Energy economics at the White House

One day after President Donald Trump took office, the first official statement on the new administration’s energy policy was posted to the White House website. ‘An America First Energy Plan’, it is called – a ‘vision statement’ to go along with five others on the following priority issues: foreign policy, jobs and growth, military strength, law enforcement, and trade. For the public, it is the closest thing to a holistic picture of U.S. leadership’s guiding principles on energy over the next four years.

The statement makes clear from the beginning that there are two primary priorities of the current White House when it comes to energy: (1) make it cheaper; (2) get it from here, i.e., the United States. A third priority – air and water quality – is introduced at the end of the statement and takes a backseat to the goals of lowering costs and raising domestic production. The rest of the statement is largely devoted to explaining how the administration is going to pursue these two main goals – in brief, by eliminating environmental regulation, opening new federal lands to drilling, and reviving the coal industry.

From an economics standpoint, there are at least three things left to be desired about this energy plan:

 

  1. All of the focus is on the costs of environmental regulation, and none are on the benefits.

The text says “For too long, we’ve been held back by burdensome regulations”, and declares a “commitment to eliminate harmful and unnecessary policies.” Moreover, the President’s Executive Order on January 30th requires that “whenever a new regulation is enacted by any federal agency, regulators must eliminate two rules, so that the cost of complying with the new rule is offset by the costs associated with the two existing rules.” As has already been pointed out, regulation produces both costs and benefits. For instance, it is estimated that the Clean Air Act Amendments of 1990 caused a $5.4 billion total foregone wage bill, but that number is two orders of magnitude smaller than estimates of the total health benefits of the amendments. Good policy compares both sides of the economic ledger; that is not what is being advertised by the White House.

 

  1. Predictions about the impacts of policy are given with no evidence

The Energy Plan claims that “eliminating harmful and unnecessary policies” such as the Climate Action Plan and the Waters of the United States rule will increase wages by more than $30 billion over the seven years. But it provides no evidence to make that claim credible. With this much economic welfare at stake, the least one could ask of the government is that it provide an analysis justifying its policy decisions. Decades of environmental economics research are devoted to learning about policy and improving our ability to measure policy impacts. The White House should try taking advantage of that.

 

  1. The nature of competition in energy markets is misunderstood

“The Trump Administration will embrace the shale oil and gas revolution” and “[revive] America’s coal industry.” Both of these priorities have been featured by President Trump since before the election. While it may be politically attractive to pledge that two industries in direct competition with each other will both grow, it is actually quite difficult to follow through on that pledge. Take a look at trends in coal and natural gas electricity generation: they almost never move in the same direction. Coal and natural gas are generally strong substitutes for each other, so a drop in the price of natural gas can be expected to drive some switching away from coal (and vice versa for a price hike). Research confirms this basic logic: low natural gas prices (and not environmental regulation) are the main cause of the coal industry’s decline in recent years. Both theory and practice thus point to the dual priority of coal and natural gas expansion being misguided.

 

In sum, the White House energy plan may not be aligned with what is best for the country’s overall welfare. It seems predicated on a blind focus on costs, a move away from evidence-based policy, and an incorrect logic of energy market function. And on top of all that, it ignores the basic feature of the climate change problem:  it can only be solved through cooperation. The Trump administration is not about to shed its “America First” rhetoric and agenda, but when it comes to the global climate, that agenda could easily harm the United States in the long run.

 

Image courtesy of Flickr. Originally published by S&S on March 17, 2017.

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