Who should regulate shale gas development? Today, almost all regulation is at the state level. In a July 6th New York Times op-ed, Harvard law professor Jody Freeman called for a larger federal role in the form of national minimum standards. In a letter to the NYT, the American Petroleum Institute’s Erik Milito argued the opposite—claiming federal regulation would be clumsy and overly restrictive. This debate has philosophical roots. Environmentalists often have a reflexive mistrust of state regulation because they fear industry’s influence on state regulators (i.e., industry “capture”). Industry often has a distrust of the federal government because they fear aggressive, inflexible regulation. These fears are based on real experience so they aren’t unreasonable. However, state regulation often is environmentally effective, and federal regulation is often flexible and realistic.
Because these old fears can get in the way of clear thinking, it's worth taking a look at first principles. If we were working from a blank slate, environmental risks would be most efficiently regulated by a jurisdiction that's exactly the same size as the area that is vulnerable to those risks. In economic terms, such a jurisdiction perfectly internalizes externalities. This means different risks from shale gas development—such as those from air, surface water, and groundwater pollution—may best be regulated at different government levels. Federal, state, multistate, and local regulation might all have a role to play.
This basic principle is important, but it’s not the whole story. For one thing, centralizing regulation has advantages. Higher levels of government have bigger budgets, can hire the best talent, and benefit from economies of scale. They also may be harder to capture. On the other hand, local governments have the best knowledge of local conditions and preferences. Moreover, it’s often not obvious which regulations are the most effective. Decentralized regulation allows different approaches to be tested. In other words, there are tradeoffs.
The best illustration of these issues is the paradoxical positions held by industry and environmentalists. Regulating closer to the source of environmental risk lets communities decide what level of risk they want to accept—Texans, with long experience of oil and gas drilling, may have very different views on shale gas risks than people in New York or Pennsylvania. This leads many environmentalists to support local (i.e. municipality-level) regulation on democratic grounds. Lower-level regulation can also be cheaper, more responsive, and more cost-effective since regulators benefit from knowledge of local conditions.
This is part of why many in industry prefer state regulation over uniform federal rules . But the argument is not taken to its apparent logical conclusion—many in industry generally oppose local-level regulation, appealing to legitimate concerns about locals’ resources and capacity, and the cost of complying with many different rules. Of course, these same arguments can be used in favor of federal regulation, which the shale gas industry opposes (unlike firms in some other industries, like auto manufacturing).
Many environmentalists fear capture at the state level and therefore tend to support federal regulations (though they should remember that if you can capture the federal government, you only need to do it once!). It’s unclear why environmentalists generally don’t fear capture at the local level as much.
Our research on state-by-state regulations of shale gas development is somewhat relevant here. It shows that there is great heterogeneity among states in how they regulate any given facet of the process. This is some evidence that regulatory capture is not pervasive—otherwise we would see uniformly lax rules. But it doesn't show that capture isn't happening at all. At the extreme, states could be swept up in a regulatory race to the bottom, though we don’t see evidence for this. So capture is a risk, but it isn’t enough to resolve the question of which level of government is right for regulating which parts of the shale gas development process.
Many environmentalists also back federal regulation in part, we believe, because they think it will be stronger. But that won’t necessarily be the case. It might be ineffective, inefficient, or simply too weak. Experience shows federal environmental laws are hard to change, and the regulatory process can be very slow. Federal standards might also slow state efforts to impose stronger rules—states usually don’t take advantage of their right to regulate more strictly than the feds. If what you really want is stronger regulation, that should be your primary focus—not forum-shopping between the federal and state levels.
Different perspectives (and priors) lead industry and environmentalists both to reach paradoxical positions. Industry generally takes the Goldilocks view of the status quo—state regulation is just right. Environmentalists disagree, but usually support both centralizing and decentralizing regulation away from the state level. It will be impossible for any division of authority to satisfy everyone.
The right balance between federal and regulation (and the role, if any for local rules) is hard to determine. Returning to first principles, we can at least say that it's very unlikely that regulating exclusively at one level is the right answer. Freeman's proposal recognizes this (at least between the state and federal levels) by allowing states to be more restrictive than the federal minimums. This approach is surely better than simply federalizing all shale gas regulation (an approach apparently advocated by, of all people, George Mitchell, one of shale gas’ pioneering figures). But it’s not a perfect solution either. If the federal minimum is too stringent, it’s inefficient. If it is too low, it’s non-binding and a waste of time. For similar first-principles reasons, it’s also unlikely that industry’s preference for near-exclusive state-level regulation is the right approach.
Finding the right balance will be hard. But even if it were easy it wouldn’t be enough to ensure effective, efficient regulation. Regulation can and should improve at all levels of government. This means better and more transparent enforcement and record keeping, flexible performance standards, and better understanding of risks—not just tighter rules. For now, at least, these are more important goals than deciding which level of government should regulate.
