect the
health of 'eo'le and their ani(al", a" $ell a" of $ild life, in the area.
-he geogra'hic i('act of the 'roduction e,ternalitie" (ay be broader than the i((ediate area.
The flow of ground and subsurface water may carry fracking fluids away from well sites,
and methane and chemicals may eventually work their way to the surface. -he i('act" on
'eo'le and the environ(ent are uncertain but 'otentially "eriou" and long.la"ting.
&t i" in the "elf.intere"t of both the 'roducer and the con"u(er to reduce their o$n financial
co"t" by generating e,ternalitie" 8 'rofit" increa"e and 'rice" fall. )f cour"e, both 'roducer"
and con"u(er", becau"e of effect" on their environ(ent and ta,e", (ay be indirectly affected
by their o$n e,ternalitie", but u"ually by only a tiny a(ount of the e,ternal co"t" they i('o"e on
other" 1and "ave for the("elve"2.
%hile di"cu""ion of e,ternalitie" i" often focu"ed on 'roduction, "o(e of the longe"t.la"ting and
broade"t e,ternalitie" of frac4ing are li4ely to occur fro( con"u('tion. /ven if unconventional
ga" ha" a lo$er carbon foot'rint than other energy "ource", if it delay" the nece""ary "hift to
2
rene$able energy "ource", it $ill "till add to greenhou"e ga"e" and therefore to global $ar(ing.
-hi" i" an e,ternality that i" largely borne out"ide Nova Scotia and <anada, but nonethele""
(u"t be con"idered in a""e""ing the real co"t" of unconventional ga". %e cannot 6u"tify
(a4ing our econo(ie" le"" co"tly financially by i('o"ing real co"t" on other".
#ealing with e"ternalities
-here are (any $ay" to deal $ith e,ternalitie" . $ithin the (ar4et, $ith govern(ent "etting
u''er li(it" on the level of e,ternalitie" or on the activitie" that generate the(, through the
regulation of tho"e activitie", or through an outright ban on tho"e activitie".
Many argue that (ar4et failure due to e,ternalitie" can be "olved by the (ar4et it"elf. So(e
'ro'o"e "elf.regulation by the fir(" involved, 6ointly agreeing on behaviour" to avoid generating
e,ternalitie" in order to enhance their individual co('etitive 'o"ition. Self.regulation ha" li(ited
'otential, given the incentive" to "et the bar lo$, under.re'ort incident", and the difficultie" of
enforce(ent for a voluntary a""ociation.
&n theory, the "olution i" for the (ar4et to *internali0e the e,ternality+, i.e., force the (ar4et
tran"action to include the co"t" of the e,ternalitie". &n thi" "cenario, govern(ent7" function i" to
e"tabli"h the legal fra(e$or4 8 "et u' auction" for 'ollution right" or re3uire full legal liability to
co('en"ate tho"e forced to bear the e,ternal co"t". -hi" i" the rationale for the Nova Scotia
/nviron(ent ;ct re3uiring that tho"e $ho 'ollute (u"t 'ay the co"t" they i('o"e.
i
Faced $ith
the"e additional co"t", fir(" $ould choo"e the 'roduction (ethod $hich i('o"e" the lo$e"t
financial co"t and, therefore, the (o"t efficient technology, a" the real co"t of 'roduction and
di"tribution thi" $ould no$ include thi" financial co"t.
Both of the"e (ar4et "olution" have funda(ental fla$".
&n an auction, the govern(ent e"tabli"he" a (a,i(u( 3uantity of a 'articular ty'e of 'ollution
and auction" off the right" to generate it. -he auction "u''o"edly e"tabli"he" the value to
"ociety of the e,ternal co"t" 8 the fir(" $hich "ave the (o"t fro( being allo$ed to 'ollute $ill
outbid the other". -hi" financial co"t $ill increa"e 'rice" and the 3uantity de(anded $ill fall, "o
there $ill be le"" 'ollution. /,ternalitie" are 'aid for and their level reduced.
But doe" an auction 6u"t "ell the right to 'ollute= -he rebuttal to thi" i" that anyone can 6oin the
auction. -ho"e $ho $ant to avoid the e,ternality or to lo$er the level of 'ollution to an
*acce'table+ level 1e.g., the level at $hich natural "y"te(" can handle it2 can 'ut their (oney
$here their (outh i" and outbid the indu"trie" $ho "ave other re"ource" by being allo$ed to
'ollute.
-he 'roble( i" that the 'olluting fir(" have the infor(ation about the nature and 3uantity of
their 'ollutant", they 4no$ the i('lication" of lo"ing the auction, and they have fund" to bid. )n
the other hand, tho"e affected by the e,ternalitie" are u"ually di"'er"ed, have li(ited
infor(ation, and lac4 the organi0ation and funding to effectively engage in the auction. -hey are
often (arginali0ed, for in"tance "(all far(er" or Fir"t Nation" 'eo'le $ith li(ited fund" or
'olitical influence. Moreover, they $ould "uffer fro( the *free rider+ 'roble( 8 "o(e 'eo'le
3
$ould not offer to fund a 6oint bid, ho'ing that $hat other" do $ill be "ufficient to 'rotect the(
fro( the e,ternality co"t".
-he"e difficultie" are le""ened, but not re(oved, $ith the liability a''roach in $hich the
'otential 'olluter i" re3uired to get full liability in"urance. -he theory i" that the in"uring
co('any $ill conduct due diligence and a""e"" the 'robability of an event generating
e,ternalitie", their li4ely i('act" and co"t", and the 'o""ibility of an e,'en"ive legal battle to
e"tabli"h the liability and the a(ount. -he"e e"ti(ated co"t" $ould then be 'art of the co"t of
the liability in"urance 're(iu(" for the 'otential 'olluter. &f the"e 're(iu(" are too high,
'roduction $ill not occur and the e,ternalitie" $ill not be generated 8 the 'roduct i" not $orth it"
co"t and the intere"t" of "ociety are "erved.
But even thi" doe" not (ean that the 're(iu(" $ill accurately reflect the 'robable e,ternal
co"t". -he in"urance co('any7" e"ti(ate i" li4ely to be lo$er than the actual co"t". -heir
e"ti(ate" are di"counted by the 'robability of a "ucce""ful "uit $hich de'end" on the ability of
tho"e affected by the e,ternality to (ount their ca"e, by the rigour $ith $hich the la$ i" a''lied,
and by the in"urance co('any7" la$yer"7 "4ill". Moreover, the 'olluter can e,'en"e their legal
co"t" again"t 'rofit", lo$ering their cor'orate inco(e ta,e" . the 'ublic 'ay" 'art of the co"t
$hich the co('any incur" to avoid 'aying co('en"ation for the da(age" it ha" cau"ed.
-hu" re3uiring full liability for e,ternalitie" ha" the "a(e 'roble(" a" the auction a''roach. The
olluter knows more about its emissions than others, and has the financial self$interest
to challenge anyone who might sue them. -he onu" of 'roof i" on the co('lainant" $ho
face the infor(ation, organi0ation, and funding 'roble(" found $ith auction". &n addition, the
'olluter" (ay engage in a variety of tactic" to confu"e the 'ublic, "uch a" funding "u''o"edly
inde'endent thin4 tan4" to 3ue"tion the "cience around the nature and "ource of the
e,ternalitie" and initiating Strategic >a$"uit" ;gain"t ?ublic ?artici'ation 1S>;??"2, legal effort"
to head off legal action by tho"e affected by 'ollution.
Further, the govern(ent (ay be lobbied to relieve an indu"try of it" liability e,'o"ure. ; ca"e in
'oint 8 nuclear 'o$er. &n <anada and the @.S., the nuclear electric energy indu"trie"
"ucce""fully lobbied to have ca'" 'ut on their liability in the event of a (a6or nuclear accident.
-hey argued that, if re3uired to 'ay the in"urance 're(iu(" for full liability, they $ould be 'riced
out of the electricity (ar4et. /ffectively, thi" $a" an ad(i""ion that the e,ternalitie" $ere "o
large, nuclear energy $a" not $orth the ri"4. -he ca' on their liability (ean" that they can
co('ete only by e,'o"ing "ociety to con"iderable unco('en"ated ri"4". -he ca' (ean" that
'rofit" are 'rotected, but not 'eo'le nor the environ(ent.
-hi" i" not to argue that auction" or full liability have no 'lace in the 'olicy tool 4it, but the"e
a''roache" do not re(ove the funda(ental cau"e" of (ar4et failure. -he"e a''roache" (u"t
be carefully crafted to avoid the 'itfall" of the (ar4et "olution". -he need for "trong regulation
"hould be obviou".
%egulation & 'est ractice, Highest Standards, (itigation, and Technology
4
)ften regulation and 'enaltie" for environ(ental and health da(age are cited a" ta4ing care of
the i""ue of e,ternalitie". Faced $ith "tringent rule" and "trong enforce(ent, it i" clai(ed that
fir(" $ill not only be "en"itive to the i""ue of e,ternalitie" but "ee4 to 'erfor( to the highe"t
"tandard" by u"ing the be"t 'ractice" and the late"t technologie". (oreover, we are to believe
that any roblems that might nonetheless occur will be dealt with by the firms) mitigation
lans. Is this sufficient*
Ho$ "tringent are the regulatory regi(e"= Fir"t con"ider $ho ha" the (o"t infor(ation to
deter(ine e,ternal effect" and co"t", the govern(ent or the indu"try= Nor(ally it i" the latter.
-herefore it i" co((on 'ractice for govern(ent to hire tho"e be"t infor(ed to de"ign the
regulation" 8 insiders from the industry
1
. But once they have hel'ed de"ign the regulation"
the"e 'eo'le often leave govern(ent 8 for 6ob" bac4 in the indu"try. -he deregulation of the
financial "ector and the cri"i" of 200A are a clear e,a('le of thi". Moreover, (any govern(ent
regulator" eventually retire and al"o 6oin the indu"try.
This revolving door between regulated industries and the agencies which olice them
clearly raises concern about how stringent the regulations are and how vigorously they
are enforced. -hi" concern i" heightened $hen the 'ublic "ee" (alleable 'olitician"
2
$ho
adhere to the free (ar4et (ythology and in"truct enforce(ent agencie" accordingly. Moreover,
regulators trying to enforce the rules often rely on the regulated firms for information. &t
i" in"tructive that the current debate about tran"'orting ga" and oil ha" led to di"clo"ure" that
'i'eline and rail co('anie" have not fulfilled their obligation" to re'ort lea4" or accident".
3

;nother i""ue re"'ecting the effectivene"" of regulation and for(" of control i" that e,ternal
co"t" often ta4e a long ti(e to be recogni0ed but cor'oration" have a very "hort 'rofit hori0on
and 'olitician" a "hort 'olitical hori0on. -he"e li(ited hori0on" fit nicely $ith "hort.ter( benefit"
of activitie" that need to be regulated. Nova Scotian" are 4eenly a$are of the"e difficultie" fro(
1 For instance Albertas Premier Redford, appointed Gerard Protti, a founder of the Canadian Association of
Petroleum Producers, as chief of Alberta's ne ener!" re!ulator#
2 For instance, a federal $inister of the %n&ironment called en&ironmentalists 'terrorists( for )uestionin! the
e*pansion of the tarsands#
3 $oreo&er, it has been reported that the raila" association had, prior to the tra!ed" of +ac $e!antic, lobbied for
a chan!e in the re!ulations to re)uire feer and less intensi&e inspection of trains safet" procedures and
e)uipment
,
e,'erience" "uch a" the %e"tray
4
(ine di"a"ter and the colla'"e of the cod "toc4"
,
. In the
case of hydraulic fracturing, the ossible migration of fracking fluids into wells or
a+uifers could take decades.
Ho$ (uch co(fort can $e ta4e in *be"t 'ractice+ and *highe"t "tandard"+= -he"e are nor(ally
the goal" of regulation but they do not guarantee that e,ternalitie" $ill be eli(inated or fully
co('en"ated for. &n addition, they (ay only (ean that 'roducer" $ill (eet the "tandard" if
they do not cost too much and the enalties for ignoring the regulations are high.
Moreover, relying on evolving technologie" to eventually deal $ith the i""ue" i" an ad(i""ion
that e,i"ting 'ractice" are generating e,ternalitie"9 'roduction "hould $ait until ade3uate
technologie" are available and thoroughly te"ted. ;gain, the nuclear 'o$er indu"try i"
in"tructive, a" no "ati"factory (ethod of di"'o"al of their radioactive $a"te ha" yet been found.
Si(ilarly, the 'ro(i"e of (itigation i" no (ore than a 'ro(i"e to try to avoid or to undo or (a4e
u' for e,ternalitie". (itigation lessens the imact but does not remove it. !s some of the
e"ternalities will involve health, social, and environmental imacts that cannot be
reversed, mitigation is not a guarantee that e"ternalities will be fully accounted for.
,ther costs and concerns
#elated to the i""ue of e,ternalitie" i" the 3ue"tion of the u"e of the de.co((i""ioned $ell."ite".
<an the "ite" be returned to their original u"e or converted to ne$ u"e" or do the abandoned
$ell" (a4e the "ite" un"uitable for other u"e" even if the co('any follo$" through $ith it"
re(ediation 'lan"=
-here i" al"o the 3ue"tion of infra"tructure 8 $ill the co('any build and (aintain all
infra"tructure "'ecific to it" need"= %ill it 'ay the ta,e" to build and re'air road" and other
'ublic infra"tructure that it $ill "train by it" additional u"e= %here $ill the co('any get the large
a(ount" of $ater re3uired and ho$ $ill thi" diver"ion of $ater affect it" current environ(ental
and other u"e". %hat $ill the co('any do $ith the $a"te $ater=
;nd $hat i" the net i('act of a 'ro6ect on other ta,'ayer"= <o('anie" often cite the ta,e" they
$ill add to 'rovincial or local coffer", but ignore the +ta, e,'enditure"+ 8 the ta, revenue" lo"t by
giving 'otential e('loyer" ta, conce""ion" 8 and the direct ca"h "ub"idie" often e,'ected. &"
thi" an indu"try $here "uch "'ecial treat(ent i" e,'ected, even de(anded=
&n addition there i" the 3ue"tion of royaltie" and cor'orate ta,e" 8 doe" the 'rovincial
govern(ent "i('ly a''ly a fi,ed 'ercentage of the federal 'rofit ta, or doe" it have it" o$n
cor'orate ta, for( a" it doe" for 'er"onal inco(e ta,= %hat royalty regi(e a''lie"= <an the
4 -n the .estra" case, the coal compan" i!nored safet" re!ulations and tampered ith safet" monitors#
, /he politicians i!nored the ad&ice of biolo!ists and inshore fishermen and appro&ed unsustainable )uotas for the
traler fleet#
0
'rovincial govern(ent a''ly it" o$n "et of ta, rule" or other rule", for in"tance banning S>;??"
1a" Buebec ha" done2 or legi"lating that a co('any cannot deduct fro( it" 'rofit" the legal fee"
to finance a S>;?? or the co"t of adverti"ing to "$ay the 'ublic=
-here are al"o 3ue"tion" of the right" of o$ner"hi'. %ith (o"t co((oditie", 'rivate o$ner"hi'
(ean" 100C control of an a""et. Ho$ever, in Nova Scotia, the ?rovince clai(" "ub"urface
right". -hi" i" even (ore co('licated $ith hori0ontal drilling. &f a co((unity 1e.g., Sac4ville2
i('o"e" a ban on frac4ing, doe" thi" 'revent a co('any fro( "etting u' on it" boundarie" and
frac4ing underneath= Ho$ ea"y i" it for a fir( to e,'ro'riate land fro( o$ner" $ho 'lace a
value on their land $hich i" above the going (ar4et 'rice= Do trade agree(ent", "uch a" the
N;F-; and the </-;, give a co('any the right to "ue a govern(ent for lo"t 'rofit" if, becau"e
of health or environ(ental i""ue", a govern(ent 'a""e" legi"lation $hich re"trict" frac4ing=
-here are other "ource" of (ar4et failure in dealing $ith the energy i""ue. &n 'erfectly
co('etitive (ar4et", all actor" are 're"u(ed to have full infor(ation to a""e"" a tran"action 8
for in"tance, (unici'alitie" need to 4no$ $hat i" in the $a"te $ater and ho$ it can be treated.
Ho$ever, not all 6uri"diction" get full infor(ation. Mar4et failure al"o occur" $hen tran"action"
are (ade bet$een agent" $ith une3ual 'o$er in the (ar4et 'lace 8 $hat bargaining 'o$er i"
held by "(all to$n" and even "(all 'rovince" and by $or4er", co('ared to the co('anie" $ith
$hich they deal= Not everyone ha" viable alternative", even if legally treated a" e3ual". *-he
la$ treat" rich and 'oor ali4e9 both are 'rohibited fro( "lee'ing under bridge"D+ 1;natole
France2
'enefits of unconventional gas
)f cour"e, to a""e"" any 'ro6ect, $e (u"t $eigh it" benefit" again"t it" co"t. &n a *free (ar4et+,
thi" i" the 'rivate calculu" in $hich there i" dee(ed to be a net benefit to "ociety if the 'roducer
can "ell it" 'roduct at a 'rice $hich cover" all the financial co"t" and leave" a 'rofit. ;" there
are "ignificant concern" about the e,ternalitie" involved, thi" (ar4et *te"t+ i" not ade3uate for
hydraulic fracturing.
-he 'ri(ary benefit of hydraulic fracturing i" that it give" acce"" to a ne$ "ource of energy, to
unconventional energy. ;" Nova Scotia i" heavily de'endent on i('orted energy, "o(e $ith a
high carbon foot'rint, at the right co"t unconventional ga" (ay be an i('ortant
0
alternative
"ource of energy. %ithout detailed evidence of it" 'otential and real co"t", the viability of
unconventional ga" in Nova Scotia i" not yet deter(ined.
&f it i" de"irable to e,tract "ignificant a(ount" of unconventional ga", $ill Nova Scotian" have
acce"" to it= %ill the "i0e and location of the ga" de'o"it" 6u"tify an internal di"tribution "y"te(
or $ill the bul4 of the "u''ly be e,'orted= %ill the ga" be di"tributed by truc4 or 'i'eline and
$hich i" "afer=
0 but perhaps relati&el" short1term alternati&e as !reener ener!" technolo!ies are de&eloped and become
competiti&e
2
&f the ga" i" e,'orted, the energy advantage of the "ector $ould be that the e,'ort dollar" could
be u"ed to i('ort other "ource" of energy $ho"e 'rice and "u"tainability are better than our
o$n energy "u''lie". -hi" de'end" on the a(ount of the e,'ort revenue $hich "tay" in Nova
Scotia. -hi", in turn, de'end" on the ca'ital inten"ity of the indu"try 1revenueca'ital co"t"2, the
$age" and the lea"e rental" 'aid to Nova Scotian" for the 'lace(ent of $ell'ad" and 'i'eline",
and the e,tent to $hich the indu"try i" o$ned $ithin Nova Scotia, and the royalty revenue".
&n the be"t.ca"e "cenario, the indu"try $ould be locally o$ned, 'erha'" by (unici'al utilitie",
e('loying local $or4er" 1(en and $o(en2 $ho have the nece""ary "4ill" $hen needed. -heir
average $age" $ould be above current level" 1and above the (edian $age even (ore "o, for
develo'(ent of the indu"try to reduce the rate at $hich inco(e di"'aritie" are increa"ing2.
Much of the 'hy"ical ca'ital re3uire(ent" $ould al"o be (et locally, increa"ing the 'o""ibility of
develo'ing a long.ter( ca'ital.good" indu"try. Si(ilarly, the financial ca'ital for the indu"try
$ould be fro( local inve"tor" "o that both dividend" and control re(ain in Nova Scotia.
-he be"t.ca"e "cenario $ould include other "'in.off" to the local econo(y, "uch a" "u''lying
the in'ut need" of the indu"try and engaging in re"earch on the 'roduction technology and
alternative u"e" for thi" technology and the ga" it"elf. )f cour"e, the be"t.ca"e "cenario
a""u(e" that the unconventional ga" re"erve" $ould be viable for at lea"t a generation, "o that
the ca'ital, $or4er, and infra"tructure inve"t(ent" can be fully 'aid for $ithin the life.ti(e of the
"ector.
-o achieve the nece""ary condition" for the be"t.ca"e, the "ector "hould develo' "lo$ly,
allo$ing local intere"t" to ad6u"t to it" de(and" and e,'ectation". Slo$ gro$th lengthen" the
duration of the "ector, allo$ing a (ore cautiou" a''roach to dealing $ith the e,ternalitie". &n
"o(e ca"e", a" in !er(any, their "tringent environ(ental la$" led to *green+ indu"trie" $hich
"erve local need" and develo'ed an e,'erti"e $hich generate" e,'ort" of both green 'roduct"
and green con"ulting. Note, ho$ever, that the e,'ort" are not the goal9 (eeting local need" i"
the goal. -he e,'ort "'in.off" are an indication of the "ucce"" in (eeting local need" and the
co('etitive edge thi" give" !er(an fir(".
)f cour"e, $e cannot e,'ect the indu"try to generate the be"t ca"e "cenario. Nonethele"", it
'rovide" a bench(ar4 again"t $hich to a""e"" the benefit" the indu"try (ay generate,
-onclusions
!iven the nu(ber, co('le,ity, and uncertainty of the e,ternalitie" and other i""ue" involved in
hydraulic fracturing, if or $hen frac4ing i" 'er(itted, the a''ro'riate regulation $ill be co('le,,
difficult, and co"tly becau"e it (u"t be e,ecuted rigorou"ly and $ith the highe"t 'rofe""ional
"tandard". -he co"t "hould be borne by the indu"try "o that it" 'rivate calculu" reflect" all of
the "ocial co"t" incurred.
-he i""ue" rai"ed here indicate the (any area" $here (ore infor(ation i" nece""ary to co(e
to gri'" $ith the large and long.la"ting i('act" of hydraulic fracturing. -he"e are addre""ed in
the cha'ter" that follo$.
3
-he /cono(ic, Social, and /nviron(ental &""ue" of Hydraulic Fracturing $a" $ritten by Dr. Michael
Bradfield, 'anel (e(ber of the &nde'endent #evie$ of Hydraulic Fracturing, to 'rovide an econo(ic
analy"i" cha'ter for the #evie$ re'ort. ;" (uch of thi" (aterial did not a''ear in the ?anel7" final re'ort,
Dr. Bradfield ha" agreed to (a4e hi" original (aterial available to the 'ublic through thi" $eb"ite.
May 2014
4
i %ast Coast %n&ironmental +a, 'Failure to %nforce5 /ime for transparent and effecti&e en&ironmental enforcement in
6o&a 7cotia( 89une 2:14; <nline at http=>>#ecela#ca>421failure1to1enforce1final1?une12:14#html