American Oil and Gas Reporter - June 2014 - 172

adds. The modeling also appears to suffer
from assumptions that are biased to give
exaggerated SCC values. The report takes
another approach to show the SCC estimates are so unstable regarding reasonable
changes in assumptions as to make the
SCC entirely unsuitable for regulatory
policy, even if the core damage function
actually was legitimate, it states.
Federal agencies estimate SCCs using
three integrated assessment models: DICE,
FUND and the Policy Analysis of the
Greenhouse Effect (PAGE). Unfounded
FUND points out that, as with any statistical
model, these three depend on several assumptions, with results using Monte Carlo
simulations. The Heritage Foundation
says just as it did in its analysis of the
DICE model, its FUND examination depends on a sensitivity analysis that examines how simple changes to a few fundamental assumptions (in particular discount
rates and equilibrium climate sensitivity
distributions) affect those estimates.
In the FUND model, several equations
and probability densities represent projections of populations, economic activity
and emissions, carbon cycle and climate
model responses, and estimates of the
monetized welfare impacts of climate
change to estimate the SCC, the analysis
says. Each SCC estimate uses an average
of 10,000 Monte Carlo iterations based
on a number of variables, including differing potential values of how much
warming a doubling of CO2 will generate.
The model is estimated using five economic growth scenarios.
Economists often use cost/benefit
analyses to decide whether an action or

rule has net economic benefits. The Heritage Foundation says the objective is to
use measures of costs and benefits closest
to those actually affected by the action.
Because most people prefer benefits
earlier and costs later, it is necessary to
normalize costs and benefits for a common
time whenever they occur at different
rates. Researchers select discount rates
to be used in the analysis, although the
OMB stipulates that government agencies
must use discount rates of 3 and 7 percent
a year in their cost/benefit analyses. Unfounded FUND points out that EPA ignored the OMB requirement, instead basing its analysis on annual rates of 2.5
percent, 3.0 percent and 5.0 percent.
Using the OMB-recommended discount rate results in an average estimated
SCC of essentially zero dollars, the Heritage Foundation reports, suggesting there
are no economic damages associated with
CO2 emissions. Some simulations run by
the foundation indicate a nonzero probability of negative SCC, which would signify a net economic benefit from CO2
emissions, it adds.
Sensitivity
One critical component demonstrating
the unsettled state of climate science is
how much warming a given increase in
atmospheric CO2 levels will generate, a
relationship called equilibrium climate
sensitivity (ECS). The measurement typically gives an expected warming in degrees centigrade for a doubling of atmospheric CO2 levels, Unfounded FUND
explains.
Integrated assessment models use a

distribution of possible ECS values, producing a spectrum of values in which
potential temperatures are weighted by
the probability of occurrence. The study
points out that because of myriad factors
that affect measured temperatures, ECS
distribution estimates themselves are uncertain and evolve as new data and theory
are developed.
Since 2010, climate scientists have
used an ECS distribution based on an academic paper written several years previously, although a number of updated
ECS distributions have been published
since that suggest lower probabilities of
extreme global warming, the Heritage
Foundation says.
Using updated estimates, Unfounded
FUND reports it finds the average SCC
is markedly lower and sometimes even
negative. "This variability clearly illustrates
the FUND model's sensitivity to assumptions and resulting unreliability as a meaningful methodology for justifying potentially onerous economic regulations," the
study asserts.
In addition to uncertain economic
modeling assumptions, Unfounded FUND
attacks EPA for projecting economic
damages out 300 years in the FUND
model's scenario. Adjusting the time
frame studied would have a dramatic
change on output, it asserts.
"We conclude, as we did with the
DICE model, that the FUND model, although an interesting academic exercise,
is, at least at this point, completely unfit
as a tool to justify trillions of dollars of
economic regulations," the authors state.
r

Regulatory Overview

States Lead Way In Shale Regulations
By Marty T. Booher
W. Ray Whitman,
and Daniel M. Kavouras
HOUSTON-With Congress and the
White House mired in partisan gridlock
and preoccupied by issues such as the
federal debt ceiling and the Affordable
Care Act rollout, states took the lead on
shale gas issues in 2013. Several states
enacted new hydraulic fracturing regulations, and many others completed overhauls of existing rules to account for
changing technology and expanded opportunities for unconventional oil and
gas plays.
Most of the action on the federal level
occurred in the regulatory sphere, highlighted by the Bureau of Land Manage-

ment's proposed rules for hydraulic fracturing on federal land, issued in May
2013. The rules represent a modified version of drilling regulations proposed by
the BLM in 2012, based in part on public
comments received by the agency.
Among other things, the BLM's revised
rules would:
* Exempt automatic disclosures of
chemicals used in the fracturing process
based on trade secret protections and
designate FracFocus.org for all public
disclosures;
* Create testing protocols for well
integrity, particularly cementing, maximum injection pressure, and flow-back
volumes; and
* Require management plans to protect both surface and groundwater from

172 THE AMERICAN OIL & GAS REPORTER

contamination by flow-back fluids, including potentially requiring such fluids
to be stored in closed tanks.
Experts have estimated the BLM's
proposed regulations could cost the industry between $20 million and $2.7 billion each year. The public comment
period for the proposed rules drew more
than 1 million responses, and BLM has
yet to set a date for issuing a final rule.
Among the concerns voiced in the
comments were calls for greater protection
of industry trade secrets, since as written,
the rule requires companies claiming protection to provide proprietary information
to operators, which could violate private
nondisclosure agreements.
Several rules issued by the Occupational Safety and Health Administration

American Oil and Gas Reporter - June 2014

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