An Assessment of the Potential Costs and Benefits to New Jersey from Shale Gas Extraction in Pennsylvania and an Examination of Cost Mitigation Strategies

Abstract

Shale gas extraction in the United States has increased considerably over the last three years. President Obama and many Republican and Democratic members of Congress hail this increase as vital to energy security and a substantial step toward energy independence. Concurrently, numerous environmental organizations have voiced concerns about the effects shale gas extraction has on water resources and air quality.

The Marcellus Shale, which underlies much of the Northeast, is a rock formation that has become a major source of shale gas. Pennsylvania, in particular, has seen shale gas extraction increase from 9,800,000 Mcf (thousand cubic feet) in 2008 to 271,800,000 Mcf in the six month period between July 2010 and December 2010, the latest time period for which data is available. Production in Pennsylvania is projected to increase even more in future years. New Jersey has no substantial shale gas plays, but it abuts the Marcellus Shale deposit, and is downwind (especially during the winter) and downstream from shale gas development in Pennsylvania. To date, no studies examining the economic and environmental benefits New Jersey will realize, or the environmental costs New Jersey will incur as a result of this shale gas extraction, have been published. Thus, the purpose of this project is to examine both the costs and benefits New Jersey will likely experience as a result of shale gas extraction in Pennsylvania. Most of the policy options that are then proposed and assessed are cost mitigation strategies, but some also touch on ways New Jersey can maximize the benefits it is likely to derive from Pennsylvania’s shale gas production.

This report focuses specifically on the potential degradation of New Jersey air quality that would occur if ozone levels in New Jersey increase due to shale gas development. I concentrated on potential ozone increases because ozone is New Jersey’s most problematic air pollutant. The United States Environmental Protection Agency (EPA) considers the entire state of New Jersey to be a moderate 8-hour ozone non-attainment area. Moderate 8-hour non-attainment areas have a design value between 0.092 parts per million (ppm) and 0.106 ppm. This range is well above the EPA’s ozone standard of 0.075 ppm, which it instituted in order to protect public health. The design value is defined as the three year average of “the fourth highest daily maximum 8-hour average [ozone] concentration recorded each year.”

Ozone levels in New Jersey may increase as a result of shale gas extraction in Pennsylvania. This is due to the ground-level ozone that is produced when the toxic and volatile organic compounds, as well as fugitive natural gas, “mix with nitrogen oxides from the exhaust of diesel-fueled, mobile and stationary equipment.” Ground level ozone produced in Pennsylvania can affect New Jersey air quality because ozone and its precursor pollutants can be transported “into an area from sources hundreds of miles away.”

Increased ozone levels are a concern for New Jersey because there are numerous health effects associated with exposure to ozone including premature lung aging and, with extended exposure, asthma and chronic obstructive pulmonary diseases. Children and individuals who spend time outdoors, in addition to the aged, are particularly vulnerable groups.

In my analysis I found that currently, natural gas production in the Pennsylvania Marcellus Shale is not increasing ozone levels in New Jersey, but as production increases, ozone levels in New Jersey are likely to rise, particularly in the winter when the prevailing winds shift from southwesterly to northwesterly.

All New Jersey sectors that currently rely on natural gas will benefit from the stabilized and/or reduced natural gas prices that are likely to be the result of increased Pennsylvania shale gas extraction. The commercial and residential sectors, in particular, are likely to benefit the most because they comprise 29.14% and 36.50% of New Jersey natural gas consumption, respectively. Through my analysis of economic data from the New Jersey Department of Labor and Workforce Development, I found that the commercial sector comprised 82% of New Jersey’s Gross Domestic Product (GDP) in 2008. Therefore, a large portion of New Jersey’s economy stands to benefit from reduced natural gas prices. Natural gas prices are also 9.6% higher than the national average in the commercial sector and 18.9% higher than the national average in the residential sector. Thus, if New Jersey natural gas prices fall more than the national average, they may provide an incentive for businesses and individuals to relocate to New Jersey, especially given the fact that most New Jersey businesses cite energy costs as the second highest overhead cost, after labor.

The residential sector is also likely to benefit from reduced natural gas prices because households will substitute natural gas for home heating oil to take advantage of the large divergence in oil and gas prices. Currently, 19% of New Jersey households use home heating oil. In order to facilitate high rates of substitution of natural gas for home heating oil, New Jersey could encourage the construction of pipelines in counties that have the highest number of heating oil users per square mile. I used data from the U.S. Census Bureau to determine which New Jersey counties are most reliant on home heating oil. Drawing from my analysis, I recommended that new pipeline be built in Hudson and Essex Counties, which conveniently border each other. It may also make sense, however, to build pipeline in Morris and Sussex Counties. These counties have some of the highest total number of households that use home heating oil and are also likely to experience air quality degradation as Marcellus Shale gas extraction in northeastern Pennsylvania increases. Thus, reducing home heating costs could be a way of off-setting increased air pollution. The substitution of natural gas for home heating will also yield environmental benefits in the form of reduced nitrogen oxides (NOx) and carbon dioxide emissions

New Jersey would also realize large environmental benefits if the electricity currently generated from coal in the state were instead generated from state-of-the-art combined cycle natural gas plants. The chart below summarizes the emissions reductions that would be realized from this substitution.

Comparison: Tons of Pollutant emitted from generating 10,622,423.579 MWh of electricity Fuel Pollutant NOx SO2 CO2 Coal 12,635 62,298 11,523,898 Natural Gas 321 0 4,246,638 Reduction 12,314 62,298 7,277,260 Percentage of total emissions from electricity generation 54% 75% 33% At 2009 coal and natural gas prices (the last year for which data is available), natural gas was cheap enough to displace all coal-fired electricity generation in New Jersey, assuming state-of-the-art natural gas plants are built. For this to remain the case, natural gas prices in the electricity industry must stay below $5.40/MMBtu, assuming coal prices and demand remain stable and no other power plants are retired.

The downward pressure that Pennsylvania Marcellus Shale gas production is placing on New Jersey natural gas prices will yield economic benefits, particularly in New Jersey’s residential and commercial sectors. Ozone levels in New Jersey are likely to climb as shale gas extraction increases in northeastern Pennsylvania, particularly if future extraction activities are concentrated close to the Pennsylvania-New Jersey border, but the substitution of natural gas for home heating oil in the residential sector, and natural gas for coal in the electricity sector, will drastically reduce New Jersey’s NOx emissions. NOx is a precursor to ground level ozone production. Thus, if NOx emissions in New Jersey are significantly reduced, the increased quantities of ground level ozone wafting into New Jersey from Pennsylvania are likely to be offset.

The following policy options are ways in which the State of New Jersey can maximize the benefits it is likely to derive from increased shale gas extraction in Pennsylvania and also mitigate the increased ozone pollution that is likely to occur in the future. 1) General Policy Options a) The New Jersey Department of Protection could conduct a baseline study to determine the extent to which New Jersey air quality will improve or deteriorate due to shale gas extraction in Pennsylvania. b) New Jersey could take advantage of new and cheaper sources of Pennsylvanian natural gas by encouraging residents to heat their homes with natural gas and by encouraging more gas-based electric power generation. 2) EPA Options a) New Jersey could take the lead in creating a multistate coalition to lobby the EPA to exercise its regulatory authority by adopting stronger national regulations for shale gas extraction b) New Jersey can petition the EPA to make Pennsylvania revise its State Implementation Plan (SIP) if ozone produced in Pennsylvania is shown to adversely impact New Jersey air quality c) New Jersey can issue a 126 Petition to the EPA, which would ask the EPA to directly regulate the emissions from shale gas extraction in Pennsylvania. 3) Litigation Options a) New Jersey can sue shale gas extraction companies if ozone produced from shale gas production adversely affected NJ air quality. b) New Jersey can sue Pennsylvania for damages caused by its lax regulation of air pollution caused by shale gas extraction c) New Jersey could threaten to do options 2b, 2c or 3b unless Pennsylvania is willing to compensate New Jersey for the environmental damage extensive expansion of shale gas production will cause. d) New Jersey can threaten do option 3a unless Pennsylvania requires the natural gas industry to provide New Jersey with cheaper natural gas.

The following are a list of criteria by which the options were judged: Effectiveness Political Feasibility Minimize State Expenditures Legality

I recommend that New Jersey adopt option 1a immediately. The results of a detailed baseline study must be used to inform any decisions the State will make going forward. If the results show that the substitution of natural gas for home heating oil in the residential sector and natural gas for coal in the electricity sector will yield substantial environmental benefits and more than offset ozone produced by increased shale gas extraction in northeastern Pennsylvania, then New Jersey should consider implementing option 1b. Option 1b should definitely not be adopted without detailed air quality modeling because it may be expensive if natural gas prices increase. If the baseline study demonstrates that New Jersey’s ozone levels will rise significantly if shale gas production in northeastern Pennsylvania increases, New Jersey should adopt option 2b.