Topic: Energy and Environment

Solyndra: A Political-Energy Company

Good reporting shouldn’t go unnoticed just because it appeared during the week after Christmas, so let me draw your attention to a comprehensive article on the front page of the December 26 Washington Post by Joe Stephens and Carol Leonnig:

Meant to create jobs and cut reliance on foreign oil, Obama’s green-technology program was infused with politics at every level, The Washington Post found in an analysis of thousands of memos, company records and internal ­e-mails. Political considerations were raised repeatedly by company investors, Energy Department bureaucrats and White House officials….

The documents reviewed by The Post … show that as Solyndra tottered, officials discussed the political fallout from its troubles, the “optics” in Washington and the impact that the company’s failure could have on the president’s prospects for a second term. Rarely, if ever, was there discussion of the impact that Solyndra’s collapse would have on laid-off workers or on the development of clean-energy technology.

Did you know that when the president visits a factory, his aides tell the workers what to wear? Keep digging in the documents:

Like most presidential appearances, Obama’s May 2010 stop at Solyndra’s headquarters was closely managed political theater.

Obama’s handlers had lengthy e-mail discussions about how solar panels should be displayed (from a robotic arm, it was decided). They cautioned the company’s chief executive against wearing a suit (he opted for an open-neck shirt and black slacks) and asked another executive to wear a hard hat and white smock. They instructed blue-collar employees to wear everyday work clothes, to preserve what they called “the construction-worker feel.”

This story has all the hallmarks of government decision making: officials spending other people’s money with little incentive to spend it prudently, political pressure to make decisions without proper vetting, the substitution of political judgment for the judgments of millions of investors, the enthusiastic embrace of fads like “green energy,” political officials ignoring warnings from civil servants, crony capitalism, close connections between politicians and the companies that benefit from government allocation of capital, the appearance—at least—of favors for political supporters, and the kind of promiscuous spending that has delivered us $15 trillion in national debt. It may end up being a case study in political economy. And if you want government to guide the economy, to pick winners, to override market investments, then this is what you want.

More on Solyndra here and here.

The Government Must Compensate for Property Damage Even If Its Taking Was Only ‘Temporary’

Cato today filed an amicus brief supporting a request that the Supreme Court review Arkansas Game & Fish Commission v. United States.  Here’s the case:

The Arkansas Game & Fish Commission owns and operates 23,000 acres of land as a wildlife refuge and recreational preserve; the preserve’s trees are essential to its use for these purposes. Clearwater Dam, a federal flood control project, lies 115 miles upstream. Water is released from the dam in quantities governed by a pre-approved “management plan” that considers agricultural, recreational, and other effects downstream. 

Between 1993 and 2000, the government released more water than authorized under the plan. AGFC repeatedly objected that these excessive releases flooded the preserve during its growing season, which significantly damaged and eventually decimated tree populations. In 2001, the government acknowledged the havoc its flooding had wreaked on AGFC’s land and ceased plan deviations. By then, however, the preserve and its trees were severely damaged, so AGFC sued the government, claiming damages under the Fifth Amendment’s Takings Clause.

The district court awarded $5.8 million in lost timber and reforestation costs based on the substantiality of the government’s flooding and the foreseeability of the damage it caused. The Federal Circuit reversed that decision, holding that the flooding of private land can never be a taking unless that flooding is permanent. It further held that, in determining whether the government’s intrusion on AGFC’s land was permanent or temporary, courts must focus on the character of the policy behind the intrusion rather the effects of the intrusion itself. A taking cannot have occurred here because each deviation from the plan constituted a “temporary” policy, the court concluded, so AGFC had no constitutional remedy.

AGFC is asking the Supreme Court to review its case; the Court itself has recognized that something less than a permanent invasion of land can constitute a compensable taking. Cato joined the Pacific Legal Foundation on a brief urging the Court to hear the case and uphold the Fifth Amendment rights of property owners whose land is destroyed by the federal government. Our brief highlights the conflict between the Federal Circuit’s decision and both Supreme Court and lower court precedent. First, an invasion of land by flooding is no different from an invasion of land by any other means. Second, the government’s self-professed “intent” that a possible taking be “temporary” should have no bearing on whether a Fifth Amendment remedy exists when that taking has, in fact, occurred. Instead, the relevant inquiry should be whether the government caused permanent damage and, if so, how much.

The Federal Circuit’s new rule — that, so long as it might be “temporary,” no government flooding can be remedied under the Fifth Amendment — runs afoul of the letter and spirit of a constitutional provision meant to compensate property owners for government intrusions on their land. We urge the Court to grant AGFC’s petition and maintain constitutional protections for private property.

The Supreme Court will decide in the new year whether to take the case, and would hear argument in the fall if it does.

Fun with Grammar

Juliet Eilperin at the Washington Post writes:

Less than a week before U.N. negotiators convene in South Africa for a new round of talks aimed at forging a global climate pact, a hacker has released an apparent second round of e-mails from the University of East Anglia in Britain that seek to portray climate scientists in a negative light.

Now let’s break that sentence down. Could it really be the e-mails from the climate catastrophists that “seek to portray [themselves] in a negative light”? Surely not. Rather, it appears that the sentence was intended to read something like this:

…a hacker believes that the apparent second round of e-mails from the University of East Anglia that he released today portray climate scientists in a negative light.

If there’s any embarrassment to the writers of the e-mails, after all, surely it was not intended. In any case, it’s not the release of the e-mails that might “portray [some] climate scientists in a negative light,” it’s the e-mails themselves.

More on the original Climategate here. Ongoing posts at this climate-skeptic website. And as you hear terms like “skeptics,” “deniers,” and so on, remember what Pat Michaels wrote in the 2009 Cato Handbook for Policymakers:

Leading politicians and media figures are insisting that Congress make
global warming a very high priority. Global warming is indeed real, and human activity has been a contributor since 1975.

But global warming is also a very complicated and difficult issue that
can provoke very unwise policy in response to political pressure. In 2005, for instance, Congress clearly made a very bad decision about climate change when it mandated accelerated production of ethanol. Critics had argued then that corn-based ethanol would actually result in increased carbon dioxide emissions. An increasing body of science has since verified this position. Further, corn-based ethanol is responsible in part for the skyrocketing price of corn, soybeans, rice, and wheat since the mandates began.

Although there are many different legislative proposals for substantial
reductions in carbon dioxide emissions, there is no operational or tested suite of technologies that can accomplish the goals of such legislation. Fortunately, and contrary to much of the rhetoric surrounding climate change, there is ample time to develop such technologies, which will require substantial capital investment by individuals.

He’s a skeptic about the predictions of catastrophic and imminent threats, not about the existence of modest global warming.

Solyndra: Crooked Politics or Just Bad Economics?

Amy Harder has a good take on the Solyndra issue in National Journal Daily (subscription required):

Lesser evil: crony capitalism or bad policy?

Energy Secretary Steven Chu is about to find out when he testifies before a House panel on Thursday about the $535 million loan guarantee his department awarded to Solyndra, the now-bankrupt solar-energy company that was, before its demise, the poster child for America’s renewable-energy industry and President Obama’s 2009 Recovery Act.

The White House and the Energy Department say the influence of political donors such as Oklahoma oil billionaire George Kaiser, whose venture-capital firm was the major investor in Solyndra, did not sway any of the administration’s decisions on Solyndra’s loan guarantee, which was funded from the stimulus package.

By denying politics was involved, the administration is saying that its top officials genuinely and continuously thought Solyndra was a good bet—despite numerous warnings raised both inside and outside of the administration—and that the loan-guarantee program was being carefully managed despite oversight reports and an internal West Wing memo that said otherwise.

“As time went on, there was a growing concern because of the cash-flow,” Chu said in an interview with NPR on Tuesday. “And so we certainly were watching this and looking at this very closely. And eventually we recognized they were in deep trouble.”

Yet, throughout the two years Solyndra was borrowing money from federal coffers, the DOE essentially stayed the path right up until the bitter end when the California-based manufacturer went bankrupt in September. When Solyndra was on the brink of bankruptcy in late 2010, DOE decided to restructure the loan to try to keep the company afloat.

Meanwhile, in today’s congressional hearing, Energy Secretary Steven Chu insisted that “the final decisions on Solyndra were mine, and I made them with the best interest of the taxpayer in mind… . I did not make any decision based on political considerations.” This came on a day when the front page of the Washington Post reported:

In the two years preceding its collapse, Solyndra and its biggest investor aggressively asserted themselves in dealings with the Obama administration, pushing Energy Secretary Steven Chu to visit the company’s headquarters to help it raise private money and later suggesting it would file for bankruptcy if the Energy Department rejected its proposed rescue plan… .

“The DOE really thinks politically before it thinks economically,” a Solyndra board member wrote in December to George Kaiser, an Obama fundraiser whose family funds owned a third of the company.

Another Shoe Drops: Solyndra Layoff Was Delayed until after Election Day

The Solyndra story just keeps unfolding. Even as Secretary Chu tells NPR that “no decision we made in the loan program had anything to do with who is investing in this company,” today’s papers report that the Energy Department pressured Solyndra not to announce impending layoffs until the day after the crucial 2010 election. From the Washington Post:

The Obama administration, which gave the solar company Solyndra a half-billion-dollar loan to help create jobs, asked the company to delay announcing it would lay off workers until after the hotly contested November 2010 midterm elections that imperiled Democratic control of Congress, newly released e-mails show….

A Solyndra investment adviser wrote in an Oct. 30, 2010, e-mail — without explaining the reason — that Energy Department officials were pushing “very hard” to delay making the layoffs public until the day after the elections.

The announcement ultimately was made on Nov. 3, 2010 — immediately following the Nov. 2 vote.

More than a month ago, I listed some of the earlier shoes in the unfolding story. But as a friend of mine asks about the Penn State scandal, is this the “other shoe,” or is this story a centipede with lots more shoes to come?

Jerry Taylor and Peter Van Doren ignored the politics and looked at the economics of Solyndra and energy subsidies in Forbes.

Federal Energy Failures

In the Washington Post, Steven Mufson does a nice job describing how Solyndra is just one of many energy subsidy failures of recent decades.

I covered some of the same topics as Mufson–including the Clinch River Breeder Reactor and the Synthetic Fuels Corporation–in this study at Downsizing Government. However, I presented the politics of these two projects a bit differently than Mufson. He sort of suggests that the Reagan administration was gunning to kill the Clinch River project, and that only the Carter administration was to blame for Synthetic Fuels.

Regarding Clinch River, President Carter should be credited with trying hard to kill it, but Congress blocked him. The Reagan administration initially supported the project, but that changed as the bad news mounted over time. I noted:  “The combination of bad economics, environmental problems, and cost overruns gave the upper hand to project opponents in Congress, and funding was cut off by a fairly narrow vote in the Senate.”

Regarding Synthetic Fuels, the Reagan administration was once again initially supportive, and it only later changed course due to falling oil prices and numerous scandals in the program. When it became clear that the political winds were changing, I noted that ”there was a mad dash to hand out subsidies before Congress shut the project down.”

That sounds familiar doesn’t it?

Increasing the Energy Independence Ante

Three weeks ago, Cato released my policy analysis, “The Gulf Oil Spill: Lessons for Public Policy”. I argued that governmental intervention in the energy market was ill-advised and documented the depressingly numerous efforts to do more of just that by those who should have known better. On October 31, a working paper that went far further than any I had criticized appeared on the Internet. That paper – written by Robert Ames, Anthony Corridore, Edward Hirs, and Paul MacAvoy, who curiously label themselves the Yale Graduates Energy Study Group – argues for a Presidential proclamation ordering a moratorium on all oil imports save those from Canada. The withdrawal from global oil markets would be phased in over a decade.

As one might expect, there are many problems with their argument.

First and foremost, their case depends upon far greater certainty than is justified on the danger of foreign-supply disruptions, the effects of an embargo on domestic consumption, and the timely emergence of various domestic alternatives to foreign crude, particularly coal-to-liquid technology and biofuels. This ignores horrendous prior experience (something the authors tacitly recognize at the end of their paper by listing the bad energy initiatives of the past).

Their bottom line, however, is that the supply response will be so great that it will generate producers’ profits that far exceed the losses to consumers. The calculation, however, is Orwellian in its premises and is an analytically invalid measure.

Standard international-trade theory indicates that trade restrictions almost always harm the country that imposes them. Trade, nationally and internationally, arises because it is cheaper to swap other goods to get, say, petroleum, than to produce petroleum at home. The Yale Graduates’ calculation covers only the lesser part of the effect – the gains in the import-replacing industry. The larger cost of losses in export industries is ignored.

The Yale Graduates, moreover, effectively assume away the result possible in theory, but not in practice, of an astute level of import control that produces a net gain from lowering import prices without, as the Yale Graduates propose, severely reducing import volume.

In a country already burdened with enormous costs of ill-advised government policies, the last thing we need is such another governmental plunge into a fantasy world. The resulting waste would make Obamacare seem a bargain.

A second, related technical concern is that their calculation of embargo costs departs from standard practice by including the direct cost to oil consumers. Such costs are generally excluded from such calculations because, if import disruption were as probable as the authors assert, people would hedge against them. If they hedge, the cost will be zero.

The hypothetical indirect costs from alleged inflationary and unemployment effects are the usual concerns regarding foreign-supply disruptions. The standard method is to translate these costs into an estimate of the appropriate offsetting level of defensive import restriction. However, while the vast relevant literature is inconclusive about the magnitude of the impacts, it has never before produced figures that imply total elimination of imports. Regardless, Chantale LaCasse and André Plourde pointed out in 1992 that as long as the United States is engaged in any international trade, it will be affected by any oil shock. There is simply no way to wall-off the United States from major economic events abroad.

Objections also arise at several more fundamental levels.

First, the effort would be a horrendous policy initiative. Decades have been spent since 1933 trying to restore international economic integration to its 1914 level. So drastic a step as embargoing oil imports would set a very bad example.

Second, the exclusion of Mexico would violate the North American Free Trade Agreement and, almost certainly, U.S. obligations to the World Trade Organization. Examination of present and prospective patterns of oil imports indicate that the total ban would hurt clear friends as well as actual or possible enemies.

Third, even if the Presidential power to impose oil-import moratoriums (last exercised by President Eisenhower) still exists, its exercise is even more inadvisable that it was in the Eisenhower case. Critics of President Eisenhower correctly argued that the national-defense rationale for keeping foreign oil out of the United States was a fig leaf designed to disguise the real aim of the policy - to protect the independent oil producers who were the prime beneficiary of state production controls. The proposed phased-in embargo would restore the nightmare of quota allocation that messed up the initial Eisenhower program and its implementation by the Kennedy and Johnson administrations.

Fourth, a presidential moratorium would be another unwise assumption of executive power. No president can be trusted correctly to implement such draconian import restrictions or, for that matter, any similar interventions into industry. To make matters worse, no President could be in office for the whole ten-year phase-in period.

It’s hard to believe that serious people could propose such a thing. Exposure to modern economics has greatly reduced errors as gross as this, but obviously not completely.

Note: The cited paper has a peculiar history. A precursor was Robert M. Ames, Anthony Corridore, and Paul W. MacAvoy, “National Defense, Oil Imports, and Bio-Energy Technology,” Journal of Applied Corporate Finance 16 no. 1 (Winter 2004) 28-50. The latest version was posted on the Social Science Research Network, but in four different browsers, the link refused to access the paper. A Google search yielded access to a substantially identical article (with the author order reversed) presented in 2010 to the United States Association of Energy Economists.