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‘Simple Rules for a Complex World’: Five for Energy Policy

“[P]ermanence and stability are the cardinal virtues of the legal rules that make private innovation and public progress possible. To my mind there is no doubt that a legal regime that embraced private property and freedom of contract is the only one that in practice can offer that permanence and stability.”

- Richard Epstein. Simple Rules for a Complex World,  Cambridge:  Harvard University Press, 2004, p. x1.

In U.S. Energy Policy and the Pursuit of Failure–and in a recent blog post at MasterResource–I have argued that for government energy policy to be effective it has to be modest—modest especially in what policy can be expected to accomplish.

But for modest policy to be effective, there must be some basic understandings about what energy policy should or should not entail. Here are my rules for effective energy policy.

  1. Make energy policy be about energy. Seems too obvious? Not to policymakers. Since the 1970s, energy policy has been said to have near magical qualities. Proponents of energy legislation have claimed bills would: reduce the U.S. trade deficit, aid farmers, build U.S. manufacturing capabilities, provide world technological leadership, strengthen the dollar, reduce inflation, boost economic growth, protect the American way of life, and restore America’s confidence. And of course, energy legislation is always supposed to create jobs – thousands, hundreds of thousands, even millions. I find it hard to take seriously any policy that claims to deliver such long lists of goodies, especially since, to date, most energy legislation has delivered little or nothing of value.
  2. Base policy on what every administration says is a prerequisite: explicit identification of a market failure as well as a clear explanation of why and how government intervention will be an improvement. The identification should include a review process and the metrics that will determine if an improvement has actually occurred. Even with detailed analyses, there will, of course, be mistakes. But this kind of specification at least produces a sound basis on which success or failure can be judged. This is a modest goal, but then perhaps a goal that could actually be achieved, because it will tend to limit legislation that comes with extravagant save-the-world claims.
  3. Recognize and identify the trade-offs. U.S. energy policy is full of free lunches. Everyone will benefit and no one will lose (except maybe oil companies). Of course, this is never the case. Who wins and who loses? Production tax credits and feed-in tariffs for wind generation, for example, leave taxpayers and ratepayers worse off; wind producers reap the benefits. How big is the cost to the losers and the gains for the winners? Modest energy policy is also honest energy policy. Of course it is sometimes hard to parse from bills that are over 1000 pages long just who wins and who loses and by how much. But then perhaps a rule like this would make future legislation actually readable.
  4. End Commercialization Subsidies. Energy commercialization subsidies imply that policymakers and bureaucrats can choose market winners; this is clearly an immodest idea, especially since the evidence is overwhelming that the government can’t, and shouldn’t even try, to pick commercial winners. In the meantime subsidies directly transfer wealth – whether given to producers or consumers – and are detrimental to the normal process of technological development. Subsidies are insidious and hard to reverse, because recipients have every reason to try to preserve them. If the beneficiaries have a strong lobby, officials will be reluctant to make any changes. This is true whatever the form of the subsidies: direct grants, loan guarantees, feed-in tariffs or tax preferences. Advocates of alternatives claim that fossil fuels get subsidies so that subsidies to alternatives just level the playing field. Though I think a “level-playing-field” is a meaningless cliché, I certainly agree that all commercialization subsidies should be stopped to anyone—fossil fuel producers, nuclear power developers and alternative technology purveyors.
  5. Reconceive or abolish the Department of Energy. The Department of Energy (DOE) was created in 1977 to direct a “strong national energy program” because of the impending exhaustion of fossil fuels (or at least of natural gas and oil) and because U.S. dependence on the international oil market imperiled our national security and sovereignty. This is of course the 1970s energy narrative that I critique at length in my book. That story was not true then and is even more obviously incorrect today. The rationale for the DOE was actually quite bizarre. Imagine if the Department of Agriculture justified its existence because we were running out of farm land or the Department of Transportation because our automobile market was dependent on supplies of foreign-made cars. But how can the DOE function if energy policy is modest instead of “strong?” I’m not sure it can. Right now the DOE is the essence of a bloated bureaucracy clinging to an obsolete mission, developing immodest ideas to save the world. It would seem that the most straightforward action is to close it and find new homes for any functions that can actually be shown to provide social benefits.

Modest aims have never been associated with U.S. energy policy. But then the immodest goals of government policymakers have never been achieved either. My belief is that energy policy goals never will be unless somehow modesty prevails.

3 comments

1 Tom Tanton { 10.04.13 at 7:37 am }

“Let nature takes its course”…good energy policy might just be for recognizing that “doing nothing” might just be actually doing the one thing of value.

2 Ed Reid { 10.04.13 at 8:52 am }

“Permanence and stability” are extremely important regarding facilities with 40-60 year useful lives and regulated 40 year depreciation periods, such as power generation facilities and natural gas transmission pipelines. Nowhere is this more pertinent today than in the discussion of “natural gas as a bridge fuel”.

The advocates of “natural gas as a bridge fuel” fail to realize, or consciously choose not to realize, that a bridge which requires 40 years to recover its investment, but is subject to being closed well before the end of that period, would not be financed and built.

This issue might well become even more pertinent to the investors in existing coal generators next year, when US EPA releases its proposed CO2 emissions limits for those existing power plants. Depending on the specific emissions limits and the proposed compliance period, many utilities and their stockholders might find themselves with coal generators which are not yet fully depreciated, but rendered inoperable by federal government regulation. It would then fall to state regulators to deal with the “used and useful” issue with regard to recovery of the ratebased assets stranded by federal regulation.

Both of these situations could result in massive economic dead losses, on top of the massive investments required in non-CO2 emitting generating assets. This is one of the most insidious aspects of incrementalism in dealing with major technological and economic change. If it is the intent of federal regulators to ultimately reduce US CO2 emissions to zero, it would be useful to clearly state that intent; and, to identify the schedule over which the reduction would be required. It goes without saying that if would also be helpful to KNOW that such an effort would be both necessary and effective.

“Don’t begin vast programs with half-vast ideas.”

3 Some recent comments and op-eds | Peter Z. Grossman { 10.04.13 at 5:42 pm }

[...] the second, laid out my “rules for a modest energy policy” http://www.masterresource.org/2013/10/simple-rules-energy-policy/, derived from Chapter 9 of my book. The op-ed is a reflection on the Arab oil embargo and the first [...]

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