Introduction

The Darling Downs region is an area of Queensland’s central south located west of the Great Dividing Range. It covers an area of 170,710 km2 and encompasses a variety of regional landscapes, including urban and rural holdings, agricultural production, resource and mine sites, and protected areas. Furthermore, it is home to some of Queensland’s most resource rich land comprised of extensive deposits of petroleum, coal seam gas (CSG), thermal coal, and other minerals. Resultantly, the Darling Downs represents a crucial role in supporting local communities and industry and plays a major role in the state’s economy. However, in recent years, there has been a considerable push behind the expansion of CSG in Australia, driven by international demand for liquefied natural gas (LNG) (Chen, Randall 2013). This has raised concerns for the safety of CSG development and the environmental impact it will have on the region. This report will aid in providing a general sense of trajectory of the CSG industry in the Darling Downs and examine the characteristics and level of its environmental impact to the extent that they can be anticipated and/or known based on reasoning and evidence made available. Economic theories and models will be utilised to evaluate the environmental impact and to make appropriate policy recommendations so that a socially efficient equilibrium can be reached.

Problem description

Currently in Queensland, more than $70 billion has been invested to LNG production in the CSG industry (QRC, 2018). This has facilitated the drilling of 11,000 CSG wells and 3450 conventional wells in Queensland with 76% of active wells situated in the Surat basin and Southern Bowen Basin, both located in the Darling Downs (DNRME, 2018). Coal seam gas reserves represent a major contribution to energy needs; however, gas retrieval by hydraulic fracturing (fracking) has possible environmental risks and land use conflicts. Figure 2, below, shows some chemicals commonly used in the fracking process. The industry is making an effort to change to more benign fracking materials but there is still a lack of information and research on exposure to natural and added chemicals, their fate and ecotoxicity in both the discharged by-product and flow back and produced waters (Chen, Randall, 2013).

The Darling Downs faces two main water issues relating to the extracting of CSG; water usage and water waste. The Great Artesian Basin (GAB) is relied on heavily as a water source in CSG extraction with more than 300 gigalitres withdrawn annually (Chen, Randall, 2013). For context, this is over 60 percent of the total allowable withdrawals, which would suggest that there is displacement of existing uses in conjunction with exceeding the sustainable level of water withdrawals and increased competition for the resource.  The increased water usage requires wells and bores to be drilled deeper with the possibility of drying up completely. Water waste is also a problem for the Darling Downs. As water pressure in the coal seam must be reduced, some CSG wells produce large volumes of water (averaging 10,000 litres/day/well in Queensland) (John, n.d.). The water waste produced is very saline and contains a variety of chemicals found in and around the coal seam including toxins and radioactive substances (geogenic contaminants). Additionally, the chemicals found in the fracking substance may seep into the waste water. The Australian Broadcasting Corporation has reported cases where governments have made an informed choice to allow the contaminated water to be released into streams without being fully treated to remove the variety of chemicals present in concentrations well above the guidelines for aquatic ecosystems and in some cases at toxic levels (Carlisle, 2012). Most of the water, however, is stored in salt pits and briny dams and is evaporated over time or percolates into the soil.

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CSG is often thought to be a cleaner energy source when compared to carbon because it burns more cleanly. However, recent studies, including those performed by Cornell University, have shown that the atmospheric effect of CSG may be equal to that of coal. This is due to many factors some of which include the methane and carbon dioxide released from the CSG wells and gas fields, energy used in the production process and emissions in processing the CSG into LNG. After accounting for all of these factors, the greenhouse gas reduction benefits of CSG ends up being more unsubstantiated and based on individual CSG projects.

CSG deposits in Australia are often located in areas of prime agricultural land, such as the Darling Downs. Academics and media reporters have found conflict between agricultural producers and CSG developers.

“Property Rights Australia finds it unacceptable that yet again landowners, including agricultural producers, have been treated as second class citizens and have not been fully informed” (Property Rights Australia Chairman Dale Stiller, 2015)

The law in Australia dictates that property owners only own to a certain depth under their properties, these depths are dependent upon many factors. According to section 27 of the Petroleum and Gas (Production and Gas) 2004 (QLD) (PGPGA), in Queensland, a crown grant gives the state ownership of all petroleum found on or below the surface and exclusive rights to commence, or authorise others to commence, petroleum activities. This makes petroleum a non-rivalrous but exclusive good (shown in figure 3). Known as the fragmentation of property rights, this means that the Queensland government has the power to permit separate interest to be held over the same property so that the land can be owned by a farmer as a freehold interest, while entitling a petroleum company to enter the property to search for and produce coal seam gas. However, multiple areas within the Darling Downs feel that CSG development does not match with the objectives or characteristics of the area (e.g. tourist and wine regions) and are worried about the possible effects CSG mining will have on their health.

Qualitative field data using a participatory approach has shown community views on the health impacts of CSG. Reports showed a significant increase in health complaints in the Wieambilla rural residential estate (Darling Downs) since CSG operations in the area commenced. The health complaints reported include severe skin rashes (photographed by residents), headaches, nosebleeds and loss of smell. Additionally, Health experts, including the Australian Medical Association have expressed concern about the health impacts of CSG developments in populated areas. There has been a significant increase in hospital admissions for circulatory and respiratory conditions in the Darling Downs. Data shows that hospital admissions increased drastically from 2007-2014 even with figures controlled for population growth. Table 1 shows this increase compared to the increase in CSG chemicals linked to these conditions in the Darling Downs region. To support this data, Table 2 shows the emissions acknowledged by the CSG industry to cause both acute and chronic health effects. 

Table 1: Increase in hospital admissions compared to the increase in CSG emissions in the Darling Downs (2007-2014) (Shikwambana, Ncipha, Malahlela, Mbatha & Sivakumar, 2019)

Condition

Increase (%)

Acute circulatory admissions

133%

Acute respiratory admissions

142%

CSG emissions

Nitrogen oxide

489% to 10,048 tonnes

Carbon monoxide

800% to 6800 tonnes

PM10

6000% to 1926 tonnes

Volatile organic compounds

337% to 670 tonnes

Formaldehyde

12kg to over 160 tonnes

Table 2: Air pollution and human health hazard: a compilation of air toxins acknowledged by the gas industry in Queensland’s Darling Downs (McCarron, 2018, https://doi-org.ezproxy.library.uq.edu.au/10.1080/00207233.2017.1413221)

Potential solutions

Presently, a command and control approach is being used by governments to regulate the number of petroleum companies mining CSG. Governments issue licenses, known as petroleum resource authorities, to CSG developers to explore and extract a given level of gas. This has previously not been successful because these firms have an incentive to export the majority of CSG to international buyers due to the high prices found in overseas markets. The impact on the Australian economy will be increased prices and a decrease in the quantity of CSG supplied to the Australian market.

CSG is a non-renewable resource so the aim of the licenses is to protect the known reserves so that they can be used efficiently even if it involves mining companies and society incurring extra costs. The added benefit of this approach is less CSG mining companies entering the market meaning less pollutants and harmful chemicals damaging the environment.

A Pigouvian tax can be applied to a market activity that generates a negative externality. It is used to correct an unwanted or inefficient market outcome and remove any external costs. Internalising an externality using a Pigouvian tax is a good alternative to a regular tax that has a deadweight loss. The concept proposes is that if the tax equals the value of the externality (difference between MPC and MSC), the market will pollute at an efficient level. In regards to coal seam gas in the Darling Downs, the tax would take the form of charging the pollution each well releases into the environment. Each well operator will make additional efforts to decrease the chemicals used in the fracking process. Eventually, it will become more cost effective for them to treat produced water rather than store it in briny dams where it will either evaporate or percolate into the underlying soil. After the Pigouvian tax is implemented, there will decreased risks to the surrounding communities and potential damages to farmer’s properties and crops.

Figure 5: pigouvian tax to remove the negative externalities of CSG

Marketable pollution permits (MPPs) can be a very effective way for maintaining or improving environmental conditions such as decreasing the amount of harmful chemicals produced throughout the CSG extraction process. They use economic incentive to minimise total abatement costs by equating marginal abatement costs (MAC) across polluters, unlike a command and control approach. The mining company is then more likely to conduct more research and development in abatement technology while still reaching a target level of pollution. It could possibly replace the current command and control approach because the government would still be able to maintain their current set pollution limit however, there will be an overall decrease in abatement costs making the industry more efficient and environmentally conscious.

Figure 6, illustrates how MPPs work showing a simplified version with only two CSG companies (polluter 1 and polluter 2). They both have different abatement cost shown as MAC1 and MAC2. If a limit on pollution is wanted, governments can issue permits for that amount. The polluters would have the choice either to reduce pollution or to buy a permit. Market forces would move towards an equilibrium. Supply is fixed and can be represented as a vertical line at Q1. The demand curve is the horizontal sum of the demands from both polluters. Since firms would rather not incur abatement cost, their demand (or WTP) for permits is identical to their MAC curves and the result is a “kinked” demand curve for permits indicated by the blue dotted line. If permits were free, each firm would want to pollute at the level Q5, totalling a demand of Q1. The excess demand would push up price until demand is equal to supply. This will occur at price P, the demand of polluter 1 is Q3 and polluter 2 is Q4. The first polluter’s MACs are higher so it is more of an incentive to buy permits than to incur the high abatement cost compared to polluter 2 with a lower MAC will have more of an incentive to sell.

Figure 6: tradeable permit market allocation

The Queensland government has insisted that operators provide those affected by CSG activity with water usage due to reduced and more costly underground supplies. This is the government’s attempt to ‘make good’ by compensating those negatively affected by water extracted from wells to release gas. Compensations have to be taken into account to ensure the efficiency of a policy and the Queensland government’s decision to compensate those affected by ground water usage makes this Pareto efficient since nobody is worse off, in regards to water access, then they were before CSG in the region.

Limitations

Limitation for this study should be noted due to the influence it may have had on the findings in the report. To indicate that there are environmental impacts associated with the mining of CSG in this region deductive reasoning has been used in some instances where information was limited or not available. Furthermore, certain estimates from other studies have been transferred as proxies for the Darling Downs. More research and information is needed regarding the future effects exposure to natural and added chemicals contained in the flow back and produced water will have and to better assess the ecological risks from gas recovery specific to the Darling Downs region. Another limitation regarding the collection of appropriate research is in Queensland, CSG extraction areas tend to be rural, have particular demographics not necessarily reflective of the general population of Australia and poor pre-existing health care infrastructure that complicate the gathering of data concerning CSG related health issues.

Conclusion

To reach an environmentally, socially and economically efficient level of CSG output in the Darling Downs a multifaceted approach will be needed. Meaning that, not just one solution listed above will be able to solve every problem associated with CSG mining in the region and there are multitudes of additional solutions that could not be included in the report involving environmental management, health, politics etc. that also need to be considered and evaluated. There are many challenges facing policy makers regarding poorly defined property rights for farmers and the environmental flow on effects of CSG happening throughout the region. An analysis of some potential solutions concluded that the current method used to regulate the CSG industry is having a negative effect on the market for Australian CSG. A more appropriate solution may be a pigouvian tax where the externality gets tax or some form of marketable pollution permit where the same level of output currently produced can be maintained but at a more efficient level due to the decrease in abatement costs.  To make an informed decision, further research needs to be done in the Darling Downs before any policy changes necessary for this specific region can be implemented, as there is currently a lack of data and information available. 

Total Word Count: 2190- excluding headings, quotes, tables, captions and references

References

Barker, L (2015), The Darling Downs coal seam gas bomb. Retrieved from The Independent: https://independentaustralia.net/environment/environment-display/the-darling-downs-coal-seam-gas-bomb,8106

Labinsky, M (2015), Hopeland’s ‘cloud of contamination’. Retrieved from Queensland Country Life: http://www.queenslandcountrylife.com.au/story/3295240/hopelands-cloud-of-contamination/

Walton, A. M., McCrea, R., Leonard, R., & Williams, R. (2013) “Resilience in a Changing Community Landscape of Coal Seam Gas: Chinchilla in Southern Queensland,” Journal of Economic and Social Policy: Vol. 15 : Iss. 3 , Article 2. Available at: http://epubs.scu.edu.au/jesp/vol15/iss3/2

https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/Parliamentary_Library/pubs/BriefingBook44p/GasDebate

Queensland Resource Council (QRC) 2018, resource innovation: shiploads of Queensland LNG exports, (http://resourcinginnovation.com.au/education/shiploads-of-queensland-lng-exports/)

DNRME