22 Feb 2017

What are the real costs of shale gas production?

Jan writes*

After the inauguration of Donald Trump the White House announced the new administration’s America First Energy Plan to foster the exploitation of shale oil and gas. The embracement of this ‘revolution’ would ‘bring jobs and prosperity to millions of Americans.’ The revenues from this cheap energy would then be used to increase public investment and boost the economy.

It is often argued that shale gas has not only contributed to low US gas prices but that its environmental footprint is also much cleaner compared to traditional fossil fuels. The problem with these assertions is that they either ignore or understate the environmental impact of methane emissions which escape to the atmosphere in the course of extracting and delivering shale gas. According to a recent study US methane emissions have increased by roughly 30 percent over the past 15 years. Although the authors are reluctant to link this increase directly to a particular source they do note that it coincides with the rise of shale gas production and other studies seem to confirm this notion.

These estimates are much higher compared to the official numbers reported by the U.S. Environmental Protection Agency (EPA). One reason for this disparity is the fact that the EPA relies mostly on numbers reported by the gas industry and is not allowed on most sites in order to conduct its own measurements. This selection bias might explain why official numbers on methane emissions are much lower than those published by researchers who rely on measurements taken in the atmosphere.

The problem with methane is that its environmental impact is much more drastic in the short-term compared to carbon dioxide. According to a report [pdf] published by the IPCC in 2013, the global warming potential of methane is 86 over a 20-year period and 34 over a century. In other words, methane traps 86 times more heat in its first 20 years after having escaped to the atmosphere compared to carbon dioxide. That means that even if comparatively little amounts of methane are leaked its immediate impact on climate change is relatively large.

It therefore needs to be assumed, that any potential environmental benefits that shale gas might have since it partly replaces traditional fossil fuels are offset by the devastating short-term impact of methane on climate change. In order to determine the exact methane leakage percentage in the shale gas production, independent inspectors need to be allowed to access any operator’s site. Further, politicians and society have to understand that current gas prices do not reflect the true costs of shale gas production since the gas industry is allowed to dump part of its production costs on the whole society - for free!

Trump might be right that shale gas production keeps gas prices low and creates new jobs but if costs outweigh benefits, then the whole undertaking is inefficient and you are doing more harm than good. This is basic economics. He should understand that, especially as a businessman.

Bottom Line Methane, which is leaked in the course of producing shale gas, has a much bigger environmental footprint compared to carbon dioxide. This externality needs to be taken into account when politicians favour shale gas over conventional gas due to the supposedly low production costs of shale gas.

* Please comment on these posts from my environmental economics students, to help them with unclear analysis, alternative perspectives, better data, etc.