Commentary

Energy-Bill Follies

With great fanfare, the Senate passed a $35 billion energy bill earlier this month that has been characterized as a somewhat wiser and greener bill than that passed by the House a few months ago. Although conservatives claim to find much therein to embrace, virtually every section of the bill represents a rejection of free markets and limited government.

The most obnoxious aspect is the ten-year, $18.4 billion in tax breaks and incentives for various energy investments. While conservatives like to argue that if you subsidize something, you’ll get more of it, that observation is generally used as an admonition against — not as a rationale for — government intervention. In this case, the Senate proposes to subsidize investments that have been unable to attract as much private capital as proponents would like. But what are the chances that 100 senators using other peoples’ (taxpayers) money will make better investment decisions than investors using their own money? It’s possible that some of the Senate’s choices are sound, but in those cases, all that is accomplished is the unnecessary transfer of resources from taxpayers to investors. In short, the Senate isn’t subsidizing energy as much as it’s subsidizing dubious investments and/or particular investors.

The bill also contains specific production and consumption orders. Ten percent of all electricity sold in 2020 must be produced from a list of approved renewable fuels; refineries must churn out 8 billion gallons of ethanol per year by 2012; and the president is called on to reduce oil consumption by one million barrels a day by 2015. Government mandates that “thou shall produce” or face prosecution seem to be more characteristic of Soviet five-year plans than of a free-market economy.

Numerous energy-conservation and efficiency mandates also are in the bill, but high energy prices, if they are permanent, offer consumers adequate incentive to economize on energy use. And if prices turn out to be lower in the future, then conservation and efficiency investments would have been a misuse of capital. Given that the track record of government predictions about future energy prices has not been good (remember $100 per barrel of oil by 2000?), shouldn’t conservatives allow consumers — rather than government — to decide how their money is spent?

Respect for state and local autonomy is also tossed aside in the stampede to shove liquefied natural gas (LNG) terminals down the collective throats of communities that simply don’t want them given the risk of potentially dangerous industrial accidents. If investors can’t pay local governments enough to accept these terminals — which are necessary to import natural gas from abroad — it tells us that the costs of such facilities in those communities (at least, when subjective risk preferences are included in the calculation) are greater than the promised economic benefits. Some communities, of course, have demonstrated a willingness to accept such payments in return for terminal construction, so LNG will get into the United States one way or the other. The only issue is which local communities receive what level of payments to compensate for perceived risks. If some communities or regions of the country are willing to pay higher natural-gas prices in order to avoid the risk associated with such terminals, why should Washington intervene and overrule those preferences?

Conservatives are also excited about language that permits federal regulators to overrule state and local regulators who are preventing the construction of new power lines. But the same objections that apply to the LNG provisions of the bill apply here as well.

There are two salutary provisions of the bill. First, the Senate bill requires an inventory of oil and gas resources on the outer continental shelf. While the survey is not tied to any change in public policy, an informed debate about the relative merits of offshore drilling in currently protected waters is better than an uninformed debate. Second, the bill repeals the Public Utility Holding Company Act (PUHCA), a depression-era law that prohibits certain kinds of investments and corporate organizational structures in the electricity sector.

The House’s version: better, but still bad
Those are the highlights of the energy bill passed this month by the Senate. To be fair, the House bill championed by conservatives isn’t much better. There are a few positive elements: The tax preferences are smaller at $8.1 billion over ten years; the ethanol mandate is only for 5 billion gallons by 2012; there is no renewable-electricity production order or dictate to the president to reduce oil consumption; and the energy-efficiency provisions are more restrained. On the other hand, the provisions regarding federal preemption of state authority over LNG-terminal and electric-transmission-line construction are the same as in the Senate’s version. Curiously, the “conservative” House has long resisted the inventory of oil and gas resources in the outer continental shelf, although it did decide to open up the Arctic National Wildlife Refuge to the oil industry, while the Senate did not.

The biggest political difference between the two bills is the issue of liability for the producers of MTBE, a component of gasoline that contaminates groundwater when underground gasoline tanks leak. The problem concerns the underground storage tanks used by independent gas stations but abandoned after congressionally mandated improvements in tank technology. Many small stations exited the business rather than pay for the upgrades, which leads to the question: Who should bear the cleanup costs, since the owners of the leaking tanks cannot be found or cannot pay for damages that could well exceed $75 billion? The House argues that producers were not responsible for leaking underground storage tanks owned by others; that MTBE use increased because of a mandate by Congress in the 1990 Clean Air Act; and that producers should not be liable. The Senate believes that producers knew of the dangers posed by MTBE to groundwater; knew that underground storage tanks were prone to leak; could have used other fuel oxygenates to comply with the 1990 Clean Air Act amendments; and were thus at least partially responsible for the groundwater contamination that followed.

Everyone agrees that price signals should reflect all the costs associated with production — including the cost of environmental damages associated with production and consumption. But including yesterday’s environmental costs in today’s product does not reflect the cost of production today — it reflects the cost of production yesterday and thus distorts price signals. Moreover, it’s hard to make a normative case that would hold MTBE producers liable for the negligence of the retail outlets they sold the product to. Accordingly, the cleanup should be thought of as a public good that should be paid for by the public at large.

In sum, both bills have far more chaff than wheat, and it’s unlikely that the upcoming conference committee will improve matters. A bill that would simply repeal PUHCA, open up ANWR for oil exploration, conduct an inventory of energy reserves off federal coastal waters, and protect MTBE producers from liability would be nice, but that bill could not possibly pass either chamber of Congress. Moreover, it wouldn’t do all that much to improve the operation of energy markets that — truth be told — aren’t in any great need of political “fixing.” Accordingly, we’re probably better off relying on existing supply-and-demand dynamics rather than politicos to drive down energy prices.

Jerry Taylor is director of natural-resource studies at the Cato Institute and Peter VanDoren is editor of Cato’s Regulation magazine.