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External Effects of Hydraulic Fracturing: Risks and Welfare Considerations for Water Supply in Germany

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  • Loucao, Sebastian

    (RWTH Aachen University)

Abstract

In this paper, we investigate the externalities related to hydraulic fracturing (‘hydrofracking’) in Germany, based on a detailed analysis of hydrofracking risks and potentials, and a stylized social welfare analysis related to adverse impacts of unconventional gas production on both surface and ground water resources and water supply. Natural gas is extracted by a profit-maximizing monopolist. Society faces several kinds of negative externalities, including additional water purification costs. The results of our sensitivity analysis show that the maximized welfare is in any case higher than the welfare resulting from the profit-maximizing quantities, as is predicted by our model. Also, the regulator always has to pay a subsidy in order to maximize welfare, which shows that the monopolist has an incentive to exercise his market power in order to keep the prices up for profit maximization. The monopolist’s profits are always non-negative, whereas the welfare-maximizing shale gas production generally reduces his profits. As profits do not drop below zero, however, there is no need to employ a second-best approach. We conclude that increasing costs and/or an increasing price sensitivity will lead to reduced profits and to reduced social welfare, while for an increasing choke price it is the other way around.

Suggested Citation

  • Loucao, Sebastian, 2014. "External Effects of Hydraulic Fracturing: Risks and Welfare Considerations for Water Supply in Germany," FCN Working Papers 4/2014, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN), revised Aug 2015.
    • Handle: RePEc:ris:fcnwpa:2014_004
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    References listed on IDEAS

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    1. Jenner, Steffen & Lamadrid, Alberto J., 2013. "Shale gas vs. coal: Policy implications from environmental impact comparisons of shale gas, conventional gas, and coal on air, water, and land in the United States," Energy Policy, Elsevier, vol. 53(C), pages 442-453.
    2. Popkin, Jennifer H. & Duke, Joshua M. & Borchers, Allison M. & Ilvento, Thomas, 2013. "Social costs from proximity to hydraulic fracturing in New York State," Energy Policy, Elsevier, vol. 62(C), pages 62-69.
    3. Christopher Jeffords, 2012. "Constitutional Environmental Human Right to Water: An Economic Model of the Potential Negative Impacts of Hydraulic Fracturing on Drinking Water Quantity and Quality in Pennsylvania," Economic Rights Working Papers 22, University of Connecticut, Human Rights Institute.
    4. Christopher Jeffords & Farhed Shah, 2013. "On the Natural and Economic Difficulties to Fulfilling the Human Right to Water Within a Neoclassical Economics Framework," Review of Social Economy, Taylor & Francis Journals, vol. 71(1), pages 65-92, March.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Natural gas; Fracking; Externalities; Water supply; Germany;
    All these keywords.

    JEL classification:

    • L71 - Industrial Organization - - Industry Studies: Primary Products and Construction - - - Mining, Extraction, and Refining: Hydrocarbon Fuels
    • Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices
    • Q34 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Natural Resources and Domestic and International Conflicts
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling
    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy

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