17 Apr, 2018

Lessons for local governments to counter the negative effects of fracking

As the fracking industry expands to Canada, a new paper from the Institute on Municipal Finance and Governance presents lessons from the United States to inform regulatory responses for municipalities in Canada and elsewhere.

Toronto, April 17, 2018 – Throughout the United States, fracking has revolutionized oil and gas markets, practically overnight. But it might have come at a high cost for local governments. As the fracking industry expands in other countries, including Canada, a new paper released today by the Institute on Municipal Finance and Governance (IMFG) explores whether and to what extent municipal governments can – and should – have the power to manage the industry’s effects on their communities.

“Choosing the right fiscal course is a tightrope,” says the paper’s author, Austin Zwick. “Local governments typically bear a disproportionate share of the expenses compared to the revenue they receive, making the fracking industry a ‘bad deal’ for local governments.”

Zwick points to a number of fundamental mismatches that make this industry difficult for local governments to manage. Wherever fracking is carried out, local governments are on the front line in managing the effects of the industry, which include threats to water safety and air quality, noise pollution, deterioration of roads and other infrastructure, problems with wastewater disposal, and increased demand for social and health services. Yet compared with other levels of government, municipalities receive little compensation relative to the negative consequences caused by the industry.

Furthermore, spatial differences between drilling locations and the sites experiencing its impacts mean that the municipality collecting revenue from the industry may not be the same as the one that bears the costs. There can also be a timing gap between costs and revenues, since fracking tends to operate in a boom-bust cycle: debt-financed expansion during the boom may result in fiscal distress when such investments are no longer necessary or the revenues to pay for them dry up.

Zwick suggests that American state and local governments should re-examine their relationships, roles, and responsibilities. As the technology spreads in other countries, with Canada on the next frontier of fracking – particularly in Alberta, Southern Ontario, and Québec – it is important to look to lessons from the United States, to inform future regulatory responses as they unfold.

Read the paper 

About the Author

Austin Zwick is a Planner in the Ontario Ministry of Transportation. He recently received his PhD in Planning from the University of Toronto, during which time he held the 2016–17 IMFG Graduate Fellowship in Municipal Finance and Governance. He previously received his MPA in Public Finance and Fiscal Policy and a BSc in Industrial and Labor Relations from Cornell University. His research interests focus on the local public finance and governance challenges caused by emerging industries.

About the Institute on Municipal Finance and Governance (IMFG)

The Institute on Municipal Finance and Governance is a research hub and think tank that focuses on the fiscal and governance challenges facing large cities and city-regions. It is located within the University of Toronto’s Munk School of Global Affairs.

For more information, please contact:

Selena Zhang | Manager, Programs and Research
Institute on Municipal Finance and Governance, University of Toronto
selena.zhang@utoronto.ca | 416-978-5117