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Ed Dolan

Ed Dolan

Edwin G. Dolan holds a Ph.D. in economics from Yale University. Early in his career, he was a member of the economics faculty at Dartmouth…

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The Economic and Environmental Costs of Natural Gas Flaring

To an alien orbiting Earth in a flying saucer, natural gas flares would be one of the most visible signs of human life on earth. Notice I said “human life,” not “intelligent life.”

Flaring is the practice of burning off the natural gas that is produced in association with oil rather than piping it to market, using it at the wellhead, or re-injecting into the ground. Flaring was once common, but in more recent times, it has largely been limited to places like Russia and Nigeria. Now, though, it is becoming a big source of controversy in the United States. According to a recent New York Times article, some 30 percent of natural gas produced from rapidly expanding North Dakota oil fields will be flared this year—more than enough to heat every home in North Dakota through the state’s harsh winters. Elsewhere in this country, less than one percent of gas is flared.

Why would oil producers do anything so dumb? In Russia, gas is flared, in part, because the politically powerful monopolist Gazprom limits competitors’ access to pipelines. In Nigeria’s strife-ridden delta region, security concerns hamper gas collection. In North Dakota, though, it’s mainly a matter of economics.

One consideration is the cost of building pipelines to bring the gas to market. Oil  can be trucked to refineries even from small, remote fields. That doesn’t work for gas. Alternative ways of using the gas, like burning it on site to run equipment or to generate electricity also require costly investments.

A second factor is the wide gap between oil and natural gas prices. As recently as 2005, natural gas cost more than oil on an energy-equivalent basis. This year it has at times cost as little as a quarter as much, an all time record. No wonder drillers are going after oil, not gas, and are reluctant to invest in costly projects to bring the associated gas from their new oil wells to market.

A third factor further tilts the economic equation in favor of flaring: For many producers flaring looks like a free lunch, despite its significant opportunity costs. Most obviously, it contributes to climate change by adding carbon dioxide to the atmosphere, an estimated 2 million tons per year from North Dakota alone. If enough gas is flared in one place, local ambient air quality can also be affected, a growing concern even in that sparsely populated state. An additional opportunity cost of flaring gas is the increased national security burden that arises from dependence on foreign, rather than domestic energy resources.

The trouble is, North Dakota producers don’t necessarily pay these costs. State regulators do have the power to limit oil extraction from wells that are not equipped to capture natural gas. They can also tax flared gas as if it were marketed. However, temporary exemptions are routinely granted for new wells, and extensions can and are made available. (This short paper by Dave Hvinden of the North Dakota Geological Survey summarizes existing taxes and regulations.)

It’s a classic example of what I have elsewhere called the TANSTAAFL principle. There Ain’t No Such Thing as a Free Lunch. If you try to make something look free that is not, it ends up costing even more in the long run. Flaring gas is not really “free,” it just looks that way.
Producers that waste the stuff don’t pay, but the rest of us do, through the effects on climate change, air quality, and national security.

What’s the remedy? A long discussion thread sparked by the NYT article was full of suggestions. A federal law to ban flaring was the most popular solution. Others included leaving the oil in the ground, subsidizing pipeline construction, subsidizing new technologies for capture and use without pipelines, and taking the energy industry out of the hands of greedy capitalists.

All of these proposals miss the point. It never makes sense to offer people a free lunch and then turn around and force them or bribe them not to eat it. Instead, the right thing to do is to impose the full opportunity costs of all forms of energy on the people who produce it and use it. The most direct way  would be through some form of carbon tax, or another more nuanced tax that would take local air quality and national security into account along with climate change. In principle, a cap-and-trade scheme could also do the job.

A carbon tax that applied to all forms of energy, including flared gas, would provide a simple, straightforward solution to several problems that seem to vex participants in the debate over flaring.

First, it would tilt the efforts of producers back toward gas and away from oil, since oil would take a bigger hit than gas from a carbon tax.

Second, it would accelerate efforts to build pipelines. Some are already being built, but they would be built faster if it cost more to flare gas. There would be no need to subsidize pipeline construction, although there still might be a need to streamline the permitting process.

Third, it would put all available technologies on a level playing field. Pipelines are one option, but not always the best. It may be better to use the gas at the wellhead to generate electricity, which is sometimes cheaper to move to end users. Sometimes it is cheaper to use the gas to run equipment.

Fourth, a carbon tax would allow gas to be flared where that is the best solution, as it is likely sometimes to be. Pipelines and power lines are not only costly to build; they, too, can have adverse environmental impacts. For remote, low-volume wells, flaring may be the least bad solution. As long as the producers pay the full costs (including environmental costs) of all options, there is no need for an outright ban on flaring. However, the amount of gas burned off would no doubt be much closer to one percent than thirty.

Finally, we shouldn’t forget one last national security bonus from a tax on flared gas.
Extinguishing the North Dakota flares would increase the odds that any friendly aliens looking for intelligent life would land in the United States, maybe even bringing us some advanced clean energy technology. Any hostile aliens looking only for for a well-lit landing field would head for Russia or Nigeria.

By. Ed Dolan

"This post originally appeared on Ed Dolan's Econ Blog at Economonitor.com, and is reprinted here with permission."

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  • Anonymous on September 30 2011 said:
    I cannot emphasize enough that if buildup of carbon dioxide in the atmosphere is so serious a problem as to justify demanding 50+ MPG CAFE from the cars we drive, it is also a serious enough matter for Uncle Sam to demand that the oil business stop flaring natural gas right now. Granted, it may not be profitable to capture gas currently being flared and transport it to where one could utilize it. But if we were to go strictly by the bottom line, how much are we spending on the ever more sophisticated technology needed to achieve 35, 40, 50 or more miles per gallon?

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