Personal Blogs

I heard on the radio this morning that a "government-appointed panel of experts" is minded to allow fracking to continue on the UK.

The "experts" have clearly decided that the benefits of fracking justify the risks. This is an important decision to get right. Clearly there are both benefits and risks of fracking, and weighing them against each other needs to be done accurately.

If we overestimate the risks and ban fracking needlessly, then we are forgoing an economically valuable activity for no good reason. That's not a good thing. Conversely, if we underestimate the risks and allow fracking and it then causes some kind of environmental catastrophe, then that is also not a good thing.

I can't help thinking, however, that a "government-appointed panel of experts" is not the right way to go about it. How do we know they're experts? Can we really trust them to balance the risks and benefits accurately? And how much is the poor taxpayer paying for them anyway?

I would like to propose a much simpler solution to the problem, based on straightforward free market mechanisms.

Rather than the ludicrously complex and expensive system of regulation that we have at the moment, we should do away with it all and replace it with just one single regulation.

That regulation should be as follows: any company who wishes to do any fracking should be required to maintain an insurance policy with a reputable insurance company that would cover any conceivable risk from the fracking process. If an earthquake in the fracking area causes structural damage, then the insurance policy would pay for fixing it. If any groundwater is contaminated, then the insurance policy would pay for the clean-up. If any other bad things happen, not necessarily ones that anyone has thought of yet, then the insurance policy would pay for putting them right.

Insurance companies have considerable expertise in judging risk. Far more so, I suggest, than a "government-appointed panel of experts".

If the fracking company can't find any insurance company willing to take on the risk, then that would suggest that the risks are too uncertain, and it would be right, following the precautionary principle, to avoid fracking until the risks are better understood. If the premiums make fracking uneconomic, then it probably shouldn't go ahead, as that would suggest the risks outweigh the benefits. To use a technical term, requiring the costs of the risks to be borne by the fracking company in this way avoids the negative externalities of fracking, and so makes the economics of it more honest.

If, however, the fracking company can pay the insurance premiums and still make a profit from fracking, then I can't see any reason why it shouldn't go ahead.

Wouldn't that be a much better way of doing it than having government trying to micro-manage everything? And who knows, maybe you could apply the same principle to other activities, besides fracking, that also have a potential for environmental damage?