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On Monday, the UK Government announced that councils who support fracking will get to keep 100 per cent of the business rate generated from any shale gas projects in their area. The mining industry will also offer local communities £100,000 for test drilling, and transfer 1 per cent of revenues to them if shale gas is found.
Fracking is strongly supported by the Government (for its potential to bring in new investment, support thousands of jobs and reduce energy bills) and strongly opposed by environmentalists and many local communities (due to potential risks relating to water contamination, earth tremors and other environmental hazards).
Notwithstanding the difference in perspectives, fracking is an example of how the pursuit of the national interest requires action at the local level which is likely to have mainly negative impacts on local areas and communities (the expansion of Heathrow is another example, as is HS2 and nuclear power plants).
In these circumstances, national government has two broad choices. One is to impose the national interest on the local area through the law or regulation, while the second is to offer incentives that encourage and reward local communities to accept the proposed actions. Most commonly, these take the form of financial payments. In the case of fracking the Government has taken the second approach, and local councils (possibly in consultation with local communities) now have to assess whether the ‘value’ of the compensation on offer outweighs the risks that accompany fracking (for economists this is a typical cost-benefit analysis approach).
The decision that each council will make will be determined by a number of factors including: strength of local opinion (for or against); the number of people who could be affected; and, the amount of compensation on offer. Whilst the significance of the first two will depend on the circumstances and priorities of each council, the third criterion can be more objectively evaluated.
In our Room for Improvement report published in 2011, we set out seven criteria that define well designed and strong financial incentives. So, based on the details released so far, how do the fracking incentives compare against these seven criteria?
Historically, the UK Government does not have a good track record in assuring policy certainty in the long run (recent proposals to change the New Homes Bonus and the on-going uncertainty associated with renewable energy subsidies being the latest examples). This means on this issue, only time will tell.
So from the basis of designing an incentive that targets and rewards the wished for behaviour it seems the Government is starting from a strong position. It also means that local authorities have the clarity and transparency to respond to the incentive in a way that best suits them. It will be interesting to see how they actually respond and how influential the financial rewards on offer are when pitted against the beliefs and perspectives of local communities and the broader environmental community.
Some will argue that because of the budget cuts facing local authorities up and down the country, councils have no choice but to accept fracking in order to support the funding of core public services. These debates and outcomes will undoubtedly vary from place to place, but it is a good thing that local communities will ultimately be the ones taking these decisions for their areas.
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