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Federalism, Regulatory Lags, and the Political Economy of Energy Production

The production of natural gas from formerly inaccessible shale formations through the use of hydraulic fracturing has expanded domestic energy supplies and lowered prices and is stimulating the replacement of dirtier fossil fuels with cleaner natural gas. At the same time, shale gas production has proven controversial, triggering intense opposition in some parts of the United States. State and local regulators have scrambled to adapt to the boom in natural gas production, raising the question of whether federal regulators should step in to supplant or supplement state regulation. This Article takes a policy-neutral approach to the federalism questions at the center of that inquiry, asking which level of government ought to resolve these policy questions, rather than which level of government is likely to produce a particular favored policy outcome. Consequently, this analysis begins with four economic and political rationales typically used to justify federal regulation. Federal regulation is necessary (1) to address spillover effects that cross state boundaries, (2) to prevent economic forces at the state level from initiating a “race to the bottom” in environmental regulation, (3) to promote business efficiencies through uniform national standards, and (4) to respond to national interests in the development of natural resources through a federal licensing system. Applying these rationales to the regulation of fracking yields several important conclusions. First, while a few of the externalities of shale gas production cross state boundaries, most are experienced locally. Second, existing federal regulatory regimes offer ample authority to address those few interstate externalities. Third, the race-to-the-bottom rationale does not justify federal regulation of shale gas production because shale gas states are not competing for quantity- or time-limited capital investment. Fourth, given that the impacts of fracking are still under study and the subject of considerable ongoing debate, there is currently no overriding national interest supporting the creation of a comprehensive federal licensing or regulatory regime for shale gas production.