Topic: Energy and Environment

AEP v. Connecticut: Global Warming as Political Question

Yesterday the U.S. Supreme Court heard oral arguments in American Electric Power v. Connecticut, the massive greenhouse-gas suit. Like the other “big” global warming/climate change suits, this one suffers from a basic and incurable defect: it seeks to undermine the separation of powers established under the U.S. Constitution by inviting the courts to address “political questions” of a sort properly resolved by other branches of government. As Cato’s amicus brief by Ilya Shapiro and Evan Turgeon explained in the case of Comer v. Murphy Oil:

“[W]hile it executes firmly all the judicial powers intrusted to it, the court will carefully abstain from exercising any power that is not strictly judicial in its character, and which is not clearly confided to it by the Constitution.” Muskrat v. United States, 219 U.S. 346, 355 (1911). A dispute is not “judicial in its character” when, among other reasons, the plaintiff does not have “standing” or the claim raises a “political question.” … And the political question doctrine, for which “the appropriateness under our system of government of attributing finality to the action of the political departments and also the lack of satisfactory criteria for a judicial determination are dominant considerations,” Coleman v. Miller, 307 U.S. 433, 454-55 (1939), isolates the judiciary from policy disputes the Constitution assigns to the democratic process.

By its nature, global warming is exactly the sort of policy question traditionally entrusted to the political branches: it is wholly unsuited to individualized justice based on links between particularized emissions and particularized effects, its proposed remedies are much disputed and likely to be the result of inevitably arbitrary compromise, sovereign negotiations with foreign actors play a crucial role, and so forth. As the courts have long recognized, one does not generate a case for judicial action simply by piling atop each other the propositions “something needs to be done” and “the political branches have not done it.” Indeed, the Obama administration itself has more or less invited the Supreme Court to dismiss the action on political-question grounds.

The Cato Institute filed an amicus brief urging the Supreme Court to review the American Electric Power case and then filed another amicus brief on the merits. Anyone interested in how the complexities of the Court’s “political question” doctrine apply in this case should read – in addition to Ilya Shapiro’s blog posts here and here – this new article in the Federalist Society’s publication Engage by Megan L. Brown of Wiley Rein LLP, who has served as Counsel of Record to the Cato Institute in its amicus briefs in this area. Brown provides a thorough explanation of why all three of the major warming suits fail the justiciability test, why Justices Kennedy and Breyer may be worth watching as “swing” votes in AEP, and how the new case affords the court a chance to revisit its problematic pro-regulatory holding in Massachusetts v. EPA (2007). (More from Brown in this Christian Science Monitor op-ed.)

Also worth reading on this subject: Harvard professor Laurence Tribe, by no means known as a general skeptic of environmental regulation, who has assisted the defense side in this litigation and explains some of the reasons in a new Boston Globe op-ed.

If There Were An Annual ‘Regulation Day’

As Iain Murray points out at National Review’s “Corner,” there’s no date on the calendar each year that reminds us, the way income tax filing day does, of the huge share of our economic labors that the government commands in the name of regulation. In part this is because the costs of regulation are even better disguised than those of taxation: while paycheck withholding may lull us into complacency about our income tax burden, it is downright transparent compared with the costs of regulation, which the ordinary citizen may never recognize when passed along in the form of higher utility bills or sluggish performance by some sector of the economy. Iain notes the good work done by his colleagues at the Competitive Enterprise Institute:

Regulations cost $1.75 trillion in compliance costs, according to the Small Business Administration. That’s greater than the record federal budget deficit — projected at $1.48 trillion for FY 2011 — and greater even than all corporate pretax profits. This is only one of many findings of the new edition of Wayne [Crews’] “Ten Thousand Commandments: An Annual Snapshot of the Federal Regulatory State,” a survey of the cost and compliance burden imposed by federal regulations.

As is now becoming evident, the Obama Administration is presiding over one of the most extraordinary expansions of regulation in all American history, in areas from health care to consumer finance, university governance to “obesity policy,” labor and employment law to the environment. Not all these developments originated with Obama appointees – some had their start under President George W. Bush or with lawmakers in Congress – but this administration has pursued stringent regulatory measures with extraordinary zeal, notwithstanding the odd feint to soothe business-sector misgivings.

Here are three more or less random samplings from recent days of the quiet momentum that’s built up in Washington toward a much bigger regulatory state:

  • Reflecting the historical development of the Food and Drug Administration, the introduction of new medical devices such as pacemakers and joint replacements is still somewhat less intensively regulated than the introduction of new pharmaceutical compounds. As Emory’s Paul Rubin relates at Truth on the Market, pressure is building in Washington to correct this supposed anomaly by intensifying the regulation of devices. As Rubin notes, “virtually all economists who have studied the FDA drug approval process have concluded that it causes serious harm by delaying drugs,” yet the premise of the new campaign for regulation “is that we should duplicate that harm with medical devices.”
  • Much of the new regulation of consumer finance has taken the form of rules governing what information lenders can ask for or consider about borrowers’ situation in extending credit. One such proposed rule, from the Federal Reserve, “would require credit card issuers to consider only a person’s independent income, and not the household’s income, when underwriting credit cards in an effort to protect young adults unable to repay debt.” Great big unforeseen consequence: many stay-at-home parents will now be unable to establish credit in their own names (via).
  • Among a slew of other high-profile regulations, the Environmental Protection Agency (EPA) has chosen this moment to demand very rapid new reductions in emissions from industrial boilers (“Boiler MACT” rules). Per ShopFloor, Thomas A. Fanning, who runs one of the nation’s largest electric utilities, the Southern Company, thinks trouble lies ahead:

    EPA has proposed Utility MACT rules under timelines that we believe will put the reliability and affordability of our nation’s power system at risk. EPA’s proposal will impact plants that are responsible for nearly 50 percent of total electricity generation in the United States. It imposes a three-year timeline for compliance, at a time when the industry is laboring to comply with a myriad of other EPA mandates. The result will be to reduce reserve margins—generating capacity that is available during times of high demand or plant outages—and to cause costs to soar. Lower reserve margins place customers at a risk for experiencing significant interruptions in electric service, and costs increases will ultimately be reflected in service rates, which will rise rapidly as utilities press ahead with retrofitting and projects to replace lost generating capacity due to plant retirements.

At least we’ll be able to avert brownouts by switching over readily to fracked-natural-gas, Alberta tar-sands, and latest-generation-nuclear options – or we would had all those options not been put under regulatory clouds as well.

Gas Prices, Speculation, and the Price of Tea in China

With gasoline in the United States moving toward (and in some places, above) $4 a gallon and motorists understandably unhappy, there is a growing desire to blame someone for the high prices.

Previous gas price spikes in 2006 and 2008 brought blame on ”Big Oil” (meaning firms like Exxon-Mobil, BP, Royal Dutch/Shell, et al., which really are just mid-sized oil — but whatever), the Bush administration and Republicans, environmentalists, and the federal government. But 2011 offers a new leader in the blame game: speculators. From Capitol Hill lawmakers, to business columnists, to activist websites, to letters to the editor and hyper-forwarded emails, people are calling out trading in the oil and gasoline futures markets, aka ”speculation,” and demanding that government do something about it.

The problem is, I haven’t seen any of these folks offer a coherent explanation for how speculation drives up the price at the pump. And I doubt any is forthcoming.

The speculation-blamers’ story is simple enough: Investors sign futures contracts in oil and gasoline — traditionally, agreeing to a price today for oil or gas that will be delivered weeks or months in the future (and that probably has yet to be pumped out of the ground or refined). But, speculation-blamers say, the investors are running amok, paying outrageous prices for the futures. Those prices then affect oil and gasoline sales today, driving up prices at the pump.

Worse, they say, many of the futures are just paper transactions: the traders don’t have oil or gas to sell, nor do they intend to take delivery of it. Instead, when the future closes (that is, reaches its end-date), then one of the two counterparties will simply pay the other the difference between the agreement’s price and the actual market price on the closing day. For instance, if Smith Investments and Jones Investments signed a six-month future for one barrel of oil at $100, with Smith taking the “short” position (believing that oil’s price will be less than $100 six months from now) and Jones taking the “long” position (believing the price will be above $100), and six months from now oil is selling for $80, then Jones will pay Smith $20. Vice-versa if oil’s price is $120. (In fact, most futures today are settled in cash, even if one of the counterparties is somehow involved in oil production or use.)

On first blush, the speculation-blamers’ story makes sense: Surely, the price for future delivery of oil or gasoline will affect the price for present-day delivery. And all the paper-transaction stuff just seems devious and dangerous — shrewd Wall Street investors are hosing Main Street again!

But think more carefully about the story, and it begins to unravel.

Futures prices for some commodity like oil or gasoline can affect current prices — but if and only if those futures cause producers, consumers, or stockpilers (i.e., people who buy and hold commodities for future sale, aka speculators) to change their behavior in some way that would affect supply and demand today. For instance, if the federal government were to announce that it’s going to buy a lot of gold in six months at a price much higher than what it sells at now, stockpilers would likely respond by buying and storing gold today in anticipation of selling it to Uncle Sam later, at a profit. This would push up prices today.

However, commodities that are costly to store are less likely to experience this because speculators will have to factor in the storage cost, which could make the strategy risky and unprofitable. For instance, roses are inexpensive most of the year, but are very expensive around Valentine’s Day. The reason for this (in part) is that roses harvested in August can’t be stored cheaply and sold on Valentine’s Day. A “rose future” signed in August but closing in February won’t have much effect on August rose prices.

Interestingly, oil and gasoline are more like roses than gold. Oil and gas don’t spoil (at least, not to the extent roses do), but they’re expensive to store — petroleum is heavy, dirty, emits fumes, and is combustible. For that reason, not a lot of oil or gasoline is stockpiled for the long term (beyond the Strategic Petroleum Reserve). With that said, there has been some building of oil stockpiles in recent weeks, but it’s not dramatically higher than the stockpiling usually seen prior to the summer driving season – and gasoline stocks have been declining.

What about the devious-seeming paper transactions? One prominent speculation-blamer, The Street contributor Dan Dicker, derisively compares this investing to gambling. OK, but what does that have to do with the price of gasoline at the pump? If you and I were to bet on the Capitals-Rangers series, our bet wouldn’t affect the outcome of the series. Likewise, I don’t see how a bet on the future price of oil between two investors would affect the price of oil today (or in the future for that matter) because their paper transaction would not affect the supply or demand for oil today.

So what is driving the gasoline price spike? It seems far more likely that it is the result of a combination of the following:

  1. Uprisings in the Middle East could spread to mega-exporters Saudi Arabia and Iran, which has resulted in an implicit risk premium on oil and oil products.
  2. Japanese recovery efforts from the March 11 earthquake and tsunami are drawing heavily on petroleum.
  3. China and India are using more energy as their economies recover from the global recession.

All of this exacerbates the underlying problem: World demand for oil is very strong at most any price, but supply can’t be ramped up quickly in response to demand (because it takes about a decade to bring a new oil field online). In economic parlance, this means that both supply and demand are “price-inelastic,” which in turn means that even little problems can have a big effect on price (fortunately, in either direction). To understand this better, see this short paper.

Now, I admit, I’m no Wall Street wizard, and perhaps the Dan Dickers of the world know something that I don’t. But, so far, I haven’t seen them present a sound explanation for their claim that speculation is to blame for high gas prices. When I read their comments, I think of the old retort, “What’s that got to do with the price of tea in China?” So the next time one of these folks starts in, we need to get him to clearly explain how “speculation” affects the price at the pump.

Congress: The Least Dangerous Branch

That’s the topic of my Washington Examiner column this week. In it, I discuss last week’s budget battle and the failure of “policy riders” designed to rein in the Obama EPA’s attempts to regulate greenhouse gases without a congressional vote specifically authorizing it. The Obama team believes it has the authority to implement comprehensive climate change regulation, Congress be damned. Worse still, under current constitutional law–which has little to do with the actual Constitution–they’re probably right. Thanks to overbroad congressional delegation, “the Imperial Presidency Comes in Green, Too.” At home and abroad, the legislative branch sits on the sidelines as the executive state makes the law and wages war, despite the fact that “all legislative powers” the Constitution grants are vested in Congress, among them the power “to declare War.”

Yet, as I point out in the column, Congress retains every power the Constitution gave it–powers broad enough that talk of “co-equal branches” is a misnomer. Excerpt:

The constitutional scholar Charles Black once commented, “My classes think I am trying to be funny when I say that, by simple majorities,” Congress could shrink the White House staff to one secretary, and that, with a two-thirds vote, “Congress could put the White House up at auction.” (I sometimes find myself wishing they would.)

But Professor Black wasn’t trying to be funny: it’s in Congress’s power to do that. And if Congress can sell the White House, surely it can defund an illegal war and rein in a runaway bureaucracy.

If they don’t, it’s because they like the current system. And why wouldn’t they? It lets them take credit for passing high-minded, vaguely worded statutes, and take it again by railing against the bureaucracy when it imposes costs in the course of deciding what those statutes mean.

Last year, in the journal White House Studies [.pdf], I explored some of the reasons we’ve drifted so far from the original design:

Federalist 51 envisions a constitutional balance of power reinforced by the connection
between “the interests of the man and the constitutional rights of the place.” Yet, as NYU‘s Daryl Levinson notes, ―beyond the vague suggestion of a psychological identification between official and institution, Madison failed to offer any mechanism by which this connection would take hold…. for most members, the psychological identification with party appears greatly to outweigh loyalty to the institution. Levinson notes that when one party holds both branches, presidential vetoes greatly decrease, and delegation skyrockets. Under unified government, “the shared policy goals of, or common sources of political reward for, officials in the legislative and executive branches create cross-cutting, cooperative political dynamics rather than conflictual ones.”

Individual presidents have every reason to protect and expand their power; but individual senators and representatives lack similar incentive to defend Congress’s constitutional prerogatives. “Congress” is an abstraction. Congressmen are not, and their most basic interest is getting reelected. Ceding power can be a means toward that end: it allows members to have their cake and eat it too. They can let the president launch a war, reserving the right to criticize him if things go badly. And they can take credit for passing high-minded, vaguely worded statutes, and take it again by railing against the executive-branch bureaucracy when it imposes costs in the course of deciding what those statutes mean.

In David Schoenbrod’s metaphor, modern American governance is a “shell game,” with We the People as the rubes.  That game will go on unless and until the voters start holding Congress accountable for dodging responsibility.

GE and Obama: A Betrothal at the Altar of Industrial Policy

The angry Left has been calling for President Obama to fire Jeffrey Immelt from his position as head of the President’s Council on Jobs and Competitiveness. I think that would be a good idea, but for different reasons.

Sen. Russ Feingold, Moveon.Org, and the regular scribes at the Huffington Post see Immelt, the chairman and CEO of General Electric, as unfit to advise the president because GE invests some of its resources abroad and, despite worldwide profits of $14.2 billion, paid no taxes in 2010. No illegalities are alleged, mind you; GE — like every other U.S. multinational — responds to incentives, including those resulting from tax policy and regulations concocted in Washington. 

But there are more substantive reasons for why Immelt is unfit to advise the president.  In particular, GE is a major player in several industries that President Obama has been promoting as part of his administration’s cocksure embrace of industrial policy. With over $100 billion in direct subsidies and tax credits already devoted to “green technology,” President Obama is convinced that America’s economic future depends on the ability of U.S. firms to compete and succeed in the solar panel, wind harnessing, battery, and other energy storage technologies. Concerning those industries, the president said: “Countries like China are moving even faster… I’m not going to settle for a situation where the United States comes in second place or third place or fourth place in what will be the most important economic engine of the future.”

Well, just yesterday GE announced plans to open the largest solar panel production facility in the United States, which nicely complements its role as the largest U.S. producer of wind turbines (and one of the largest in the world). The 2011 Economic Report of the President describes the taxpayer largesse devoted to subsidizing these green industries:

[T]he Recovery Act directed over $90 billion in public investment and tax incentives to increasing renewable energy sources such as wind and solar power, weatherizing homes, and boosting R&D for new technologies. Looking forward, the President has proposed a Federal Clean Energy Standard to double the share of electricity produced by clean sources to 80 percent by 2035, a substantial commitment to cleaner transportation infrastructure, and has increased investments in energy efficiency and clean energy R&D.

And Box 6.2 on page 129 of the 2011 ERP conveniently breaks out those subsidies by specific industry, most of which are spaces in which GE competes.

Tim Carney gave his impressions of this budding relationship between GE and the Obama administration in the DC Examiner last July:

First, there’s the policy overlap: Obama wants cap-and-trade, GE wants cap-and-trade. Obama subsidizes embryonic stem-cell research, GE launches an embryonic stem-cell business. Obama calls for rail subsidies, GE hires Linda Daschle [wife of former South Dakota Senator and Obama confidante Tom Dachle] as a rail lobbyist. Obama gives a speeeh, GE employee Chris Matthews feels a thrill up his leg. I could go on.

And Carney does go on in a December 2009 Examiner piece:

Look at any major Obama policy initiative — healthcare reform, climate-change regulation, embryonic stem-cell research, infrastructure stimulus, electrical transmission smart-grids — and you’ll find GE has set up shop, angling for a way to pocket government handouts, gain business through mandates, or profit from government regulation.

One month after President Obama proposed subsidizing high-speed rail because, in his words, ”everybody stands to benefit,” the head of GE’s Transportation division proclaimed, “GE has the know-how and the manufacturing base to develop the next generation of high-speed passenger locomotives. We are ready to partner with the federal government and Amtrak to make high-speed rail a reality.”

About the optics of these related events, Carney writes: “This was typical — an Obama policy pronouncement in close conjunction with a GE business initiative. It happens across all sectors of the economy and in all corners of GE’s sprawling enterprise.” And he goes on to list other examples.

Jeff Immelt should step down as head of the President’s Council on Jobs and Competitiveness because there is simply no avoiding a conflict of interest.  Even if he recommends courses of action to the president that don’t advance GE’s bottom line, it’s hard to see how that wouldn’t be an abrogation of his fiduciary responsibility to GE’s shareholders.

But more troubling is that Immelt and the president appear to be two peas in a pod when it comes to faith in government-directed industrial policy.  Immelt admires the German model of industrial policy because the Germans believe in “government and business working as a pack.”  He admires China’s “incredible unanimity of purpose from top to bottom.”  And days after Obama’s inauguration, Immelt wrote to shareholders:

[W]e are going through more than a cycle. The global economy, and capitalism, will be “reset” in several important ways. The interaction between government and business will change forever. In a reset economy, the government will be a regulator; and also an industry policy champion, a financier, and a key partner.

Citizens of a country that owes so much of its unmatched economic success to innovation and entrepreneurship and an absence of heavy-handed top-down mandates should be wary of the changes the presdient and Mr. Immelt are fostering.

Cato Unbound - There Ain’t No Such Thing As Free Parking

This month at Cato Unbound we’re discussing a practical, everyday issue – parking!

Yes, Cato Unbound is supposed to cover big ideas, deep thoughts, and the like, but parking policy is both important in its own right and also points to what I consider a very interesting problem: Given a theoretical or abstract commitment to free markets, well, how do we get there in the real world? What would a free-market policy look like in this or that issue area?

The answer isn’t always obvious, and the map isn’t the territory. Parking is interesting in this respect and possibly helpful. Parking is all around us, most of us deal with it every day, and the unintended consequences of parking policy are I think maybe easier to see than the unintended consequences in other fields. Parking affects how we live, how we shop, and how we work. It touches our cities, our family life, our environment, and even our health. Learning to look for such unintended consequences is part of developing a political culture that values economic insights and puts them to work.

That’s why this month we’ve invited four urban economists, each of whom can fairly be said to value the free market. Still, there will be a few disagreements among them – as I said, the map isn’t the territory. Donald Shoup leads the issue with his essay “Free Parking or Free Markets?” – arguing that our expectation of abundant free parking is both bad for our communities and the product of anti-market planning.

The conversation will continue throughout the month, with contributions from Professor Sanford Ikeda, Dr. Clifford Winston of the Brookings Institution, and Cato’s own Randal O’Toole. Be sure to stop by throughout the month, or else subscribe via RSS.

Energy Error Continued

When Barack Obama emerged as a serious contender for the presidency, he offered a core menu of curing everything by increased federal intervention in health care, education, and energy. Whenever new problems arose that lessened the urgency of earlier concerns, Obama has crafted assertions that his original prescriptions will also resolve the new difficulties. In energy, this has involved extending his program to new, even more dubious projects. He also has a habit of incessantly repeating the same tired arguments in the vain hope that his skill at persuasion will win the day.

His March 30, 2011 energy speech and accompanying Blueprint are typical. About the only differences between these and his June 15, 2010 speech on energy were more bad ideas. He added to the panic-driven slowdown in offshore oil and gas drilling permits, now rationalized as a prudent response; a post-Japan crisis review of nuclear power; and another for new methods of producing natural gas. For no good reason, he argued that Brazilian oil development needed U.S. government support despite the long history that successful oil development in some of the most backward countries in the world has occurred without major U.S. government aid. (In fact, the aid offered was an Export-Import Bank loan and thus more an exercise in crony capitalism than a useful move.)

Otherwise Obama continued to display the central characteristic of his philosophy — that he and his advisers possess such superior insight that they can guide the average American to better decisions. This is precisely the Progressive error that has led to the present political mess and the cause of the dramatic 2010 shift in the composition of the U.S. House of Representatives. Whenever concerns arise that he has overreached, he claims that he was doing the sensible thing.

His Blueprint constitutes Exhibit A in the case against this interventionism. It is essentially a list of the many mandates that Obama has achieved or desires, ranging from high-speed rail to micromanaging the design of every new building in the United States. This list is dominated by the many provisions of the infamous stimulus bill that indiscriminately threw money at every favored area including energy. Obama seems to believe that seeing where the money went will counteract the outrage at ill-conceived, unnecessary, and counterproductive spending. At least to energy specialists, what actually appears is resounding proof that the voters were right — every idea is bad.

The speech also showcased Obama’s talent at making dubious assertions. Many have commented that he does not deserve the credit that he seems to claim for the rise in U.S. oil output. The very long lead times, which Democrats traditionally use to oppose expanded oil-and-gas leasing, imply that the rise was facilitated by actions in prior administrations. An even greater whopper was his intimation that the existence of many undeveloped leases suggests that no rush exists to lease and license more. The more obvious criticism is that his cumbersome licensing policy contributes to the inability to develop. Less apparent is the likelihood that many of those leases proved, after further examination, to be unattractive while more promising areas are being withheld from leasing.

He similarly selected the most misleading possible way to understate U.S. oil-production potential. He indicated correctly that the United States has only 2 percent of world “proved” reserves of oil. What he ignored is that proved reserves cover only already-known sources and wild methodological differences among countries in how this is calculated make cross-country comparisons dubious. (This situation was worsened by 1970s hysteria. The highly efficient existing U.S. system was replaced because it was run by the supposedly untrustworthy industry. The government created its own far more expensive and far less satisfactory system.) The more reliable measure of actual production shows an 8.5 percent U.S. share in 2009. Neither measure satisfactorily indicates what really matters — the potential efficiently to add production. Obama thus adds to his prior unjustifiable aim to reduce petroleum use by also misstating the petroleum potential. Substantial oil imports remain desirable for the U.S. because of the underlying economics. Nevertheless, the federal government has imposed undesirable restrictions on oil and gas production.