Just in time for Earth Day, the Environmental Protection Agency (EPA)  issued a final rule on hydraulic fracturing (a.k.a. “fracking”) this past week.  Remarkably, it looks like the rule passes a benefit-cost assessment without even quantifying any benefits.  Why is that?

On the one hand, it isn’t clear what the benefits are.

While we expect that these avoided emissions will result in improvements in air quality and reductions in health effects associated with HAP, ozone and particulate matter (PM), as well as climate effects associated with methane,we have determined that quantification of those benefits and co-benefits cannot be accomplished for this rule in a defensible way. This is not to imply that there are no benefits or co-benefits of the rules; rather, it is a reflection of the difficulties in modeling the direct and indirect impacts of the reductions in emissions for this industrial sector with the data currently available.

The more remarkable result is that the costs are negative.  That is, the agency projects the industry will save millions of dollars by complying with the regulations. And, why is that?

The engineering compliance costs are annualized using a 7-percent discount rate. The negative cost for the final NSPS reflects the inclusion of revenues from additional natural gas and hydrocarbon condensate recovery that are estimated as a result of the NSPS. Possible explanations for why there appear to be negative cost control technologies are discussed in the engineering costs analysis section in the Regulatory Impact Analysis (RIA).

Notice they are discounted at a (real) 7 percent rate.

Here’s the table:

Final NSPS

Final NESHAP

Final Combined

Total Monetized Benefits

N/A

N/A

N/A

Total Costs

-$15 million

$3.5 million

-$11 million

Net Benefits

N/A

N/A

N/A

Non-monetized Benefits

11,000 tons of HAP

670 tons of HAP

12,000 tons of HAP

190,000 tons ofVOC

1,200 tons ofVOC

190,000 tons of VOC

1.0 million tons of methane

420 tons of methane

1.0 million tons of methane

Health effects of HAP exposure
Health effects of PM2.5 and ozone exposure
Visibility impairment
Vegetation effects
Climate effects

As you read the table, HAP is hazardous air pollutants, VOC is volatile organic compounds, and PM2.5 is little bitty pieces of particulate matter. As for NSPS and NESHAP, the rule is “Oil and Natural Gas Sector: New Source Performance Standards and National Emission Standards for Hazardous Air Pollutants Reviews,” and you can find the pre-Federal Register copy here.

Economists are often bemused by the idea that federal agencies can point to big, tasty profits being left on the table by the private sector, but I’m not really in position to say.

I heartily recommend that you sit down and plow through all 588 pages of it, if you want a real education on how the regulatory process works. Though, you’ll probably get the gist of it within the first 450 or so pages.

Here are the Wall Street Journal and the New York Times on the story.