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Governance of shale gas development: Insights from the Bloomington school of institutional analysis

Abstract

The boom in shale gas production has been accompanied by concerns that polycentricity, whereby multiple levels of government share regulatory authority, has resulted in an inefficient and ineffective governance. The Bloomington School of institutional analysis suggests otherwise. Drawing on the work of Elinor and Vincent Ostrom, we clarify a diverse regulatory response to shale gas development within federations may be appropriate depending on the physical context of shale gas development, local demand for economic development (including geology, geography, and the built environment), the regulatory capacity of local governments, uncertainty about the appropriate regulations to address externalities from shale gas production, and the extent of inter-jurisdictional coordination problems. We apply the framework to regulation of shale gas development two fracking federations: the US and EU. In each context, letting a thousand regulatory flowers bloom is more sensible than uniform standards.

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Notes

  1. For an excellent overview of the economics of fracking, see Fitzgerald (2013).

  2. There is also a tremendous amount of oil in shale, but fracking shale oil has not revolutionized energy markets like shale gas. Thus, the “shale revolution” or “shale era” generally refers to fracking shale gas. Although it is not our focus, the analytical framework developed readily applies to the case of regulation of shale oil.

  3. We follow Eusepi and Wagner (2010) and Wagner (2005) in distinguishing between polycentric and decentralized orders. Polycentrism is defined by contestation and competition at multiple levels of government, while decentralized governance may simply involve implementation at local levels, without meaningful self-governance. Our interest is in political regimes where there is legitimate self-governance by local units in federal systems, which is the essence of a polycentricity.

  4. Economists interested in the American west have done much to dispel the notion that it was disorderly, mostly because institutions emerged spontaneously to reduce conflict (Anderson and Hill 2004; Umbeck 1977). The accounts of the shale boom as a Wild West do not necessarily correspond to the reality of the American west, which was quite orderly for reasons anticipated by the economics literature on anarchy. One of the reasons why order is common in such contexts is because institutions often arise spontaneously to resolve economic problems (Clark and Powell 2017; Palagashvili et al. 2017; Powell and Stringham 2009).

  5. In this regard, the epistemic and generative functions of polycentric governance parallel the epistemic role of prices in Austrian economics.

  6. We do not consider positive externalities. There are certainly positive externalities with the oil and gas industry, which is one reason why there is substantial public investment in university extension programs devoted to research how to improve mining techniques (Clay and Wright 2010).

  7. One of the virtues of polycentric governance, as conceptualized of by Vincent Ostrom (2008), is that is provides a political foundation for self-governance. A complementary perspective conceptualizes of self-governance as order which occurs in stateless societies, or without much role for a state (Leeson 2006, 2011, 2014). Each perspective emphasizes that the central government is not the only source of order in society, as well as recognizes a role for spontaneous order (Boettke and Coyne 2005).

  8. The importance of local experimentation is also theme in the public choice literature on governance. Both Hayek (1945) and Coase (1960) suggested governments face information problems that require consideration of decentralized solutions. Stringham and Zywicki (2011) articulate the affinities between Hayek’s perspective on governance and the literature on polycentric governance.

  9. Despite the public choice criticism of polycentric governance, much of the approach is based in part on insights from earlier architects of public choice, especially Hayek (Boettke et al. 2014; Boettke and Coyne 2005).

  10. Richardson et al. (2013) provides a review of state-level regulation of the shale industry, including how these regulations vary across states.

  11. Warner and Shapiro (2013) and Osofsky and Wiseman (2014) describe in detail the federal option for regulation of hydraulic fracturing regulation.

  12. Although Poland allowed fracking, and even encouraged it, the initial estimates of recoverable shale gas were something around 100 times the actual amount of recoverable shale gas (Blake 2014). Hence, there has not been and may never be a shale revolution in Poland, although the government certainly encouraged it.

  13. The European case demonstrates that centralization of regulation can just as easily be used to promote hydraulic fracturing as to constraint it. Indeed, in the US, typical rationale for Congressional regulation of interstate economic activities has been to promote economic activities and to limit the ability of states to constrain economic development (Weingast 1995). In the context of shale regulation, the presumption is often that a stronger federal role would constrain rather than promote hydraulic fracturing.

  14. There is also the fact that France imports nearly all its oil and gas already, which has led to investment in nuclear energy. Hence, the opportunity costs of banning fracking in France is much lower than in Poland.

  15. In Kelo v. City of New London, the Supreme Court upheld taking land from a citizen to give it to a corporation, interpreting this taking as “public purpose” because it might result in economic development.

  16. The two goals (international coordination and local autonomy with respect to the regulation of fracking) are somewhat incompatible. Super-local coordination necessarily requires the alienation of some degree of autonomy at the local level. To the extent that some combination of the two is possible, this is more likely to be achieved within a polycentric system in which localities can decide whether to form a super-local authority.

  17. Groundwater contamination is of course not unique to shale gas extraction but is the potential side effect of well casing in general. We thank one anonymous referee for pointing this issue to our attention.

  18. The greater the probability that some disastrous event, the more justified a moratorium on what is perceived to be the potential cause. For the reasons discussed in the paper, this is very unlikely to be the case of fracking. The externalities of the latter tend to be concentrated within the relevant locality or regional at worst. In a case like this, adopting the precautionary principle at the national level has little benefits to it. The few local jurisdictions involved are better placed, both from a local knowledge and an incentive compatibility perspective, to deal with the issue.

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Acknowledgements

We would like to thank Chris Coyne, Jeremy G. Weber, and two anonymous referees for insightful suggestions and criticisms. The standard disclaimer applies.

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Murtazashvili, I., Piano, E.E. Governance of shale gas development: Insights from the Bloomington school of institutional analysis. Rev Austrian Econ 32, 159–179 (2019). https://doi.org/10.1007/s11138-018-0424-5

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Keywords

  • Polycentric governance
  • Bloomington school
  • Fracking
  • Institutions
  • Private property