Blog Post

Managing the Risks of Shale Gas Development Using Innovative Legal and Regulatory Approaches

At the heart of the US shale gas boom is a tense relationship between the desire for its economic benefits and the fear of its environmental costs. Regulatory measures and industry best practices can be adjusted to ease this tension, but the potential for incorporating innovative tools into new measures has been relatively understudied. Both regulation and litigation are already important components of shale gas risk mitigation, but understanding how these two systems can be improved requires an analysis of how they currently work together.

While state regulation receives the most attention in public discussions about shale gas risk mitigation, liability is probably the more important driver of risk-reducing behavior by operators. According to economist Steven Shavell, the decision to use regulation and liability to account for environmental risks should be based on the presence of information asymmetry, the ability of those at fault to pay, the ability of those at fault to avoid being sued, and the cost of the chosen action. Shavell noted that a mix of liability and regulation is often used in real-world settings, and that society generally gets the regulation–liability decision right.

We believe that this is true in the context of shale gas as well. While the presence of well-informed operators points toward a liability system, a potential lack of victim access to private information would require more regulation-based strategies. Calculating which is more cost-effective is difficult, because liability may be cost-effective for small scale events but less useful for dispersed harms that require complicated class-action lawsuits. Ultimately, the idea that there is a loose “division of labor” between the use of liability and regulation appears to hold true for shale gas development, though that’s not to say that switching between these policies won’t be beneficial in some existing situations.

Thus, rather than debating whether regulation is needed, we examine (in a new RFF discussion paper) ways in which the existing balance between regulation and liability can be made more efficient and effective. Operators and policymakers should consider market alternatives to prescriptive approaches when assessing the regulatory needs of a shale development project or region, and incorporate them when possible. Alternatives may focus on accounting for the social cost of externalities into a severance tax, or adapting existing environmental markets, such as tradable pollution permit programs, to shale gas development. Some may also choose to implement disclosure policies similar to the US Toxics Release Inventory program, though improvements in data availability will be needed to ensure that operators are held fully accountable for their environmental impacts.

Ultimately, policymakers should consider the wide range of options available to mitigate shale gas risks, because different strategies work best under different circumstances. Where regulation is needed or preferred, market-based policies have the potential to significantly reduce costs. In other situations, regulation may be avoided in favor of small changes to the existing liability system that can lower overall expenses. Going forward, research into alternative shale gas risk mitigation solutions should explore the empirical evidence of the efficiency and cost-effectiveness of current development.