Let’s Fix the Quorum Quandary at FERC

https://www.cato.org/blog/lets-fix-quorum-quandary-ferc

Travis Fisher

The Federal Energy Regulatory Commission (FERC) is not a household name, but its impact on the daily lives of Americans is profound. FERC is an independent and bipartisan federal agency, and a well‐​functioning FERC is essential to a well‐​functioning energy industry in the United States. The agency is responsible for (among other things):

FERC’s origin and responsibilities regarding hydropower go back to the 1920 Federal Water Power Act. Most of its present responsibilities come from two major congressional actions in the 1930s—the 1935 Federal Power Act and the 1938 Natural Gas Act (NGA). For more background, see the official “FERC 101” slide deck. Also, I should disclose that I spent about half of my career at FERC and have great respect for my friends and colleagues who work there.

An examination of the natural monopoly premises underlying FERC’s organic statutes is important but beyond the scope of this piece. Those of us who support free markets can debate whether the federal government should have so much authority, but FERC has had a significant level of authority since the 1930s and is not going anywhere soon.

In fact, recent legislative proposals would give FERC an additional responsibility—one that’s presently being abused by the Department of Energy (DOE)—to approve the international sale of natural gas. FERC is responsible for licensing LNG facilities, many of which are for domestic use only. However, under the NGA (as amended by the DOE Organization Act), the DOE is responsible for approving the sale itself—the import or export of the natural gas commodity—if it deems the transaction in the “public interest.”

As Cato’s Scott Lincicome has written, returning the DOE’s LNG authority to FERC is probably a step in the right direction (the NGA tasked the Federal Power Commission with approving international sales of natural gas; the DOE Organization Act created the DOE, renamed the Federal Power Commission to FERC, and gave the authority to the new DOE).

However, any conversation about giving FERC more authority (or encouraging it to push the envelope of its existing authority) should also address the elephant in the FERC room—the near‐​perennial concern that FERC won’t have enough votes to do its job.

The Quorum Issue, Past and Present

Writing and issuing orders is how FERC operates. By law, FERC needs a quorum of three voting commissioners out of a maximum of five to issue orders, which are typically drafted by FERC’s staff of about 1,500 people. These orders are negotiated and ultimately approved and voted out by the commissioners, who are nominated by the president and confirmed by the Senate. At the moment, the agency has two vacant commissioner roles and three active commissioners. Richard Glick (D) and James Danly (R), each a former chairman and commissioner, left at the end of their terms (in 2022 and 2023, respectively) and have not been replaced.

Commissioner Allison Clements (D), one of the three sitting FERC commissioners, has announced that she will not seek a second term. Her current term expires on June 30, 2024, but she can stay at FERC until she is replaced or until the end of the congressional session. As Politico reported, Clements’ departure would mean a loss of quorum and a standstill for FERC and the two remaining members, Chairman Willie Phillips (D) and Commissioner Mark Christie (R).

Political transitions are particularly vulnerable moments for FERC. The last time FERC was without a quorum was in 2017, when Republican President Donald Trump designated a new chairman among the three sitting commissioners (all Democrats), and the demoted commissioner promptly departed. The new chairman at the time, Cheryl LaFleur, and Commissioner Collette Honorable were left without a quorum, and FERC attempted to issue as many orders as possible by delegating additional authorities to staff. Ultimately, the period without a quorum lasted six months.

If the White House and Senate do not fill at least one of the vacant seats this year, FERC will again lose a quorum in early 2025. It is unclear who would be at fault, and the lack of clear responsibility could be part of the problem. It takes two to tango—the White House and the Senate. However, in this dance, many FERC insiders would say the Senate takes the lead, in part because the Senate Committee on Energy and Natural Resources (ENR) holds the hearings and markups for incoming commissioners.

Further, as a practical matter, the ENR leaders of each party frequently provide the names of top‐​tier candidates for the president to officially nominate. Last year, Senator Joe Manchin (D‑WV and ENR chairman) recommended former FERC staffer and present ENR staffer David Rosner for the vacant Democratic seat. As of the time of this writing, Senator John Barrasso (ENR ranking member) has not recommended anyone for the vacant Republican seat. (Side note: Senator Barrasso’s wife recently passed away after a long battle with a devastating form of brain cancer, and my heart goes out to the family.)

Given the Senate’s leadership role in approving new FERC commissioners, it can also be a choke point. Senator John Kennedy (R‑LA) recently pledged to block all nominations by President Biden—presumably including FERC nominees—until Biden lifts his “pause” on LNG exports. Senator Kennedy said: “Until Mr. Biden drops this battle against American energy, I’m going to block every nominee he tries to place at the State and Energy departments.” Ironically, if Congress returns the LNG authority to FERC this year, only a Biden nominee would rescue FERC from another lost quorum and enable it to approve LNG exports next year.

Solutions to the Quorum Quandary

It should be a no‐​brainer that the White House and Congress would give FERC every tool it needs to carry out its important work. However, there is no silver bullet solution to the quorum issue. Ideally, when an existing commissioner comes to the end of their tenure, the White House and Senate would move to ensure that the coming vacancy would be filled quickly by a qualified regulator. This should happen on a regular schedule—the five FERC commissioners would each complete their staggered five‐​year terms (or several of them), and the president and the Senate would work together to make certain FERC always has a full complement of five commissioners.

Sometimes it takes a nudge to get things moving. Consider this piece my polite nudge to Senate and White House leaders: please fill the two current vacancies (and the coming vacancy) because we need a functioning FERC.

Given the hyperpartisan mess we find ourselves in here in the nation’s capital, there are a couple of ways to move forward. First, the tried‐​and‐​true method of pairing a Democratic nominee with a Republican seems to work well in getting both approved. Democrats have put a name forward—Republicans should do the same, the president should formally nominate them, and the Senate hearing and markup should follow in short order.

Second, how about something that’s the opposite of tried‐​and‐​true? For an independent agency, there has been a dearth of actual independents or third‐​party nominees. Given the third vacancy created by Commissioner Clements’ coming departure, now is an opportune time to break that trend and nominate an independent thinker who does not identify as Democratic or Republican (in addition to the typical Democratic and Republican nominees). Both parties might scoff at this suggestion, but it is worth wondering why.

Of course, my preference is to have a nonpartisan and free‐​market thinker at the helm of FERC, and it seems neither political party fully embraces free‐​market thinking anymore. If the policy debates at FERC continue to be between typical Democrats and typical Republicans along partisan lines, the odds of FERC regulations embracing an open‐​ended approach to the energy industry will continue to fall.

Conclusion

FERC finds itself once more with an uncertain future. Likewise, much of the US energy industry—surely the large portion directly regulated by FERC—is subject to the same uncertainty. The prospect of another lost quorum at FERC should be enough to get the Senate and White House moving on FERC nominees. The American people need a reliable power grid and abundant natural gas. Let’s hope partisan politicians don’t hamstring FERC again.

Examining Elon Musk’s Claim That a Carbon Tax Is a Simple Solution to Climate Change

https://www.cato.org/blog/examining-elon-musks-claim-carbon-tax-simple-solution-climate-change

Travis Fisher

On February 3, Elon Musk posted a simple message on X: “The only action needed to solve climate change is a carbon tax.” Five days later, that message has over 22 million views. And perhaps for good reason—it’s accompanied by a compelling video titled “Elon Musk’s Unbelievably Simple Killer Break Down on Climate Change,” and the pro‐​carbon‐​tax message is easy to grasp.

Musk makes taxing carbon dioxide (CO2) sound straightforward. However, the drawback of his message is that it’s oversimplified because it ignores prominent sticking points in the policy debate over the carbon tax. Specifically, Musk fails to propose the level of the CO2 tax—or even discuss how to derive it—and glosses over the scope and burden of potential CO2 taxes.

To be clear, I respect Elon Musk—he’s a world‐​changing entrepreneur and steadfast advocate for free speech. Although I oppose the subsidies and mandates for electric vehicles in the United States, I appreciate the renewed competition Musk has brought to the US auto industry with Tesla. He’s also widely considered to be an engineering genius and a (somewhat) libertarian public figure. Depending on the day, he’s also the richest person in the world (or second or third).

For all these reasons, it’s worth digging in when Musk claims to have found a simple solution to one of the most vexing public policy problems in human history: climate change.

What Exactly Did Musk Say?

Musk’s tweet on February 3 is new, but his support for a carbon tax is not. In fact, the audio used in the eight‐​minute video accompanying Musk’s tweet comes from a speech he gave at the Panthéon‐​Sorbonne University in Paris in December 2015. That speech coincided with the 21st Conference of the Parties to the United Nations Framework Convention on Climate Change, or COP 21, which gave us the Paris Agreement.

You can watch video from the longer version of that presentation, including a Q&A session, or read the full transcript.

It seems Musk’s recent message was resurrected in response to the ongoing farmer protests in Europe. In a reply to his own tweet, Musk wrote: “We should not, for example, impose draconian laws on farmers or make citizens uncomfortable by limiting air‐​conditioner usage!” On the point of not limiting my air conditioning use in the summer, Musk and I completely agree.

Musk tweet farmers AC

The takeaway from the message is simple: ask your legislators to tax CO2 emissions. Much of the short video and the longer presentation reflect standard economic theory suggesting that the government should tax negative externalities to internalize the costs of economic activities that impose a cost on others. Economists tend to refer to these taxes as “Pigouvian,” named after economist Arthur Cecil Pigou, who pioneered externality theory in his 1920 work The Economics of Welfare.

So, what fault could anyone possibly find in this approach, particularly when thousands of American economists support the idea? As with most simple solutions in politics, it’s complicated.

Glaring Omission: What’s the Level of the Tax?

Musk did not specify the external cost per ton of CO2 emissions. Instead, he said: “We need to go from having untaxed negative externality, which is effectively a hidden carbon subsidy of enormous size, $5.3 trillion a year according to the IMF every year. We need to move away from this and have a carbon tax.” He is no doubt referring to a July 2015 working paper from the International Monetary Fund (IMF) that claims that the lack of a CO2 tax is itself a subsidy. I agree there is likely an external cost associated with CO2 emissions, but what is it?

First, the IMF paper doesn’t say what Musk claims. It reads, in relevant part: “While externality cost accounts for the bulk of the post‐​tax energy subsidies, at more than 80 percent in both 2013 and 2015, a detailed examination reveals that about three‐​fourths of these subsidies are related to local environmental damages and only about a quarter are due to global warming effect of CO2 emissions.” (emphasis added)

In other words, a carbon tax would only address a quarter of the global “hidden carbon subsidy,” according to the IMF paper. Further, in the United States, we already have a robust (and arguably too strict) regulatory regime addressing the cited local environmental damages from criteria air pollutants like sulfur dioxide, nitrogen oxides, and particulate matter, meaning we have addressed those externalities.

Second, if we want to internalize the climate externality, what should be the level of a CO2 tax? Mainstream economics tells us that the optimal carbon tax would be set at the social cost of CO2 (SCC). The IMF relied on a 2013 US Interagency Working Group study on the SCC that used a 3 percent discount rate and multiple integrated assessment models (IAMs) to come up with a central estimate of about $43 per ton for the SCC.

If the $43 per ton SCC estimate were a stable or well‐​supported figure, Musk might have an economic case for establishing a carbon tax at that level. But here’s where the idea of a CO2 tax gets dicey—the level of the SCC is, at best, an educated guess, and it depends more on the parameters chosen by the modeler than the magnitude of future costs and benefits. For example, consider the chart below showing the range of SCC estimates using the same IAM (the FUND model) under a range of discount rates.

Dayaratna et al SCC

Recall that discount rates are used in cost–benefit analyses to give the appropriate weight to costs and benefits that occur in the future. The higher the discount rate, the less weight the model gives to future impacts. There is a political dimension to this technical question—for example, advocates of a low discount rate previously argued that the discount rate should match lower interest rates but have been silent as interest rates have risen in recent months. It is a hallmark of such arbitrary modeling that anyone choosing any discount rate could be accused of cherry‐​picking and ignoring relevant data.

Note the wide range in the SCC estimates for 2050, when the United Nations wants the globe to reach net‐​zero CO2 emissions. Using a 2.5 percent discount rate, the 2050 SCC will be about $43 per ton, which is right at the 2013 working group estimate and very close to the 2016 working group estimate of $42 per ton. But when we look at the 2050 SCC using a 7 percent discount rate, it implies the economically efficient carbon tax would be just $0.63 per ton of CO2. An amount so low would scarcely warrant a new federal regime designed to collect it, and it certainly would not drive the global economy to net‐​zero CO2 emissions.

The optimal level of the CO2 tax should be a central component of Musk’s proposal, yet he declines to offer his own SCC estimate. Perhaps that is the safest territory, given that the US federal government’s estimates of the global SCC have ranged from $43 per ton (under President Barack Obama, 3 percent discount rate) to $6–9 per ton (under President Donald Trump, 7 percent discount rate) to $53–63 per ton (Trump, 3 percent discount rate) to $190 per ton (under President Biden, 2 percent discount rate). If the global SCC—the climate externality—could just as easily be zero as $50 per ton or $200 per ton, what is the economic imperative to internalize it?

One final point about the level of the carbon tax. In the Q&A portion of the 2015 speech in Paris, Musk said: “Any price you put on it will be more right than close to zero, which it is right now.” In his defense, maybe he meant any politically feasible carbon price, which would likely be very low (according to the most recent data, just 38 percent of Americans say they are willing to pay a monthly carbon fee of $1). But taking Musk literally, it is easy to imagine a CO2 tax that is less right than zero. Take, for example, a carbon tax of $500 per ton. Even if we think the SCC is $190 per ton, zero is closer to that than $500 per ton.

The Scope and Burden of a Carbon Tax

It’s unclear whether Musk would be willing to establish a global governance system to create and enforce a global CO2 tax. He only said, “Whenever you have the opportunity, talk to the politicians. Ask them to enact a carbon tax.” But there are no global politicians, thankfully, and many of the people and politicians of other nations are focused on economic growth, even if it means increased emissions.

In the United States, we have a bevy of local, state, and federal policies that address the climate externality, and that regulatory cocktail cannot be unmixed. With so many existing regulations, mandates, and subsidies—and a few subnational CO2 cap and trade policies—does it make sense to layer a CO2 tax on top of everything else?

The choice of a national or global scope also impacts SCC estimates. The Government Accountability Office explained under the Trump administration: “Current national estimates are based on domestic damages and are about 7 times lower than prior estimates based on global damages.”

Regarding the burden of a carbon tax (meaning who pays it), Musk said, “Maybe it takes five years before the carbon taxes are very high so that means that only companies that don’t take action today will suffer in five years.” This statement implies that companies will be the ones suffering under a regime of very high CO2 taxes. It ignores the fact that energy costs are baked into the manufacturing, transportation, and operating costs of everything a consumer buys. Consumers who don’t radically change their lifestyles will also suffer.

For example, a CO2 tax of $190 per ton translates to an increase of $1.71 per gallon of gasoline. That means today’s average price of about $3.15 per gallon would rise to $4.86 per gallon if the Biden administration implemented a carbon tax at its most recent estimate of the SCC. Musk claims the increased costs could be offset by reductions in other types of taxes, but it’s difficult to imagine a CO2 tax scheme that would not be regressive, damaging to the overall economy, and harmful to consumers. Put differently, if fossil fuel companies were the main ones hurt by a CO2 tax, someone will have to explain to me why so many of them advocate for it.

Finally, there is wide political discretion in estimating the emissions embodied in different consumer goods, as we have learned in recent debates over a CO2-based tariff on imported goods. This is yet another practical problem with implementing a carbon tax—among many others, including the fundamental problem of using a price instrument to reach an emissions quantity goal (net zero)—that goes unaddressed in Musk’s video.

Conclusion

Recently, some researchers have acknowledged that a carbon tax is not a straightforward or comprehensive solution. For my part, I wish more experts were candid about the complexities involved in climate policy, particularly in estimating the magnitude of the externality caused by carbon dioxide. Unfortunately, without attempting to solve the methodological problems, Elon Musk has left millions of followers with the impression that taxing CO2 is “the only action needed to solve climate change.”

Biden’s ‘Pause’ on LNG Exports Is Impulsive and Destructive

https://www.cato.org/blog/bidens-pause-lng-exports-impulsive-destructive

Travis Fisher

On January 26, the Biden administration announced it would pause new approvals of liquefied natural gas (LNG) exports. The official news followed several leaked stories—including one prominent article by The New York Times—that triggered criticism from LNG supporters and praise from climate activists.

The announcement appears to be a concession to the “keep it in the ground” movement and the 65 federal lawmakers who asked for the policy change in November 2023. However, some pragmatic progressives see the pause as misguided: “The urgency of the energy transition cannot excuse counterproductive purity tests,” wrote Elan Sykes and Neel Brown of the Progressive Policy Institute.

From the libertarian perspective, the pause is unwise energy policy, an encroachment on free trade, and a continuation of the Biden administration’s use of uncertainty as a political weapon against energy suppliers. Let’s dig in.

What Is Changing, Exactly?

LNG is the liquefied version of natural gas (mostly methane, CH4). Shippers cool the gas to approximately negative 260 degrees Fahrenheit to make it a liquid that is portable via tanker ships. International trade in LNG has spiked in part because of the abundant natural gas resources in the United States, which were enabled by technological improvements in unconventional production from shale formations.

The United States did not export significant quantities of LNG until about 2015, so one might say the industry is in uncharted waters. The aggressive growth in LNG exports (particularly relative to historic levels of imports) can be seen in the graph below.

Liquefied natural gas imports and exports, 1985-2022

(Source.)

Although the large quantities of exports are new, the legal apparatus is not. Specifically, under the Natural Gas Act (NGA), the Department of Energy (DOE) must approve any import or export of natural gas. Congress passed the NGA in 1938, so the statute predates the organization of the DOE itself, which was formed by Congress in 1977 by the DOE Organization Act.

Before the DOE was established the responsibilities in this section of the NGA were carried out by the Federal Power Commission (renamed in 1977 to the Federal Energy Regulatory Commission or FERC). Now the two agencies each regulate different parts of the LNG industry. DOE explains their roles as follows:

The NGA directs DOE to evaluate applications to export LNG to non‐​FTA [Free Trade Agreement] countries. … Typically, the Federal Energy Regulatory Commission (FERC) has jurisdiction over the siting, construction, and operation of LNG export facilities in the US In these cases, FERC leads the environmental impact assessments of proposed projects consistent with the National Environmental Policy Act, and DOE is typically a cooperating agency as part of these reviews. Obtaining a DOE authorization to export LNG to non‐​FTA countries is an important step for most projects in their path toward financing and construction.

The Biden administration said the DOE will now scrutinize applications to export LNG through the lens of climate change and other factors in determining whether additional US LNG exports are in the public interest. The White House stated:

The current economic and environmental analyses DOE uses to underpin its LNG export authorizations are roughly five years old and no longer adequately account for considerations like potential energy cost increases for American consumers and manufacturers beyond current authorizations or the latest assessment of the impact of greenhouse gas emissions. Today, we have an evolving understanding of the market need for LNG, the long‐​term supply of LNG, and the perilous impacts of methane on our planet.

The DOE has never denied an LNG export application, so this is a big shift in public policy.

Who Carries the Burden of Proof?

The rise of low‐​cost natural gas production in the United States—combined with high prices and resource constraints in other parts of the world—means US producers can profitably refrigerate, ship, and deliver gas to other countries. In contrast to other energy resources that require mandates and subsidies, LNG exports merely require approval from the federal government. All the government has to do is get out of the way.

The text of the NGA establishes approval as the default position. The statute says the DOE “shall” issue an order approving a project “unless, after opportunity for hearing, it finds that the proposed exportation or importation will not be consistent with the public interest.” Hence a pause to further consider new factors is the wrong posture—LNG approvals should continue until and unless DOE makes a new finding that LNG exports are inconsistent with the public interest. Ideally, of course, the government shouldn’t have the power to bar energy exports in peacetime.

There is a case to be made on either side of the climate debate regarding LNG.

Supporters of LNG exports cite the lower CO2 emissions of natural gas combustion over coal. By exporting natural gas and displacing the use of coal globally, the argument goes, the United States can help other countries reduce their CO2 emissions. We have certainly seen coal‐​to‐​gas switching bring down emissions in the United States.

Opponents of LNG exports, however, argue that the energy required to cool and transport natural gas—not to mention leakage of uncombusted methane, itself a potent greenhouse gas—makes it little better for climate change than burning coal.

The Administration’s Action is Arbitrary and Capricious

As experts debate the net impact of natural gas exports on factors like global climate change, the structure of the NGA indicates that approvals should move forward while the DOE deliberates. In July 2023, the DOE rejected a petition by environmental groups to do precisely what it now accepts—to undertake a blanket review of its LNG policy.

In fact, the DOE’s rejection notes in the first sentence of the document that the Administrative Procedure Act (APA) provides that each agency “shall give an interested person the right to petition for the issuance, amendment, or repeal of a rule.” The DOE’s new policy of a “pause” runs afoul of the APA and deprives interested parties the ability to challenge it before it goes into effect.

The new stated policy of a pause is especially capricious—meaning impulsive or unpredictable—given how the DOE responded to the environmental petitioners just six months ago:

After carefully considering Petitioners’ request, DOE is denying the Rulemaking Petition. As discussed below, DOE has reasonably exercised its discretion to implement its LNG export program through a combined approach of individual adjudications and export‐​focused regulatory actions, rather than a single rulemaking of broad applicability. DOE‘s existing LNG export regulatory program is responsive to Petitioners’ principal concerns—namely because, since 2013, DOE has, in fact, established a decision‐​making process under NGA section 3(a) that “respond[s] to the complex issues raised by LNG export and appropriately serve[s] the Natural Gas Act,” as Petitioners request. (emphasis in original)

How can the DOE now claim that it does not need to go through a formal rulemaking process in reversing course and implementing a new LNG approval regime? Even the environmental groups that want the DOE to shut down LNG exports should agree that their petition for a new rulemaking was the appropriate vehicle for enacting new policy.

Further, in the event of an administrative policy change at DOE that rises to the level of national significance—I think an indefinite LNG export pause qualifies—the Supreme Court’s “Major Questions Doctrine” should come into play. As the Congressional Review Service summarized the doctrine, “if an agency seeks to decide an issue of major national significance, its action must be supported by clear congressional authorization.” (emphasis in original) Did Congress give the DOE clear authorization to deny LNG export applications based on the factors DOE now finds important?

Political Uncertainty as Punishment

We have already seen the playbook of capricious policy in action. In February 2022, FERC issued new policy statements “providing guidance for future consideration of natural gas projects by the Commission.” The policy change—which suggested that an unspecified level of climate mitigation would be necessary to serve the public interest and receive FERC approval of gas pipeline projects—injected enormous uncertainty into the pipeline approval process.

The concept of the February 2022 policy statement was also the subject of a series of rebuttals (prebuttals?) by Commissioner Bernard McNamee, who argued forcefully beginning in 2019 that “the commission does not have the authority under the NGA or [the National Environmental Policy Act] to deny a pipeline certificate application based on the environmental effects of the upstream production or downstream use of natural gas nor does the commission have the authority to unilaterally establish measures to mitigate” emissions.

Ultimately, FERC withdrew its proposal after receiving blistering blowback from members of the Senate Energy and Natural Resources Committee (ENR). Senator Joe Manchin (D‑WV), ENR chairman, said FERC was “constructing additional road blocks that further delay building out the energy infrastructure our country desperately needs.” Delay is the practical impact of political uncertainty.

The Environmental Protection Agency (EPA) appears to be using the same strategy. Last year, the EPA proposed in its power plant rulemaking to mandate two unproven technologies—green hydrogen and carbon capture—for new or reconstructed power plants to meet greenhouse gas emission targets. The EPA proposed that “affected sources that commenced construction or reconstruction after May 23, 2023” would need to meet the requirements of the final rule.

The electricity generation industry remains in the middle of the uncertainty caused by the EPA’s unworkable proposal. For any new or reconstructed natural gas‐​fired power plant (affected source) subject to EPA’s new standard, a company can construct the unit today and be held—at some future date—to a standard that does not yet exist and may be impossible.

Given the recent track records at DOE, FERC, and EPA, crippling uncertainty is beginning to look like the aim of energy policy rather than an unfortunate side effect.

LNG Export Pause Offers a Lesson in Economic Thinking

The White House listed “potential energy cost increases for American consumers and manufacturers” as one justification for the LNG pause. It is true that, in the very short term, an announcement that the federal government will forcibly restrict the export of natural gas would likely cause its domestic price to fall. But, as French economist Frederic Bastiat implored, we should attempt to foresee long‐​term impacts. Bastiat wrote:

There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.

Yet this difference is tremendous; for it almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa. Whence it follows that the bad economist pursues a small present good that will be followed by a great evil to come, while the good economist pursues a great good to come, at the risk of a small present evil.

Restricting the sale of LNG abroad would send ripple effects up the supply chain, blunting incentives to explore for more natural gas and to produce what’s already been found. Advocates of thwarting the global natural gas trade—and of hoarding domestic natural gas—are focused on temporary, short‐​term impacts to commodity prices and ignoring long‐​term impacts to natural gas supply infrastructure.

Whose Gas Is It Anyway?

Economics aside, what business does the federal government have in dictating the direction of an industry that delivers a product that so many people find valuable? Advances in directional drilling and hydraulic fracturing technology (commonly referred to as “fracking”) allowed American firms to produce astonishing amounts of useful energy from hydrocarbons trapped over a mile deep in rock formations. (Turn useless, 6,000-foot-deep rock into electricity? Yes, please.)

People here and abroad want to use that energy. Natural gas is a valuable resource—we use it not just to fuel power plants but to cook food, heat homes, and fabricate a dizzying array of plastics, fibers, and even medicines. Natural gas liquids like propane and ethane are especially useful as a material feedstock but also have energy‐​related applications.

The DOE, EPA, and FERC may try to stifle the progress of the natural gas industry in the name of climate change (or industry protectionism), but the demand for energy will always be there. Globally, energy consumption continues to increase, as shown below.

Increase in global energy use 1900-2022

(Source.)

The challenge to meet growing demand should be exciting because energy consumption reflects the increasing living standards of countless millions (hopefully billions) across the globe. The US Energy Information Administration stated in its 2023 International Energy Outlook: “as incomes and population rise over time, energy consumption increases as more people can afford to drive, use commercial services, demand goods, and control building temperatures.”

For the hundreds of millions of people worldwide who still lack access to electricity, LNG exports could be the difference between dark and light.

Unpacking the High Cost of Offshore Wind Policy

https://www.cato.org/blog/unpacking-high-cost-offshore-wind-policy

Travis Fisher

Offshore wind is one of the most expensive ways to generate electricity. It’s also a perennial favorite when politicians mandate a preferred electricity source. Time and again, East Coast policymakers bet their own political capital and their constituents’ dollars on offshore wind as the future of energy. That is a losing bet.

The fundamental problem with offshore wind mandates is that they do not align with the preferences of energy consumers, which is why the government must subsidize offshore wind for it to exist. But the broad political justification is also curiously absent. Recent polling suggests that just 38 percent of Americans are willing to increase their energy costs by $1 per month to address climate change. The cost of offshore wind exceeds that many times over, meaning offshore wind mandates are out of step with the will of the American people.

Offshore wind faces opposition from local groups because it threatens viewsheds and wildlife, but offshore wind mandates are bad public policy because they simply cost too much and would not be economically viable without taxpayer support. No one has proposed to build an offshore wind project in the United States without lavish subsidies, and the cost to everyday ratepayers is higher than most are willing to pay.

The list of states that have either signed contracts or laid out ambitious goals for offshore wind includes Massachusetts, Rhode Island, Connecticut, New York, New Jersey, Maryland, Virginia, North Carolina, and Louisiana. Offshore wind decrees can come from the legislature, like Maryland’s recent plan to install 8,500 megawatts (MW) of offshore wind capacity by the year 2031. They can also come from executive orders, like New Jersey’s goal to install 11,000 MW of offshore wind by 2040.

The federal government has goals of its own. In 2021, the Biden administration established a goal to deploy 30,000 MW of offshore wind in the United States by 2030. The fact sheet explains how various federal agencies can facilitate the 30 by 30 goal, including offshore permitting from the Department of Interior and loan guarantees from the Department of Energy.

Political Targets Meet Reality

In contrast to the ease and simplicity of issuing aspirational offshore wind plans, policymakers are now confronting the reality that offshore wind faces many obstacles. The second half of 2023 brought story after story of canceled or renegotiated contracts for offshore wind. BP and Equinor canceled their contract with the state of New York; Ørsted canceled two large projects in New Jersey; and developers in Massachusetts canceled four projects totaling 2,400 MW of offshore wind.

Electricity is already expensive in many Mid‐​Atlantic and Northeastern states. According to the most recent data from the US Energy Information Administration (EIA), New York ranked 9th most expensive in the United States with a retail rate of about 23 cents per kilowatt‐​hour (kWh). Maryland ranked 15th most expensive at 17 cents per kWh. Connecticut and Massachusetts ranked 3rd and 4th most expensive at 29 and 28 cents per kWh, respectively, coming in behind only Hawaii and California.

wind turbine ship

With such high electricity prices, one might expect political leaders to attempt to reduce the burden of the energy costs their constituents pay. Instead, policymakers in these states have insisted on mandating offshore wind, which will invariably increase electricity rates and impose a higher federal spending and tax burden on the country. There are several ways of looking at the cost of electricity from specific resources, such as wind off the East Coast of the United States. Unfortunately, offshore wind is expensive by every measure.

Contract Prices in Power Purchase Agreements (PPAs) and Levelized Revenue of Energy (LROE)

PPA prices are a generous way to examine the cost of offshore wind. They are the price paid by the offtakers of the energy from offshore wind projects—PPAs do not explicitly show the full cost paid by retail electricity consumers and taxpayers. These contract prices are usually expressed in wholesale units of dollars per megawatt‐​hour ($/​MWh).

As one example, the Vineyard Wind project off the coast of Massachusetts has a levelized PPA price of about $98/​MWh (escalating from a lower base price to a higher final price at the end of a twenty‐​year contract). As the National Renewable Energy Laboratory explained in 2019:

This LROE estimate for the first commercial‐​scale offshore wind project in the United States appears to be within the range of LROE estimated for offshore wind projects recently tendered in Northern Europe with a start of commercial operation by the early 2020s. This suggests that the expected cost and risk premium for the initial set of US offshore wind projects might be less pronounced than anticipated by many industry observers and analysts.

Other operational projects, like the South Fork project in New York, don’t advertise the PPA price but have stated that “the power from South Fork Wind … will cost the average ratepayer between $1.39 and $1.54 per month when it starts operating.” (Recall that fewer than 40 percent of Americans are willing to spend $1 monthly to address climate change.)

In short, PPA prices tend to put the cost of offshore wind projects in the best light.

However, even PPA prices for offshore wind resources do not compare well to clearing prices in wholesale markets. Note the difference between the $98/​MWh PPA for Vineyard Wind and the day‐​ahead wholesale market prices in New England, which are less than half the PPA price at around $44/​MWh.

ISO-NE prices

Source: https://​www​.iso​-ne​.com/​i​s​o​e​x​p​ress/

The Levelized Cost of Energy (LCOE)

LCOE is a common measure of the cost of electricity from a given class of resources. LCOE boils down construction and operating costs into a single cost estimate (in dollars), divided by the energy output of the plant over its lifetime (in watt‐​hours). Hence the familiar unit of dollars per megawatt‐​hour. LCOE is a straightforward way to get a sense of the levelized (or averaged‐​out) cost of a standalone power plant.

According to recent LCOE estimates from EIA, the unsubsidized cost of offshore wind exceeds $120/​MWh and is among the most expensive generation resources. The consulting firm Lazard also publishes LCOE estimates that have become common reference points. In the latest Lazard research, the LCOE for offshore wind ranged between $72/​MWh and $140/​MWh.

Going by LCOE alone, offshore wind compares favorably to the highest‐​cost natural gas generators ($115–221/MWh) but not to the lowest‐​cost renewables ($24–75/MWh for onshore wind and $24–96/MWh for utility‐​scale solar photovoltaics [PV]). Quietly outshining these new resources is existing nuclear energy, which has a levelized going‐​forward cost (including decommissioning) of $31/​MWh, according to Lazard.

LCOE

Source: https://​www​.lazard​.com/​r​e​s​e​a​r​c​h​-​i​n​s​i​g​h​t​s​/​2​0​2​3​-​l​e​v​e​l​i​z​e​d​-​c​o​s​t​-​o​f​-​e​n​e​r​g​y​plus/

The Full Cost of Electricity (FCOE) and Levelized Full System Cost of Electricity (LFSCOE)

Recently, scholars have expanded the LCOE model to include spillover costs that are borne by other generators on the system. To remedy the analytical shortcomings of LCOE, the FCOE approach zooms out and considers the all‐​in cost of the entire electricity system. This is the appropriate measure to use when judging society‐​wide costs because the full system costs are ultimately borne by retail ratepayers (and by taxpayers when subsidies are involved, as they are today).

The most important element of FCOE that is missing from LCOE is the cost to the rest of the system of intermittent output. Intermittent or “non‐​dispatchable” generation always requires backup and balancing help from controllable or “dispatchable” resources to satisfy total electricity demand; however, the cost of making other resources fluctuate their output to accommodate intermittent generation—by backing down in times of high intermittent production and ramping up in times of low intermittent production—is not captured in LCOE estimates.

A group of authors who favor using the FCOE of solar PV and onshore wind said, “LCOE is inadequate to compare intermittent forms of energy generation with dispatchable ones and when making decisions at a country or society level.” A quick look at the very high‐​solar grid in California (the California Independent System Operator or CAISO) illustrates this issue. The term “net load” describes the amount of demand (load) that remains to be met by dispatchable generation, net of production from intermittent sources.

Net load in California

Image source: https://​www​.eia​.gov/​t​o​d​a​y​i​n​e​n​e​r​g​y​/​d​e​t​a​i​l​.​p​h​p​?​i​d​=​56880

Intermittent wind and solar resources present different operational challenges. Although the solar PV output in California is predictable, it still requires a costly effort from dispatchable generators. Specifically, mostly natural gas‐​fired generators must ramp down their output during the day and ramp up quickly in the evening to reliably meet grid demand. Wind output is more random than solar output—even for offshore wind facilities—but the costs imposed on the fleet of dispatchable generators are similar.

Another scholar recently described the Levelized Full System Costs of Electricity (LFSCOE) as follows:

The LFSCOE are defined as the costs of providing electricity by a given generation technology, assuming that a particular market has to be supplied solely by this source of electricity plus storage. Methodologically, the LFSCOE for intermittent or baseload technologies are the opposite extreme of the LCOE. While the latter implicitly assume that a respective source has no obligation to balance the market and meet the demand (and thus demand patterns and intermittency can be ignored), LFSCOE assume that this source has maximal balancing and supply obligations.

Under the LFSCOE assumptions, the cost of onshore wind in Texas is approximately seven times higher than its LCOE (an LFSCOE of $291/​MWh compared to an LCOE of $40/​MWh). The details of applying an LFSCOE to offshore wind would only be slightly different from applying it to onshore wind. Specifically, offshore wind has a slightly higher capacity factor than onshore wind (about 43 percent versus 34 percent in 2018, according to the International Renewable Energy Agency’s 2019 “Future of Wind” report). However, offshore wind is still an intermittent resource, meaning its LFSCOE is higher than its LCOE.

State Policy, Federal Costs

The cost of state‐​level mandates for offshore wind does not stay within state borders. Through federal subsidies like the Production Tax Credit (PTC) included in the Inflation Reduction Act, taxpayers across the country are poised to pay for offshore wind. And it will not be cheap—the PTC offers a lucrative tax credit of $27.50/MWh. Returning to the day‐​ahead wholesale prices in New England of $44/​MWh, the federal subsidy alone represents a hefty 62 percent increase in revenue for wind producers.

As previously covered in this space, the final cost of the PTC by the time it phases down—which could take decades—could reach into the multiple trillions of dollars. Offshore wind’s share of that total would be a modest portion of that (but nothing to sneeze at). If the Biden administration achieves its goal of 30,000 MW of offshore wind and those facilities operate for 30 years at a capacity factor of 43 percent, the total federal taxpayer bill for offshore wind would be over $93 billion. (Note: Although each new facility is supposed to claim the PTC for only 10 years, in practice, owners of many facilities “repower” them: they make enough material changes to the facility to continue to qualify for the PTC for subsequent rounds of 10‐​year eligibility.)

Conclusion

Ambitions for offshore wind are easy breezy—mandating offshore wind development seems like smooth sailing. The harsh reality of offshore wind mandates is that they are incredibly costly. Ratepayers and taxpayers will feel the sting of these decisions for years, potentially decades. Policymakers need to understand the full costs of their actions and come back to the shore. The American people simply don’t want to pay more for energy—not in their electricity bills and not in their tax bills.

Dear EPA: Go Back to the Drawing Board

https://www.cato.org/blog/dear-epa-go-back-drawing-board

Travis Fisher

The Environmental Protection Agency’s (EPA’s) greenhouse gas (GHG) rule for power plants was published in May 2023 and the original comment period closed in August. However, the EPA published a supplement to its original proposal, and that comment period just closed.

The full text of my comment in the EPA docket is available here.

The supplemental notice solicited comments on (1) reliability issues associated with the rulemaking and (2) EPA’s Initial Regulatory Flexibility Analysis (IRFA), which the EPA originally failed to publish but is required under the Regulatory Flexibility Act.

For short, let’s call this year’s proposal the Clean Power Plan 2.0 (CPP 2.0) because it’s the second effort by the EPA to promulgate a Clean Power Plan using section 111 of the Clean Air Act. The first effort started in 2014 and was ultimately overturned by the Supreme Court in the case West Virginia v. EPA.

Like the first CPP, the EPA’s selection of the best system of emission reduction (BSER) in CPP 2.0 is also arbitrary, capricious, and unsupported by the available data. The original plan was all about shifting generation, mostly from coal to renewables. The Supreme Court said that’s not authorized under the statute.

This time, EPA’s BSER includes burning low‐​GHG hydrogen at natural gas‐​fired power plants and using carbon capture and storage/​sequestration (CCS). Neither technology is “adequately demonstrated,” as required by the Clean Air Act, and it is unclear whether the EPA will change course in its forthcoming final rule.

Developments since the original proposal was published—like the cancellations of offshore wind projects and carbon dioxide pipelines—have further eroded the justification for the EPA’s proposed BSER. They also raise concerns regarding whether the EPA has adequately assessed the CPP 2.0’s impacts on the cost and reliability of electricity.

In my comments, I urge the EPA to reconsider its proposal. The shortcomings of CPP 2.0 are so numerous and complicated that the best path forward is for the EPA to go back to the drawing board. At the bare minimum, the EPA should improve its rulemaking by issuing a new supplemental notice focused on developing an objective, accurate assessment of the rule’s impact on the cost of electricity.

Scope Creep: Mandating Disclosure of Scope 3 Emissions is Costly (and Creepy)

https://www.cato.org/blog/scope-creep-mandating-disclosure-scope-3-emissions-costly-creepy

Travis Fisher and Jennifer J. Schulp

Proposals to mandate transparency and accountability in corporate environmental practices are becoming law. So far, the most aggressive actions have come from the European Union (EU) and the state of California—both have ordered large companies (public and private) to begin disclosing all greenhouse gas (GHG) emissions. The EU’s program is already in effect, with reports due in 2025. The California law requires companies to report Scope 1 and 2 emissions in 2026 and Scope 3 emissions in 2027.

The US federal government is poised to take similar steps.

The Securities and Exchange Commission (SEC) proposed a rule on the “Enhancement and Standardization of Climate‐​Related Disclosures for Investors” in March 2022, requiring disclosure of Scope 1 and 2 emissions by all public companies and Scope 3 emissions by many of those companies. (The final rule remains pending.) A related measure under federal acquisition regulations would require comprehensive GHG reporting for major federal contractors.

Disclosure of Scope 3 emissions encompasses all indirect emissions in a company’s value chain. “All” is the operative word. Emissions come in three categories—Scope 1, 2, and 3. Mandating a comprehensive accounting scheme for Scope 3 emissions (the catch‐​all category for all emissions a company doesn’t directly control) would balloon compliance costs, pry into Americans’ privacy, and grant expansive authority to the federal government.

What Are Scope 1, 2, and 3 GHG Emissions?

Scope 1 emissions come from anything directly owned or controlled by the company in question. For example, the GHG emissions from a boiler at a factory would be included in the factory owner’s Scope 1 emissions. Scope 1 emissions tend to be easy to count.

The Environmental Protection Agency (EPA) describes Scope 2 emissions as the “indirect GHG emissions associated with the purchase of electricity, steam, heat, or cooling.” Like Scope 1, Scope 2 emissions are not difficult to estimate. If a company knows its overall electricity consumption and the average GHG intensity of the electricity on the grid, it can estimate Scope 2 emissions. (Note: marginal or time‐​of‐​day GHG intensity can add a wrinkle for some companies.)

Scope 3 is everything else. EPA guidance says Scope 3 emissions “are the result of activities from assets not owned or controlled by the reporting organization, but that the organization indirectly affects in its value chain.” These emissions can be upstream and downstream. Scope 3 emissions for an automobile manufacturer, for example, would include the GHG emissions associated with all raw materials purchased to manufacture a vehicle (upstream) as well as all emissions associated with the use of the vehicle over its lifetime (downstream).

oil refinery

According to the new reporting law in California, titled the “Climate Corporate Data Accountability Act,” Scope 3 emissions “may include, but are not limited to, purchased goods and services, business travel, employee commutes, and processing and use of sold products.” EPA states that Scope 3 emissions “often represent the majority of an organization’s total” emissions. Hence, while Scope 3 emissions are probably large, they are very difficult to quantify (and, especially in the case of future downstream emissions, impossible to know with certainty).

The Cost of Mandatory Scope 3 Disclosure Would Make a Bureaucrat Blush

Counting and reporting all Scope 3 emissions would be an onerous and costly process. As Jennifer wrote regarding the SEC’s proposal last year:

The SEC estimates that its new rules would raise the annual cost of compliance from $3.8 billion to $10.2 billion. And the SEC’s estimates of $420,000 to $530,000 in annual expenses, including the services of climate modelers and emissions accountants, places a substantial burden on companies, particularly smaller ones.

And that’s likely an underestimation, with some estimating the SEC’s proposal to quadruple the cost of a company’s primary securities filings.

The EU- and California‐​type Scope 3 mandates apply directly to large companies, but there are countless small companies upstream and downstream of reporting companies that would be indirectly impacted. Specifically, mandating Scope 3 reporting would, of course, increase compliance costs at large companies, but it would also raise accounting and reporting costs for all the mom‐​and‐​pop businesses in the company’s “value chain.” The type of impact is the same regardless of whether the regulation’s target is a publicly traded company or a company of a certain size.

By their very nature, Scope 3 emissions disclosures are incredibly burdensome. Wearing a utilitarian hat for a moment, the marginal benefit of a regulation should exceed its marginal cost. And each regulator has responsibility for a different type of benefit—securities regulators are focused on investors’ needs, whereas environmental regulators have a different mandate. At some level of GHG emissions disclosure, though, the cost of obtaining an additional unit of transparency surely exceeds the benefit.

In the securities context, are climate‐​risk disclosures really worth making securities disclosures four times more costly? On the environmental side, how much more useful is additional GHG disclosure when the EPA estimates that 85–90% of GHG emissions are already covered by existing reporting? In other words, even if the juice is worth the squeeze when it comes to Scope 1 and 2 emissions for many companies, Scope 3 could be a different type of fruit altogether.

car

However, any discussion of Scope 3 mandates should go beyond the most visible costs and include the “unseen” costs of heavy‐​handed disclosure rules. Economists call these opportunity costs, and they are just as important as the costs that are easy to see. First, obsessing over GHGs would create a distracted federal government and a less effective private sector. Under a mandatory Scope 3 emissions regime, it is very likely that too many resources would go to the GHG accounting effort while too few would go to things people care about more than GHGs.

Second, even within a typical “ESG” framework, GHGs are not the only environmental issue investors and consumers may care about. Other concerns in a company’s value chain, such as toxic pollutants, water usage, and effects on biodiversity, are also important. In fact, polling data on consumers’ willingness to pay to address climate change tends to reveal modest amounts. The Associated Press reported, “To combat climate change, 57 percent of Americans are willing to pay a $1 monthly fee; 23 percent are willing to pay a monthly fee of $40.” These low figures could help explain why voluntary reporting schemes are not satisfactory to regulators—left to their own devices, people aren’t willing to spend much to address climate change.

Privacy and Other Rights Issues Abound

The government, at its best, is a force for preserving individual liberty and economic freedom. Voluntary initiatives, consumer choices, and market forces can drive positive change without the need for government mandates that may infringe upon personal and economic freedoms.

The collection of data related to a company’s supply chain and business relationships may necessitate the sharing of sensitive and proprietary information. Not only may some of that be required to be turned over to the government as a part of the reporting process, or for the government to audit the company’s reports, but the company itself may have to undertake intrusive inquiries to make the report in the first place. This is where Scope 3 accounting gets creepy.

For example:

  • To calculate the emissions from their employees’ commutes, companies may need to collect personal information from employees about the methods by which they commute, how often, and maybe even the time of day.
  • To calculate emissions produced from their supply chain, companies will be required to gather information from their suppliers about their emissions. Calculating or verifying those figures may require suppliers to provide confidential or proprietary information about their business practices.
  • To calculate emissions from the usage of a company’s products, companies will have to collect data on what their customers do with the product, including how they dispose of it. Some of this data collection may be intrusive (and the need to collect more comprehensive data than data collected for market research may increase the intrusion).

All of this is at odds with the rights of individuals and businesses to protect their privacy and trade secrets without unwarranted government interference. But privacy isn’t the only right in play.

Where the government compels a company to make disclosures, the First Amendment extends to protect from “not only expressions of value, opinion, or endorsement, but equally to statements of fact the speaker would rather avoid.” Disclosures about emissions are politically charged (and, at least in the case of the SEC, extend far beyond the type of investor‐​relevant information that the agency is empowered to require). By forcing companies to condemn themselves, mandated emissions disclosures promote one side in a policy debate and violate the First Amendment’s requirement of viewpoint neutrality.

Allow Scope 3 Disclosure to Proceed Voluntarily

Forcing companies to account for Scope 3 emissions would inflate compliance costs, invade people’s privacy, and expand the bounds of an overzealous government. And if the SEC requires the disclosure of GHG emissions, there’s little to stop it from mandating the disclosure of any other information.

Scope 3 emissions disclosures, in particular, place the burden and responsibility for emissions on those who are not clearly responsible. Holding a company to account for the use of its products seems to make little sense. Should a blue jean manufacturer really be held responsible for the carbon emissions based on its customers’ entirely voluntary decisions about how often to wash those jeans, at what temperature and time of day, etc.?

Rather than relying on government mandates, businesses should have the freedom to respond to market demand for sustainability and transparency, which can drive innovation and responsible practices. If there is a strong demand for accurate climate disclosures, nothing is stopping private companies or third parties from supplying them. Indeed, 96 percent of the companies in the S&P 500 provided some form of sustainability reporting in 2022.

Policymakers should let markets work. The American people—investors and consumers alike—should be free to drive the disclosure of all types of environmental information by the companies they invest in or support with their purchases. Government mandates distort this process and open the door to further intrusion into our lives by busybody officials.

The Cassidy Carbon Tax Is Even Worse Than Advertised

https://www.cato.org/blog/cassidy-carbon-tax-even-worse-advertised

Travis Fisher and Gabriella Beaumont-Smith

The long‐​awaited text of Senator Bill Cassidy’s (R‑LA) legislation to impose a tax on imports based on “pollution intensity” was released on November 3. Fisher’s previous piece highlighted how Senator Cassidy’s concept of a “foreign pollution fee” is 1) a carbon tax on imports, 2) will hurt American consumers, and 3) lays the groundwork for a domestic carbon tax. Unfortunately, those facts remain upon inspection of the bill.

Senator Lindsey Graham (R‑SC) is a sponsor of the bill but Senator Roger Wicker (R‑MS), the other original co‐​sponsor of the legislation, withdrew his endorsement.

We’ve read the 92 pages of the Foreign Pollution Fee Act of 2023 (hereinafter referred to as the Cassidy Carbon Tax) so our audience doesn’t have to. There are several areas of grave concern, much of which relate to provisions in the bill that were not apparent in Senator Cassidy’s Foreign Affairs article, which explained the concept in broad strokes.

Specifically, in addition to the three concerns listed above, the Cassidy Carbon Tax:

  1. Inappropriately delegates powers to the executive branch.
  2. Improperly tasks the National Laboratories with establishing trade policy and the implied level of a carbon tax.
  3. Incorrectly defines “pollution” exclusively as “greenhouse gas emissions.”
  4. Creates an arbitrary list of 16 “covered products.”
  5. Invites less carbon‐​intensive countries to impose a carbon tariff on the United States.

The Cassidy Carbon Tax Inappropriately Delegates Powers to the Executive Branch

It appears the Cassidy Carbon Tax identifies the Department of the Treasury as the lead agency in implementing the tax scheme (though it is unclear from the draft legislation). Giving additional authority to the Treasury at this time would be problematic because it would further empower an executive branch that is carrying out a “net zero” mission it was never assigned by Congress.

The Treasury Secretary has fully embraced the concept of “net zero,” even though a net zero policy has never been enacted by Congress. Take, for example, a recent speech given by Treasury Secretary Janet Yellen, which states,

“The net‐​zero transition can bring about a world in which our well‐​being and the well‐​being of future generations is less threatened by heatwaves and storms. In which our livelihoods, and the livelihoods of the most vulnerable among us, are more secure. In which our communities and our economies can prosper. Without accelerating our progress toward a clean energy future, we will see increased physical devastation and dire economic impacts. The need for action is urgent….”

Rather than empowering the present administration’s overreach, Senators Cassidy and Graham should consider sponsoring legislation that would put the concept of a forced transition to a “net zero” future to a floor vote.

The Cassidy Carbon Tax applies to certain imported goods and is imposed by multiplying the amount of the goods imported by “the variable charge.” This charge is defined on p.7 as “an ad valorem fee which is specific to a covered product” and determined by tiers of pollution intensity.

The Constitutional authority to regulate international commerce, including the imposition of tariffs and other taxes, lies with Congress. Unfortunately, Congress slowly delegated swaths of its trade‐​related powers to the president through several laws. The Cassidy Carbon Tax is set up by amending the Internal Revenue Code and grants the Treasury Secretary broad authority over the tax. Granting the Treasury Secretary authority over a tax on international commerce further weakens Congress’s authority to regulate trade.

cassidy
Senator William Cassidy (R‑LA).

The bill also amends the Internal Revenue Code by adding to the “Environmental Taxes” chapter, which falls under the “Miscellaneous Excise Taxes” subtitle of Title 26 (the Internal Revenue Code). While the foreign pollution fee could be considered an excise tax (a tax on specific goods and services), the tax only applies to imports. A tax on imports is a tariff and generally, taxes on imports are not imposed through Title 26. Choosing to call this fee by a different name raises questions, particularly since Senator Cassidy titled his Foreign Affairs article, “A Tariff for the Climate.”

As noted in the previous piece on Senator Cassidy’s Foreign Affairs article, he led a resolution against a domestic carbon tax and the bill includes the following provision (on page 4):

“Nothing in this Act, or any amendments made by this Act, shall be construed to authorize the creation of any carbon tax, fee, pricing, or other mechanism that imposes additional costs to any covered product (as defined in section 4695(a) of the Internal Revenue Code of 1986, as added by this Act) which is produced domestically and sold, used, further refined, or distributed within United States or exported to another country for sale or use.”

The Internal Revenue Code applies to “the domestic portion of federal statutory tax law.”

Although Senator Cassidy insists this foreign pollution fee is not a carbon tax, it is exactly a carbon tax on American import‐​consuming businesses and consumers. Moreover, the establishment of any carbon pricing scheme in this part of the Code lays the groundwork for establishing a domestic carbon tax.

The Cassidy Carbon Tax Improperly Tasks the National Laboratories with Establishing Trade Policy and the Implied Level of a Carbon Tax

In addition to giving too much authority over its carbon tax scheme to the executive branch, the Cassidy Carbon Tax creates a carbon pricing board. Specifically, section 4696 of the Cassidy Carbon Tax states, “There is hereby established the National Laboratory Advisory Board on Global Pollution Challenges.” The duties of the board include calculating the baseline pollution intensity of the covered American goods and the respective pollution intensity of the covered foreign goods. The Board would be comprised of federal scientists, officials, and private sector CEOs to advise on the right tax rate.

carbon tax

Creating a carbon pricing board is problematic on its own. However, this board would establish carbon taxes on imported products in an effort to “alter trade flows.…” First, the National Labs are not equipped to do this work—they are at their best when performing basic research and development in a laboratory setting.

Second, National Lab employees are unelected bureaucrats accountable (at best) to Department of Energy (DOE) Secretary Granholm, someone Senators Cassidy and Graham both voted against confirming for Secretary of Energy.

Moreover, the US trade remedies (antidumping and countervailing duty (AD/CVD)) law—and history of US tariff policy more broadly—raises concern that any carbon tax, including the Cassidy Carbon Tax, would not be administered in a sound and impartial manner. US trade remedies law is notorious for strong bias against imports and American consumers because of the broad discretion the law provides the Department of Commerce (another Executive agency). For example, if Commerce deems information provided by a foreign company unreliable or insufficient, the agency can employ methodologies to fill in information that unreasonably favors the US companies lobbying for the trade remedies.

If the DOE followed similar procedures for carbon (or pollution) intensity, equally biased results are sure to emerge. In other words, the US government could easily make foreign businesses look like they emit more GHGs to result in high taxes on foreign products in the name of climate change, but that really serves to protect American businesses from competition.

Additionally, the DOE’s Inspector General recently testified before Senator Cassidy and the Senate Energy and Natural Resources Committee. She said she is “gravely concerned” that the pace of Inflation Reduction Act spending at DOE will result in massive fraud and abuse.

The same agency—DOE—would be tasked by the Cassidy Carbon Tax to set up a carbon tariff scheme through its National Laboratories and the proposed National Laboratory Advisory Board on Global Pollution Challenges. This seems like a recipe for climate alarmist technocrats to have free rein over too much political real estate.

The Cassidy Carbon Tax Incorrectly Defines “Pollution” Exclusively as “Greenhouse Gas Emissions”

In his Foreign Affairs article, Senator Cassidy conflates ambient sulfate pollution and emissions of carbon dioxide. The quotation below highlights the seamless shift from discussing sulfate in the air to carbon dioxide emissions. Sulfate air pollution is a subset of small particulate matter, which is a criteria pollutant regulated by the Environmental Protection Agency’s National Ambient Air Quality Standards (NAAQS). In other words, it is a real pollutant.

Carbon dioxide is neither a criteria pollutant under the NAAQS program nor a pollutant in the traditional sense.

“Americans are seeing, and breathing, the results in our shared atmosphere. According to a 2014 study published in the Proceedings of the National Academy of Sciences, up to a quarter of sulfate pollution in the western United States comes from Chinese emissions. As the Bloomberg columnist David Fickling reported in August, China is responsible for one‐​third of global carbon emissions today and the majority of the net increase in global greenhouse gas emissions since 2019.”

The Cassidy Carbon Tax does not mention traditional pollutants, but instead strictly defines “pollution” on page 54 as follows: “The term ‘pollution’ means greenhouse gas emissions.” Hence, by definition, Senator Cassidy’s “foreign pollution fee” is explicitly a tax on greenhouse gas emissions, not traditional pollutants like small particulate matter.

The inappropriate framing of greenhouse gases as pollution misses a broader point about the pollution‐​reducing benefits of free trade and global capitalism. The stated purpose of the bill (on page 4) is to “raise global environmental performance to ensure a healthy environment and secure global public health benefits.” However, erecting high barriers to trade isn’t going to secure global public health benefits.

As a detailed report by the Center for Conservative Climate Solutions points out, economies that engage in free trade are cleaner, healthier, faster‐​growing economies—as they characterize it, “free economies are clean economies.” The Cassidy Carbon Tax takes the wrong approach by attempting to limit trade in the name of improving environmental performance.

The Cassidy Carbon Tax Creates an Arbitrary List of 16 Covered Product Categories

Imposing a carbon tax on a hand‐​picked list of products is an arbitrary exercise. It also is bound to cause significant lobbying regarding products to add, remove, or exempt from tariffs, which will add complexity and political uncertainty to an already complex and uncertain approach.

The list of covered products in the Cassidy Carbon Tax includes aluminum, biofuels, cement, crude oil, glass, hydrogen (along with methanol and ammonia), iron and steel, lithium‐​ion batteries, certain minerals, natural gas, petrochemicals, plastics, pulp and paper, refined petroleum products, solar cells and panels, and wind turbines.

Among the favored products within this list, crude oil is worth singling out because the practice of Enhanced Oil Recovery (EOR) using carbon dioxide receives special treatment. The Cassidy Carbon Tax states (on page 26):

“Any carbon oxide captured from manufacturing processes or from ambient air by the producer of a covered product … shall have the effect of reducing the pollution associated with the production of a covered product if such carbon oxide is … utilized to help access a contributing part, component part, transforming part, or covered product that is extracted from a geologic formation.…”

To be clear, this provision is a gift to the domestic oil industry. The Cassidy Carbon Tax would give oil companies credit for something they are already doing—profitably—and offer them a leg up on the global stage. Again, this is great news for domestic producers of favored products but represents a new tax (paid by consumers) on oil imported from places that do not employ EOR.

The Cassidy Carbon Tax Invites Less Carbon‐​intensive Countries to Impose a Carbon Tariff on the United States

According to the Niskanen Center, “the US falls in the middle of the pack globally in carbon intensity,” meaning half the world could implement a Cassidy Carbon Tax on the United States. The same study finds that the EU, UK, and Japan emit less than the US.

So, will the EU, UK, and Japan hit the US with retaliation?

It seems the bill tries to avoid retaliation by setting up “international partnerships,” which very much resemble climate clubs (preferential treatment in exchange for cooperation on climate‐​change‐​related goals). On pages 78–79, the bill grants the US Trade Representative authority to “seek to include an expansion of an international partnership agreement,” such as “a trade agreement involving international organizations such as the Organisation for Economic Co‐​operation and Development, the Group of Seven (G7), or any similar organization.”

These partnerships set a precedent for climate clubs that will create a fragmented trading world ruled by different ineffective climate commitments and increased costs. The clear protectionism displayed by this proposed legislation is likely to face legal challenges at the World Trade Organization. To avoid such challenges, domestic companies would be required to pay the price for the carbon they emit. Thus again, the Cassidy Carbon Tax would take us one step closer to establishing an explicit domestic carbon tax.

Conclusion

The Cassidy Carbon Tax was bad enough in concept. But now that we have more details about its implementation, it’s even worse than we thought. It would give undue power to the executive branch and to unelected bureaucrats. It mischaracterizes carbon dioxide and other greenhouse gases as pollution. And it sets a dangerous precedent for climate clubs that create a fragmented trading world while ignoring consumer impact, and doing little for the environment.

A Carbon Tariff Is a Carbon Tax for Protectionists

https://www.cato.org/blog/carbon-tariff-carbon-tax-protectionists

Travis Fisher

Senator Bill Cassidy (R‑LA).

Senator Bill Cassidy (R‑LA) wants to slap a tariff on carbon‐​intensive imports. Last week he told reporters: “What we’re proposing is not a domestic carbon tax, and it is not intended to lead to a domestic carbon tax.” In an article published by Foreign Affairs, Senator Cassidy referred to his carbon tariff policy as a “foreign pollution fee.” One may quibble with the labels, but three things are clear: 1) Senator Cassidy’s proposal is a carbon tax on imports, 2) it will hurt American consumers and some manufacturers, and 3) it lays the groundwork for a domestic carbon tax.

What’s in a Name?

Let’s begin by defining the terms “tariff,” “fee,” and “tax.” According to Merriam‐​Webster, a tariff is “a schedule of duties imposed by a government on imported or in some countries exported goods.” Merriam‐​Webster defines a fee (in the payment context, not the real estate ownership context) as “a fixed charge.” Likewise, Merriam‐​Webster defines a tax as “a charge usually of money imposed by authority on persons or property for public purposes.”

Whether we use the terms tariff, fee, tax, duty, or charge is a matter of semantics. I prefer to use the word tax because people know what a tax is—and a tariff is just a tax on imports. No matter how you slice it or which name you give it, Senator Cassidy’s proposal boils down to the federal government taxing imports based on their carbon intensity. It’s a carbon tax. It may only apply to a narrow set of energy‐​intensive imported goods, but the partial application of a carbon tax doesn’t change the fact that it’s a carbon tax.

[Note: I’m intentionally leaving out the word “dioxide” after carbon for brevity—the compound in question is carbon dioxide or CO2 (or CO2 equivalents in the form of other greenhouse gases).]

Taxing Imports Hurts American Consumers

Senator Cassidy’s plan would establish an import tax based on the carbon intensity of certain imported goods, such as steel from China. Although his Foreign Affairs piece does not mention the level of the tariff or the specific industries and countries involved (apart from targeting China), we know how tariffs tend to reduce the quantity of imported goods and raise prices for consumers.

The economic case against a carbon tax on imports mirrors the case against tariffs in general. Tellingly, the Foreign Affairs piece takes the perspective of American manufacturers of tariff‐​targeted goods rather than consumers (note that Senator Cassidy’s tariff would also hurt domestic manufacturers who use imported steel in their manufacturing process). The Foreign Affairs article refers to “manufacturing” or “manufacturers” more than a dozen times while failing to mention consumers.

An early passage in the article illustrates its anti‐​consumer bias:

The difference in environmental regulation enforcement between China and the United States lowers the cost of manufacturing in China, thereby encouraging US manufacturing and the jobs associated with it to migrate overseas. Such losses for the United States’ economy put downward pressure on its industrial base and American standards of living.

Low‐​cost manufacturing in other countries challenges domestic manufacturing. I do not dispute that point. I disagree, however, when the senator characterizes low‐​cost manufacturing in China as a loss “for the United States’ economy.” American consumers (including consumers of imported materials, some of which are manufacturers themselves) are also part of the economy. Consider this quote from French economist Frederic Bastiat:

There is a fundamental antagonism between the seller and the buyer. The seller wants the goods on the market to be scarce, in short supply, and expensive. The latter wants them abundant, in plentiful supply, and cheap. Our [trade] laws, which should at least be neutral, take the side of the seller against the buyer, of the producer against the consumer, of high prices against low prices, of scarcity against abundance.

A carbon tax on imports would hurt consumers just like other tariff protections enacted on behalf of domestic producers. Cato scholars have pointed out how “the US government systematically ignores consumer or broader ‘public interest’ impact when imposing trade remedy taxes on imports.” Given the lack of attention paid to the consumer by lawmakers, it is no surprise that so many companies can successfully lobby for tariff protection at the expense of consumers. Unfortunately, the consumer is missing from Senator Cassidy’s analysis.

Getting Closer to a Domestic Carbon Tax

Despite Senator Cassidy’s claim that his foreign pollution fee “is not intended to lead to a domestic carbon tax,” that is exactly what it would do, for at least three reasons. First, the foreign pollution fee concept may not be workable under World Trade Organization (WTO) rules without a domestic carbon tax. Second, applying a carbon tax on imports would require a new bureaucracy to keep tabs on the carbon intensity of traded goods. Third, a carbon tax on imports would require translating carbon emissions into dollar amounts, which is one of the biggest hurdles faced by advocates of a domestic carbon tax.

Regarding WTO rules, the CLC stated in a September 2023 report:

Commentators and some countries have raised concerns about the consistency of these measures with the rules of the [WTO], particularly to the extent that they rely on national average carbon intensity values for covered products, are not paired with a domestic carbon price, or attempt to address concerns about economic competitiveness in addition to reducing greenhouse gas emissions.

If advocates of a foreign pollution fee are faced with the choice of pairing it with a domestic carbon tax to satisfy WTO rules or dropping the scheme, which will they choose?

Regarding the new bureaucracy needed to count carbon, Senator Cassidy and others have drafted legislation called the PROVE IT Act to clear that hurdle. The PROVE IT Act would establish the Department of Energy as the carbon counter in chief. The act was introduced by Senators Chris Coons (D‑DE) and Kevin Cramer (R‑ND) and co‐​sponsored by Senator Cassidy along with Senators Angus King (I‑ME), Lisa Murkowski (R‑AK), Martin Heinrich (D‑NM), Lindsey Graham (R‑SC), Sheldon Whitehouse (D‑RI), and John Hickenlooper (D‑CO). This looks like a “who’s who” of bipartisan carbon taxers, but don’t take my word for it. The pro‐​carbon tax Niskanen Center said:

If the PROVE IT Act becomes law, it will be a meaningful step toward collecting product‐​level emissions data. Getting better at measuring, reporting, and validating product‐​level emissions is critical for implementing a border adjustment under a carbon tax.

Regarding the level of the carbon tax on imports, any legislative proposal (or the agency implementing it) will have to come up with a dollar amount to tax carbon dioxide emissions. Economists believe this is an all‐​important step—according to Pigouvian theory, the level of the tax determines whether it increases or decreases social welfare. But the “correct” level of a carbon tax is difficult to estimate and depends on a host of politically charged decisions, like how to count costs (and benefits) and whether to weigh impacts in the distant future heavily (by applying a low discount rate) or lightly (by applying a high discount rate).

Critics of carbon pricing are correct to point out that the “correct” level of the tax—the marginal social cost of carbon emissions—is so dependent on input assumptions as to be useless in guiding public policy. A neutral perspective might be that there is a lot of wiggle room. Interestingly, carbon tax supporters admit the same thing:

There is considerable uncertainty about the magnitude of the social cost of carbon. Under the Obama administration, a task force consisting of 12 US government agencies was put together to employ several climate‐​economy models and come up with an estimate of the social cost of carbon. They came up with a range—actually, a very wide range. They couldn’t rule out the possibility of a near zero social cost or a cost of around $100 a ton.

Further, establishing the level of carbon tax through protectionist trade policy almost guarantees the process will be guided by politics rather than a thorough, scientific, and economically informed attempt to price carbon at the marginal social cost of emissions. I predict that whatever carbon price is implied in defining the “foreign pollution fee” in Senator Cassidy’s plan will be held up by advocates of a domestic carbon tax, who will say “Aha! This is the magic number we’ve been looking for!”

Conclusion

Senator Cassidy’s foreign pollution fee proposal is a carbon tax on imports, and it would hurt consumers just like other tariffs. Contrary to the senator’s stated intentions, it would take us one step closer to a domestic carbon tax—one based on protectionist trade policy rather than environmental economics.

The Inflation Reduction Act Could Turn Electricity Markets into Subsidy Clearinghouses

https://www.cato.org/blog/inflation-reduction-act-could-turn-electricity-markets-subsidy-clearinghouses

Travis Fisher

“There’s been this move afoot in which markets have become something closer to a mechanism by which to harvest … subsidies, rather than what they were intended to do, which is ensure least cost dispatch of available resources and to incentivize new investment.” –James Danly, Commissioner at the Federal Energy Regulatory Commission

Counting the many reasons to repeal the energy subsidies in the Inflation Reduction Act (IRA) has become my favorite activity. In earlier posts, I examined 1) how the energy tax credits in the IRA could cost taxpayers $2.5 or $3 trillion, 2) why policymakers should remove those subsidies before expanding the high‐​voltage transmission system, and 3) the role of the IRA in enabling regulatory overreach at the Environmental Protection Agency.

Another reason to dislike the IRA is that, as written, it hurts the justification for establishing competitive wholesale electricity markets in the first place: economic efficiency. Under the IRA, the role of wholesale electricity markets could be diminished from that of the guarantor of an efficient industry to that of a subsidy clearinghouse.

The Promise of Electricity Markets

Roughly two‐​thirds of the electricity generated in the United States is dispatched through wholesale markets called Independent System Operators (ISOs) or Regional Transmission Organizations (RTOs). For this piece, let’s call these organized markets RTOs. The RTOs were conceived to accomplish one simple but profound task: harness competition to ensure electric reliability at the least cost to consumers.

The 1999 rulemaking by the Federal Energy Regulatory Commission (FERC) that established FERC’s pro‐​RTO policy—titled Order No. 2000—clearly stated the purpose of the rulemaking and RTOs: “The Commission’s goal is to promote efficiency in wholesale electricity markets and to ensure that electricity consumers pay the lowest price possible for reliable service.”

The seven RTOs across the United States are listed below and shown in the following image from the FERC website:

  • California Independent System Operator (CAISO)
  • Electric Reliability Council of Texas (ERCOT)
  • ISO New England (ISO-NE)
  • Midcontinent ISO (MISO)
  • New York ISO (NYISO)
  • PJM Interconnection (PJM)
  • Southwest Power Pool (SPP)

The other regions of the country—Northwest, Southwest, and Southeast—are served by vertically integrated utilities or federally‐​owned systems that have not joined RTOs.

Source: https://​www​.ferc​.gov/​e​l​e​c​t​r​i​c​-​p​o​w​e​r​-​m​a​rkets

An explainer published by Resources for the Future outlines the key role RTOs play in achieving the economic efficiency promoted by FERC on behalf of consumers:

“RTOs use energy markets to decide which units to dispatch, or run, and in what order. In the day‐​ahead market, RTOs compile the list of generators available for next‐​day dispatch and order them from least expensive to most expensive to operate. For example, since wind plants operate without fuel, they are able to bid $0 into the energy market and get dispatched first. Dispatching units by lowest cost allows the market to meet energy demand at the lowest possible price.”

There is ample debate about whether RTOs have delivered on the promise of reducing consumer costs. No one has conducted a comprehensive analysis of RTOs versus non‐​RTOs and evaluated their success (or failure) in ensuring reliability at the lowest possible cost. However, one thing most observers agree on is this: the least‐​cost dispatch of generation assets over a large region brings substantial economic efficiency. If we add the long‐​run benefit of deferred investments in new generation assets because neighboring utilities can share reserve margins, the economic case for RTOs is strong.

Although there is a compelling economic case for competition in the electricity industry, RTOs are not free markets. They are FERC‐​regulated wholesale markets that operate under a federal regulatory framework of mandatory open access. RTOs promise to deliver savings by optimizing a large fleet of generators. In contrast, utilities operating in silos under cost‐​of‐​service regulation have less incentive to optimize operating costs and face a strong incentive to overbuild generation capacity. Hence, RTOs represent a different regulatory approach that attempts to create better incentives to deliver lower‐​cost reliable electricity.

The Essential Role of Market Prices

Friedrich Hayek won the Nobel Prize in Economics for (among other things) the crucial observation that market prices convey essential information about the ever‐​changing state of the world. Market prices are necessary for the full and free use of knowledge in society—Hayek understood this well before the planned economies of the Soviet Union floundered and fell.

As the Nobel Prize website summarizes, Hayek’s “conclusion was that knowledge and information held by various actors can only be utilized fully in a decentralized market system with free competition and pricing.”

RTOs are the closest thing we have to a Hayekian, price‐​driven market in the electricity sector. The genius of wholesale electricity prices set in many different locations—called Locational Marginal Prices (LMPs)—is that they convey much‐​needed information about the state of supply, demand, and transmission congestion on the power grid. The time‐ and location‐​specific prices in wholesale markets can be visualized in an LMP contour map. Below is the MISO map from approximately 5:00pm on October 19, 2023, and the units are US dollars per megawatt‐​hour of electricity.

Locational marginal prices in MISO

Source: https://​api​.mis​oen​er​gy​.org/​M​I​S​O​R​T​W​D​/​l​m​p​c​o​n​t​o​u​r​m​a​p​.html

On the supply side, prices not only reflect generator availability in real time but also signal the need for resources in the years ahead. Demand‐​side participation remains relatively low in electricity markets, but LMPs enable economic engagement from the demand side, either through direct participation in wholesale markets by sophisticated buyers or through “demand response” programs. Recent rulemakings at FERC also extend wholesale market access to distributed energy resources connected at the retail or distribution level, which broadens the influence of LMPs. In a dynamic market, these price signals create the foundation for economic efficiency.

What Will IRA Subsidies Do to the Economic Efficiency of Markets?

For the most part, RTOs have embraced the goal of economic efficiency for the past 23 years (since Order No. 2000). However, some RTOs have begun to include the “clean‐​energy transition” and “environmentally sustainable power system” in their mission statements. Advocates of economic efficiency should be concerned that the IRA will push RTOs further into a new era in which the goal of economic efficiency is secondary to environmental goals or ignored entirely.

As a refresher, the IRA extends the Production Tax Credit (PTC) that is already available to wind generators and, in 2025, applies an inflation‐​adjusted PTC to all resources that do not emit greenhouse gases at the point of generation (essentially every form of electricity generation that does not break a hydrocarbon bond as its energy source—nuclear, hydro, wind, solar, geothermal, etc.). This PTC‐​for‐​all will have profound impacts on wholesale electricity markets and their ability to promote economic efficiency. It has no end date and could cost trillions of dollars.

One predictable impact of a PTC‐​for‐​all will be an increase in the frequency and magnitude of negative prices. When prices in other industries go negative—such as the brief negative pricing of crude oil futures in April of 2020—it sends an appropriate level of extreme, “visceral” panic to producers. Not so in wholesale electricity markets. Negative prices can emerge as a natural consequence of transmission constraints, inflexible generation resources, or due to large subsidies. They can also reflect the willingness of generators to keep producing—to claim a lucrative subsidy—even if the price of electricity is negative.

The value of the PTC today is $27.50 per megawatt‐​hour. In the price contour map above, several of the indicated hubs were trading below that amount (in the range of $25–26 per megawatt‐​hour). Again, in most other industries, a federal subsidy larger than the price of the commodity would be unimaginable—people familiar with the industry would sound alarms about the distorting effects of large subsidies. People would be justified in losing their temper, for example, if Congress implemented a new federal subsidy of $70–90 per barrel of crude oil produced in the United States (the going rate over the last year or so). With subsidies larger than the commodity price, will RTOs trade as much (or more) in federal subsidies as they do in electricity?

As researchers at Lawrence Berkeley National Laboratory wrote in 2021, “monetary production incentives such as renewable energy credits or tax credits also enable negative bids; indeed, negative prices predominantly occur when demand levels are low and wind production levels are high.” Likewise, Professor Bill Hogan at Harvard recently explained the perverse incentives negative prices provide to market participants:

“Subsidies produce unintended consequences and undermine the incentives provided by markets. To illustrate, the production tax credit is well known to create a perverse incentive for the wind generator which turns the real zero variable cost into a perceived negative variable cost equal to the amount of the subsidy. The results can be negative energy prices. This, for example, creates an incentive for storage operators to charge and discharge simultaneously, making money while dissipating energy by operating the battery as a radiator and thereby increasing load.”

Being paid to waste energy should be a clear sign that IRA incentives are all wrong. But will it be corrected?

Some champions of organized wholesale markets have more faith in Congress than I do to recognize the problem and enact reforms. One observer stated in a recent piece titled In Defense of Electricity Markets: “it is hard to believe that Congress won’t cut back subsidies if Inflation Reduction Act bills start skyrocketing while government interest payments are stacking up.” One can hope. However, let’s weigh that optimism against the observation that the companies receiving IRA subsidies are not only growing richer but also more influential in politics—the R Street Institute says the “non‐​utility renewable energy industry has increasingly been able to compete for influence against incumbent monopolies.”

Providing a PTC for everything could trigger a subsidy contagion. Coal and natural gas are dispatchable generation resources that presently provide 60 percent of our electricity. They are also essential if grid operators are to maintain reliability. Subsidies for intermittent generation will lead to the retirement or bankruptcy of dispatchable resources, which will not only create challenges in maintaining grid reliability but will open the door for subsidies for dispatchable resources (whether or not they are truly needed for reliability). Such a subsidy spiral could be endless and could pit federal subsidies in the IRA against state subsidies for preferred resources, all paid for by American taxpayers or electricity customers one way or another.

Joseph Bowring, the independent market monitor for PJM, offered this wisdom in 2017: “Subsidies are contagious. Competition in the markets could be replaced by competition to receive subsidies.”

Likewise, FERC Commissioner James Danly presented the dilemma facing RTO advocates as follows (at minute 35 of this hearing before the House Energy and Commerce Committee in June):

“If we’re going to set up an electric system in which the success or failure of a generation asset relies not upon the efficiency with which it’s run or the cost of the fuels that powers it but instead the availability of subsidies, then one questions whether or not we need to have markets at all, since the market’s very premise is being undermined ….”

Conclusion

Supporters of wholesale electricity markets should join me in seeking repeal of the energy subsidies in the IRA. Economic efficiency demands it. And if economic efficiency is no longer the goal of wholesale electricity markets, what is?

How the Inflation Reduction Act Bankrolls EPA Overreach

https://www.cato.org/blog/how-inflation-reduction-act-bankrolls-epa-overreach

Travis Fisher

The Inflation Reduction Act (IRA) offers a master class in implementing expensive, counterproductive, and highly partisan energy policy. In previous posts, I discussed 1) how the electricity generation subsidies in the IRA could cost taxpayers $2.5 or $3 trillion and 2) why policymakers should remove those subsidies before expanding the high‐​voltage transmission system. As we count the reasons why repealing the energy subsidies in the IRA is a good idea, let’s also consider their interaction with the Environmental Protection Agency’s (EPA’s) proposed power plant rule.

It is technically true that, as Senator Joe Manchin has said, “[n]either the Bipartisan Infrastructure Law nor the IRA gave new authority to regulate power plant emission standards.” However, the IRA did provide the foundation upon which the EPA has built its power plant regulation by subsidizing the technologies that enable the new standards. Consequently, lawmakers who oppose the EPA’s overreach should consider repealing the energy subsidies in the IRA.

What is the EPA’s New Power Plant Rule?

Proposed in May of this year, the EPA’s new power plant rule looks a lot like the Clean Power Plan (CPP), which was struck down by the Supreme Court last year in the landmark case West Virginia v. EPA. Some have referred to the new rule as CPP 2.0, which is a much shorter name than the 39‐​word title the EPA gave it (“New Source Performance Standards for Greenhouse Gas Emissions from New, Modified, and Reconstructed Fossil Fuel‐​Fired Electric Generating Units: Emission Guidelines for Greenhouse Gas Emissions from Existing Fossil Fuel‐​Fired Electric Generating Units; and Repeal of the Affordable Clean Energy Rule”).

Many analysts believe, as I do, that CPP 2.0 ultimately will be struck down or rescinded for at least three reasons: 1) it will cause electricity prices to skyrocket, 2) it will exacerbate a looming grid reliability crisis (according to grid operators), and 3) it is a regulatory overreach just like CPP 1.0. (For a more thorough examination of the flaws in the CPP 2.0 proposal, see this set of joint comments submitted in the EPA docket.)

Although a final rule has not yet been published, I have no faith that the EPA will heed any of the recommendations offered by commenters on the proposal. After all, the EPA was rebuked just last year by the Supreme Court, yet its next action under the same statute—section 111 of the Clean Air Act (CAA)—once again violates the Major Questions Doctrine, the same doctrine invoked to invalidate the EPA’s CPP 1.0.

In other words, if the EPA won’t listen to the Supreme Court, what are the odds it will listen to commenters?

How EPA Established the Proposed Standards in CPP 2.0

Close followers of the CAA are familiar with the alphabet soup involved in federal air regulations. For the uninitiated, the acronyms and initials may be daunting, but the fundamental concepts are easy to understand. The energy team at the law firm Van Ness Feldman aptly explained the process of regulating pollution under section 111 of the CAA as follows:

CAA section 111 directs EPA to establish standards for controlling air pollutants for categories of major stationary sources, which include electric generating units (EGUs). Section 111 outlines a two‐​step process for establishing a standard of performance for emissions from EGUs. Under the first step, EPA determines the “best system of emission reduction” (BSER) for the relevant pollutant that is “adequately demonstrated,” taking into consideration cost, any non‐​air quality health and environmental impacts, and energy requirements. EPA then sets a standard that quantifies the “degree of emission limitation achievable through the application” of the BSER. Sources subject to the standard of performance can use any system of reduction to meet the limit; they are not required to use the system EPA determined is the BSER.

In the case of CPP 2.0, the EPA selected two technologies as the BSER used to establish greenhouse gas (GHG) reductions in the electric power sector—carbon capture and sequestration/​storage (CCS) and low‐​GHG hydrogen. With CCS and low‐​GHG hydrogen as the BSER, power plants across the country will have to 1) apply one or both of those technologies or 2) meet the same level of emissions reductions enabled by these technologies in some other way, most likely by simply shutting down power plants.

The CPP 2.0 proposal would impact all power plants that use fossil fuels to generate electricity, chiefly the coal‐​fired and natural gas‐​fired plants that together provided about 60 percent of the energy on the power grid last year (20 percent from coal and 40 percent from natural gas).

Why the Definition of ‘Adequately Demonstrated’ Matters

The fact that the EPA must choose the BSER using technologies that are “adequately demonstrated” is important because it’s one of the main ways the EPA is held to some measure of realism in crafting its rules. To be clear, CCS and low‐​GHG hydrogen are nowhere near “adequately demonstrated” according to the plain meaning of those words. Neither technology is available presently on a commercial scale, and both suffer from severe limitations.

coal, pollution

For example, CCS requires a vast network of new pipelines to transport carbon dioxide (CO2) from places where fossil fuels are combusted to places where CO2 can be injected and stored in suitable geologic formations. Given the forceful protests that nearly all linear infrastructure projects face, it is unclear whether that network can be built at all under current law, let alone on the EPA’s timeline. Energy realist Robert Bryce offered the following observation:

[T]he amount of gas involved is staggering. A bit of simple math shows that sequestering 600 million tons of CO2 per year (the number the EPA published in its May 11 press release) would require creating an industry capable of handling a mass of CO2 that’s equal to about 12 million barrels of oil per day. In other words, the EPA’s proposed CCS plan if enacted, would require creating the U.S. oil industry in reverse. (U.S. oil production is now about 12.5 million barrels per day.)

However, under precedent established by the Court of Appeals in the DC Circuit, the EPA can choose as the BSER the technologies it reasonably expects to become available in the relevant timeframe. An “adequately demonstrated” technology is, according to the DC Circuit in Essex Chemical Corp. v. Ruckelshaus (a case cited in the proposed rule at page 33272):

[O]ne which has been shown to be reasonably reliable, reasonably efficient, and which can reasonably be expected to serve the interests of pollution control without becoming exorbitantly costly in an economic or environmental way.

CCS fails the test outlined above because it has not been shown to be reliable, efficient, or cost‐​effective. Ditto for low‐​GHG hydrogen, which is not only exorbitantly costly but may not be viable without CCS. That’s because 95 percent of the hydrogen produced in the United States today comes from natural gas via steam methane reforming. CO2 is a byproduct of that process, so the vast majority of hydrogen produced would only be “low‐​GHG,” if the carbon dioxide byproduct is captured and stored.

Only 1 percent of domestic hydrogen is produced via electrolysis, which does not directly emit GHGs but could rely on electricity from GHG‐​emitting sources. (The remaining 4 percent of domestic hydrogen is produced by partial oxidation of natural gas via coal gasification.)

As of 2021, there were over 2,000 natural gas‐​fired power plants in the United States. So even if we assume every coal plant will simply close, reconfiguring all the natural gas plants in the U.S. is no small task. Those 2,000 natural gas‐​fired power plants provided about 40 percent of the electricity generated in 2022, making natural gas by far the largest energy source on the grid. Whether power plant operators choose CCS or low‐​GHG hydrogen to comply with the CPP 2.0, the effort would be something between Herculean and impossible. In no way are the BSER technologies “adequately demonstrated.”

The IRA Allows EPA to Disconnect its Rules from Reality

The energy subsidies in the IRA enable the EPA’s overreach because they allow the EPA to set unrealistic standards. In the CPP 2.0 proposal, EPA relied explicitly on the subsidies in the IRA to claim that the BSER technologies—CCS and low‐​GHG hydrogen—are “adequately demonstrated.”

If the technology were actually “adequately demonstrated,” why are the subsidies required in the first place? Presumably, technology that functions as intended and is economically efficient wouldn’t require subsidies to be “adequately demonstrated.” Specifically, the EPA said in the CPP 2.0 proposal:

The legislative history of the IRA makes clear that Congress was well aware that the EPA may promulgate rulemaking under CAA section 111 based on CCS and explicitly stated that the EPA should consider the tax credit to reduce the costs of CCUS (i.e., CCS).

To reiterate the reliance of widespread CCS adoption on IRA subsidies, EPA stated the following on page 33373 of CPP 2.0:

EPA is projecting approximately 12 GW of coal‐​fired generation will likely retrofit with CCS in order to meet the proposed January 1, 2030, compliance date for affected long‐​term coal‐​fired steam generating units. These and other CCS projects that are likely to be occurring in response to the IRA may take up a significant amount of the capacity to plan and build CCS between 2023 and 2030 [emphasis added].

The same analysis applies to low‐​GHG hydrogen. Contrary to the observed reality that low‐​GHG hydrogen only comprises 1 percent of domestic production, the EPA claims on page 33310 of CPP 2.0 that:

Given the incentives provided in both the IRA and [Infrastructure Investment and Jobs Act] for low‐​GHG hydrogen production and the current trajectory of hydrogen use in the power sector, by 2032, the start date for compliance with the proposed second phase of the standards for this rule, low‐​GHG hydrogen may be the most common source of hydrogen available for electricity production.

In essence, the EPA claimed low‐​GHG hydrogen would transform itself from 1 percent of the domestic hydrogen market to the majority of the market based on lavish subsidies. This is fanciful thinking applied to environmental regulation—the EPA can establish whatever standards it wants if the BSER technology is sufficiently subsidized.

This is a harmful precedent and does not accurately reflect reality. The standard in the CAA that the BSER be “adequately demonstrated” is instead becoming a standard that the BSER be “adequately subsidized.”

Conclusion

The energy subsidies in the IRA provide the foundation upon which the EPA built the CPP 2.0. The BSER established in the EPA’s new power plant regulation is only “adequately demonstrated” by the heavy subsidies in the IRA. Consequently, lawmakers who oppose the EPA’s overreach and want to see a reliable and cost‐​effective power grid in the United States should consider repealing the energy subsidies in the IRA.

How Subsidies in the Inflation Reduction Act Undermine Transmission Reform

https://www.cato.org/blog/how-subsidies-inflation-reduction-act-undermine-transmission-reform

Travis Fisher

A previous post showed that the total cost of the Inflation Reduction Act’s (IRA’s) energy subsidies could reach $3 trillion. Subsidies so large cause a lot of problems—one being that advocates of a robust electricity infrastructure, like me, are now skeptical of using federal policy to expand the transmission system, which is the network of high‐​voltage wires and substations that make up the backbone of the power grid.

Before committing to large‐​scale transmission expansion, Congress should eliminate the open‐​ended generation subsidies in the IRA. Energy producers can’t capture the IRA’s lucrative production tax credits until they connect their new energy projects to the grid, so more transmission without amending the IRA means more subsidies at enormous cost to taxpayers.

The Green Transition Requires Transmission

Experts across the electricity industry argue that we need more transmission—bigger networks and massive transmission development—and we need it immediately. For example, the U.S. Department of Energy under President Biden and academic advocates of “net zero” policies are calling for aggressive expansion of the transmission system. Proponents of aggressive transmission expansion have a catchphrase: “There is no transition without transmission.” That is certainly true in the case of a transition to generation resources like wind and solar energy, which tend to be located far from demand centers.

However, heeding their call without first addressing the potential to spend $3 trillion on electricity generation subsidies is not a conservative or free‐​market approach. Congress should remove the IRA subsidies for mature generation technologies like wind and solar to encourage smart transmission investments that leave electricity customers and federal taxpayers better off. If the IRA subsidies remain in place through a period of rapid transmission expansion, the cost to American taxpayers and electricity customers will escalate.

The required amount of transmission is not small or cheap. Transmission advocates at Americans for a Clean Energy Grid cite the Princeton Net Zero report, which indicates that “high voltage transmission will need to double by 2030, at a cost of $360 billion, and triple by 2050, at a cost of $2.2 trillion, to achieve a zero‐​carbon future by 2050.” Keep in mind this estimated cost of $2.2 trillion is in addition to the $2.5 to $3 trillion in subsidies for generators.

Some investment is necessary to maintain the existing transmission system. However, calls to double or triple the high‐​voltage transmission are a far cry from the $15–20 billion spent annually by utilities on operating and maintaining the grid. Further, transmission spending has already been on a steep upward trend for several years, not just from increased operations and maintenance costs but also from an increase in spending on new projects, as illustrated by data from the U.S. Energy Information Administration below.

Source: https://​www​.eia​.gov/​t​o​d​a​y​i​n​e​n​e​r​g​y​/​d​e​t​a​i​l​.​p​h​p​?​i​d​=​47316

Major Transmission Expansion Will Increase the Burden on Taxpayers

Policymakers need to understand that transmission expansion can have serious costs because it is the missing link between subsidy‐​hungry developers of generation projects and the $3 trillion pot of cash from Congress.

Today, the lack of available transmission is a barrier to new generation technologies eligible for the tax credits in the IRA—for example, generators can only claim the Production Tax Credit (PTC) if they are able to produce energy and deliver it to the grid. Further, the IRA subsidies for electricity production all become PTCs beginning in 2025, so the pressure to expand transmission will only grow in the coming years. But “removing” that barrier by expanding the transmission system would be bad for taxpayers because it would put the PTC on steroids, at taxpayers’ expense. This fits with Ludwig von Mises’ observation that government intervention in markets begets more intervention—in this case, subsidies for generation beget federal intervention in transmission.

The subsidy flood would be substantial. At the end of 2022, the United States had more solar and wind energy projects vying to connect to the grid (1,247 gigawatts) than the total generating capacity of the existing system (1,199 gigawatts). Expanding the transmission system and giving these resources access to the grid will expose taxpayers to trillions in generation subsidies.

Size of interconnection queues since 2014

Source: https://​emp​.lbl​.gov/​q​ueues

Given this backlog of subsidy‐​eligible projects, the consumer‐ and taxpayer‐​friendly approach to transmission expansion hinges on whether Congress can remove the IRA’s subsidies for electricity generation first. Commissioner James Danly of the Federal Energy Regulatory Commission (FERC) summarized the issue during a House Energy and Commerce Committee hearing in May of this year [at 33:15]:

“There’s been this move afoot in which markets have become something closer to a mechanism by which to harvest these subsidies, rather than what they were intended to do, which is ensure least cost dispatch of available resources and to incentivize new investment. And the largest barrier at the moment to the harvesting of those subsidies is the physical interconnection of what are typically remotely located resources to the markets. You can’t get, for example, the production tax credit if you aren’t connected to a market and you don’t sell. And so there has been this concomitant effort to either mandate or speed the development of transmission… . It would be a shame if we removed and socialized the cost of the development of this transmission because, at the moment at any rate, the cost of interconnecting to the electric system is one of the few disciplining factors remaining in the development of infrastructure… .[emphasis added]”

Commissioner Danly is right to be skeptical of subsidy harvesters. In addition to the existing subsidies for electricity generation, there is also a debate about whether Congress should subsidize transmission itself, as with a federal investment tax credit. But Congress could also inflict harm by simply mandating that utilities build more transmission. One example is the Big Wires Act, which would require a large increase in interregional transmission without first addressing IRA subsidies. With the IRA subsidies in place, such a mandate should be a non‐​starter for anyone concerned about federal spending, impacts on taxpayers, and the overall cost of the electricity system (which consumers always pay, either in retail electricity bills or in taxes).

The Federal Energy Regulatory Commission (FERC) could also get involved in transmission expansion. The agency has explored the question of requiring a minimum level of interregional transmission, and it could move forward with a rulemaking on the issue at any time. In addition to establishing minimum levels of interregional transmission, FERC could also socialize the cost of transmission upgrades by allocating the costs widely in the form of higher prices for all ratepayers.

So‐​called “cost allocation”—which boils down to spending other people’s money—has long been a priority for those who want to rapidly expand the transmission system. If the cost of transmission expansion falls on all ratepayers, Americans could pay trillions in generation subsidies through federal taxes in addition to trillions in transmission expansion costs through higher retail electricity prices.

Congress and FERC should set aside transmission reform efforts until lawmakers address the staggering costs of the IRA’s generation subsidies. Only after reining in the IRA’s energy subsidies should policymakers debate how to expand the transmission system, and the policy goal should be to provide reliable electricity at the lowest total cost to consumers and taxpayers.

Conclusion

Before committing to large‐​scale transmission expansion, Congress should eliminate the open‐​ended generation subsidies in the IRA. There is a legitimate need for transmission expansion when and where it can reduce the total cost of electricity service or increase reliability. However, policymakers in Congress and at FERC should be careful not to run headlong into transmission expansion schemes that only serve the interests of IRA subsidy harvesters and leave U.S. taxpayers with a $3 trillion tab.

The Inflation Reduction Act’s Energy Subsidies Are More Expensive Than You Think

https://www.cato.org/blog/iras-energy-subsidies-are-more-expensive-you-think

Travis Fisher

At the signing of the Inflation Reduction Act (IRA), President Biden said: “The Inflation Reduction Act invests $369 billion to take the most aggressive action ever — ever, ever, ever — in confronting the climate crisis and strengthening our economic — our energy security.” One year later, the Biden Administration reaffirmed the President’s statement by describing the IRA as “the most ambitious climate action in history.”

President Biden is certainly correct that spending $369 billion on anything is aggressive, even if that level of spending is projected over the next decade. That’s nearly ten times the amount Elon Musk paid for Twitter (now renamed X). However, the cost could be substantially higher than that, and taxpayers could be on the hook to provide that level of subsidy to electricity producers every few years in perpetuity or until the law is changed. That is because the energy subsidies in the IRA are enacted as permanent law, only to expire when specified emissions targets are met. This could mean that some provisions will last well beyond the 10‐​year budget window.

After the IRA was passed, the estimate of $369 billion for energy credits over a decade was revised upward. Now we have higher estimates of the cost of preserving the IRA credits for ten years. An April 26, 2023 estimate by the Joint Committee on Taxation (JCT) was $515 billion. An April 2023 Goldman Sachs report estimated that the IRA “will provide an estimated $1.2 trillion of incentives by 2032.”

Why the disparity? It depends on what’s included in the estimates. The report by Goldman Sachs estimated much higher spending on tax credits for electric vehicles than the JCT in part because it projected that more electric vehicles (EVs) would be eligible for the full credit. That is a theme throughout the IRA—eligibility for different amounts of credits depends on several factors (like labor requirements and thresholds for domestic content, etc.). The subjective nature of modeling the IRA’s fiscal cost highlights how little we know about what these energy credits will cost the taxpayer.

Time is Money (a lot of it)

Consider another variable: the amount of time the federal government (i.e., federal taxpayers) will continue to pay subsidies. If we limit estimates of the cost of IRA tax credits to a 10‐​year window (standard practice in budget assessments), we get a total of about $515 billion to $1.2 trillion. That is already a wide range, but it’s a lower bound because it fails to account for substantial costs down the road. If we look beyond the 10‐​year horizon, the cost of the IRA credits could increase and remain high for years, perhaps indefinitely.

The tax credit for producing electricity from non‐​GHG‐​emitting sources begins to phase down only when total GHG emissions from the electricity sector fall to 25 percent of the 2022 level (see PDF page 169 here):

(3) APPLICABLE YEAR.—For purposes of this subsection, the term ‘applicable year’ means the later of—

(A) the calendar year in which the Secretary [of Energy] determines that the annual greenhouse gas emissions from the production of electricity in the United States are equal to or less than 25 percent of the annual greenhouse gas emissions from the production of electricity in the United States for calendar year 2022, or

(B) 2032.

To be clear, a 75 percent reduction in GHGs from the electricity sector could take a very long time, especially since the IRA uses 2022 as the baseline year rather than a higher‐​emission year like 2005. The U.S. Energy Information Administration (EIA) analyzed electricity sector GHG emissions in the IRA reference case (and in the no‐​IRA case) and found neither case to bring electricity sector emissions down to 25 percent of the 2022 level by 2050.

So how long are taxpayers stuck with this tab, and what’s the final tally? One estimate that accounted for the cumulative cost of the IRA credits over a longer period came from the consulting firm Wood Mackenzie. In fact, a Wood Mackenzie blog post is the only source I have seen that explicitly stated that IRA energy credits could be indefinite. It said:

Based on the language in the IRA, our view is that these tax credits will be extended for substantially longer than 2032 – perhaps even 30–40 years. Absent IRA repeal, this means that instead of several hundred billion dollars in tax credits for new renewables and storage through 2032, the real money on the table is on the order of trillions of dollars over multiple decades.

With an expanded time horizon, Wood Mackenzie found the cumulative cost of IRA energy credits could reach $2.5 to $3 trillion, most of which would go to utility‐​scale solar energy projects. Of course, if EIA is right about the trajectory of GHG emissions from the electricity sector (that emissions will not fall to 25 percent of 2022 levels, even by the year 2050), the cumulative cost could be even higher.

Estimated IRA-enabled new PTC/ITC value for utility-scale renewables and storage

In a forthcoming policy brief, I will analyze the total taxpayer liability in the IRA as established in the statute, and I provide a sensitivity analysis taking into account the key variables involved: 1) the level of the credits based on eligibility criteria, 2) the volume of credit‐​eligible electricity generation, and 3) the applicable time horizon (when the electricity sector reaches GHG emissions at or below 25 percent of 2022 levels, which itself depends on many variables such as growth in electricity demand).

Conclusion

The total cost of energy credits in the IRA is an unstable number with no reasonable cap. The energy credits are subject to a wide range of variables, and they could persist for decades. Understanding the implications of the IRA for tax and budget policy requires going beyond the typical 10‐​year budget window, as the IRA itself does. Did policymakers mean to subsidize low‐​GHG electricity production to the tune of $50–100 billion per year, ad infinitum—easily $2.5–3 trillion or more when all is said and done? Maybe not, but we’ll find out if policymakers want to keep accruing them when these costs start piling up.

Parsing the Factual Errors in the Montana Climate Ruling, Part Two

https://www.cato.org/blog/parsing-factual-errors-montana-climate-ruling-part-two

Travis Fisher

This is Part Two of a multiple‐​part response to the recent court order issued in the case Held v. Montana. Part One is available here.

As an energy economist, I think the most unfortunate part of the Order in Held v. Montana is that it repeats well‐​known errors in energy system modeling made popular by Stanford Professor Mark Jacobson, who provided testimony in the case. Professor Jacobson has been making bizarre claims for years, and his work has been rejected as unrealistic, even by academics who share his desire to reduce carbon dioxide (CO2) emissions.

For example, in the Proceedings of the National Academy of Sciences (PNAS), a group of 21 academics publicly criticized the methodology and assumptions in Professor Jacobson’s work on a hypothetical 100 percent “wind, water, and solar” energy system (WWS). The authors found that Jacobson’s work “used invalid modeling tools, contained modeling errors, and made implausible and inadequately supported assumptions.” Authors warned: “Policymakers should treat with caution any visions of a rapid, reliable, and low‐​cost transition to entire energy systems that relies almost exclusively on wind, solar, and hydroelectric power.” (Note: Professor Jacobson initially sued the academics for challenging his work, but later dropped the suit.)

The counterpoint to Jacobson’s work by the PNAS authors is interesting context but doesn’t address the specific claims in the Order. And although a full rebuttal of Jacobson’s work is beyond the scope of this piece, let’s spot‐​check a few of the Order’s assertions—based on Jacobson’s testimony—to see if they stand up to scrutiny. (I also encourage readers to jump to paragraph 269 in the Order and read for yourself Professor Jacobson’s contributions to the case, which the judge deemed “informative and credible.”)

Paragraph 271 reads: “Non‐​fossil fuel‐​based energy systems across all sectors, including electricity, transportation, heating/​cooling, and industry, are currently economically feasible and technically available to employ in Montana. Experts have already prepared a roadmap for the transition… to a 100% renewable portfolio by 2050, which, in addition to direct climate benefits, will create jobs, reduce air pollution, and save lives and costs associated with air pollution” (emphasis added).

Using the kinetic energy of the wind to generate electricity has been technically available in the U.S. since at least 1888 when Charles Brush powered his home near Cleveland using a dynamo connected to a windmill and backed up by batteries in his basement. So I take no issue with the assertion of technical availability, especially if we’re only discussing one state (although a national or global shift to WWS would raise important questions about the availability of critical minerals at sufficient quantities and reasonable prices). However, the concept of a 100 percent WWS system being economically feasible needs a closer look.

Paragraph 276 offers the patently false assertion that: “Wind, water, and solar are the cheapest and most efficient form of energy. Cost per unit of energy in a 100% WWS system in Montana would be about 15% lower than a business‐​as‐​usual case by 2050, even including increased costs for energy storage.”

Policymakers should not be tricked into thinking a WWS future would be inexpensive. We have real‐​world examples of states and nations that have tried to make the transition Professor Jacobson imagines—specifically California and Germany, who have both made an expensive mess of their attempts to decarbonize. For one thing, they have yet to fully decarbonize after many years of effort, as Professor Jacobson claims is feasible. For another, the accumulated costs are staggering: an estimated $580 billion in Germany by 2025. Regarding California’s transition, proponents say decarbonization would take “about $76 billion per year on average between 2021 – 2030.” Specifics aside, it is incorrect and irresponsible to claim a WWS future would be cheap. On a national level, estimates of green energy spending included in the Inflation Reduction Act reach as high as $2.7 trillion. This doesn’t mean that such a transition couldn’t conceivably pass a cost‐​benefit test, but the costs are much higher than Jacobson claims.

Paragraph 276 continues: “New wind and solar are the lowest cost forms of new electric power in the United States, on the order of about half the cost of natural gas and even cheaper compared to coal.”

This is a reference to the Levelized Cost of Energy (LCOE). The National Renewable Energy Laboratory explains that LCOE is “an economic assessment of the cost of the energy‐​generating system including all the costs over its lifetime: initial investment, operations and maintenance, cost of fuel, cost of capital.” LCOE should not be used to compare intermittent energy sources to on‐​demand sources. The U.S. Energy Information Administration states: “direct comparisons of cost between dispatchable and resource‐​constrained technologies may not be meaningful in most contexts.”

However, perhaps the most‐​cited LCOE research firm—Lazard—attempted to remedy the “dispatchable vs. non‐​dispatchable” problem in its 2023 assessment. Slide 8 in Lazard’s 2023 report illustrates the cost of “firming” intermittent sources of energy.[1] Notably, under the Lazard methodology, the cost of firming increases as the share of intermittent energy goes up. For example, in California (which already has a high penetration of solar energy), the LCOE of firmed solar is $141 per megawatt-hour—compare that to the cost of running existing power plants like nuclear ($31), coal ($52), and combined cycle natural gas ($62). Even for new power plants, the LCOE for combined cycle natural gas ($39-$101) is competitive with the intermittent output of wind ($24-$75) and solar ($24-$96).

Paragraph 281 states: “Transitioning to WWS will keep Montana’s lights on while saving money, lives, and cleaning up the air and environment…” (emphasis added).

Regarding the power grid reliability impacts of a forced transition to intermittent resources, see pages 22–25 of my recent comments on the power plant regulations proposed this year by the Environmental Protection Agency. The short version is this: the reliability of the electric grid is a matter of public health and safety (over 200 people died during extended power outages in Texas during Winter Storm Uri), and efforts to protect people from the risks of climate change have so far ignored the health risks of an unreliable electricity supply.

Conclusion

Energy and environmental policy is too important to allow serious errors to go unchallenged. Policymakers and judges should carefully parse the facts to guarantee that energy and environmental policy is grounded in reality. Unfortunately, the court Order makes several errors on its way to concluding that Montana should turn away from fossil fuels and embrace a WWS energy system. I certainly want a “clean and healthful environment” for my own children. Where advocates and policymakers (and judges) may differ is on which facts are relevant to policymaking and the right policies to promote a clean and healthful future.


[1] Lazard provides the following explanation in a footnote: “Firming costs reflect the additional capacity needed to supplement the net capacity of the renewable resource (nameplate capacity * (1 – ELCC)) and the net cost of new entry (net ‘CONE’) of a new firm resource (capital and operating costs, less expected market revenues),” where ELCC stands for Effective Load Carrying Capability and is “an indicator of the reliability contribution of different resources to the electricity grid.”

Parsing the Factual Errors in the Montana Climate Ruling, Part One

https://www.cato.org/blog/parsing-factual-errors-montana-climate-ruling-part-one

Travis Fisher

This is Part One of a multiple‐​part response to the recent court order issued in the case Held v. Montana.

On August 14, Montana District Court Judge Kathy Seeley sided with climate activists (“youth plaintiffs”) in Held v. Montana, a first‐​of‐​its‐​kind victory in a climate lawsuit. This is a big deal. Media coverage has referred to it as a “landmark climate case,” a “significant victory,” and a “gamechanger.” Beyond finding that a recent statute was unlawful under the Montana state constitution, the judge found that the defendants—16 youth plaintiffs in Montana represented by a climate group called Our Children’s Trust—had legal standing to sue on the grounds that they were, in fact, injured by climate change.

Observers of climate lawsuits like this one have said for years that legal standing was impossible to establish for climate damages. Under state suits, the criteria for legal standing can vary but tends to require actual or imminent injuries caused by climate change that are “remediable,” i.e., curable by a court victory. Held v. Montana sets a worrying precedent that could, at least according to local attorneys, “likely provide a blueprint for climate change litigation throughout the nation.” It is troubling not just because it violates longstanding rules of legal standing, but because it gives legal imprimatur to the flawed arguments made in support of radical government actions to address climate change during the trial.

It is not sufficient that the defendants might win on appeal and overturn the order. Some of the arguments put forward in Judge Seeley’s Findings of Fact, Conclusions of Law, and Order (the “Order”) are simply inaccurate and warrant swift refutation before the next round of legal review takes place. Other arguments carry grains of truth that deserve the fuller context one might expect from a comprehensive trial. This piece offers the beginning of a rebuttal to the Order, which calls for an end to the consumption of hydrocarbon energy (“fossil fuels”). For judges or policymakers who would ban fossil fuels—which provide 80 percent of our primary energy sources (domestically and globally)—please consider the costs.

Snapshot of the Case

Plaintiffs challenged the constitutionality of a 2023 change to Montana’s statute dealing with the Montana Environmental Policy Act. That change stated that environmental reviews “may not include an evaluation of greenhouse gas emissions and corresponding impacts to the climate in the state or beyond the state’s borders.” Judge Seeley found that provision inconsistent with the article of the Montana state constitution, added in the early 1970s, that reads, in relevant part: “The state and each person shall maintain and improve a clean and healthful environment in Montana for present and future generations” (emphasis added).

In addition to finding the 2023 statute unconstitutional, Judge Seeley granted standing to the plaintiffs, affirmed their harm and injury, and found that: “This judgment will influence the State’s conduct by invalidating statutes prohibiting analysis and remedies based on GHG (greenhouse gas) emissions and climate impacts, alleviating Youth Plaintiffs’ injuries and preventing further injury” (emphasis added).

Before we explore whether any single state’s climate policy—or any single nation’s—could conceivably alleviate or prevent injuries from climate change, which is a global phenomenon, let’s take a step back and talk about the uncontroversial parts of the Order.

Yes, Montana, There Is Climate Change

There are some facts about climate change that most of us can agree on, no matter where we land on the political spectrum. Here are a few: 1) The climate is changing; 2) Human activity has an impact; 3) Carbon dioxide (CO2) is a GHG; 4) Globally, GHG emissions are on an upward trend (although global economic slowdowns create temporary downticks); and 5) The concentration of CO2 in the atmosphere is increasing and appears to be accelerating slightly in recent years. So, before anyone feels compelled to ask “Do you believe in climate change?,” my unambiguous answer is “Yes.”

The five things listed above are near‐​universally accepted facts, in part because we have sophisticated ways to measure temperature and CO2—a great example is the atmospheric CO2 record from the Mauna Loa Observatory in Hawaii (see below).

Temperature records are less straightforward, but we do have direct readings from thermometers for over 100 years, and global average surface temperatures are on an upward trend in that data set as well. The Global Surface Temperature records reported by the National Oceanic and Atmospheric Administration, for example, show that the 2022 average surface temperature was a bit more than one degree Celsius warmer than some of the earliest direct measurements, and bit less than one degree Celsius warmer than the 1901–2000 average (see below).[1] We also have interesting (if perhaps slightly less reliable) proxy temperature records established by paleoclimatologists using tools like ice core samples and tree rings that go back thousands of years.

Clarifying the Impact of CO2 on Human Health

Although it’s true that ambient CO2 concentrations are going up, we must understand that CO2 is not a traditional pollutant and causes no direct adverse biological impact in humans at ambient concentrations. In percentage terms, a concentration of 420 parts per million (ppm) equates to 0.042 percent of the atmosphere (nitrogen makes up roughly 78 percent, oxygen 21, and other trace gases like Argon and CO2 make up the rest). In fact, the Occupational Safety and Health Administration established safe levels of CO2 in the workplace in the range of 5,000 to 10,000 parts per million (ppm), so breathing in the levels of CO2 in the ambient atmosphere—less than one‐​tenth the level of the safe threshold—is simply not directly harmful to human health.

We should be clear about terms like “carbon pollution”—CO2 should not be confused with traditional pollution like toxic levels of heavy metals or dangerous smoke. But the Order blurs the line between CO2 as a GHG and CO2 as a harmful pollutant by interchangeably referring to CO2 as a GHG (throughout), as “fossil fuel pollution” (p. 86) and as “fossil fuel emissions” (pp. 90, 92). In paragraph 124, the Order states “Childhood exposure to climate disruptions and air pollution can result in impaired physical and cognitive development with lifelong consequences. Air pollution can trigger or worsen juvenile idiopathic arthritis, leukemia, and asthma in children” (emphases added). It is unclear whether the judge was referring to CO2 as the “air pollution” in question. (Historical note: traditional pollutants are all on a downward trend in the United States)

The below image (accompanying an article about CO2 emissions) illustrates the rhetorical device used by some climate activists in framing CO2 as a pollutant that is harmful to breathe and a trigger for illnesses like asthma. One harmful consequence of the Order could be that the rebranding of CO2 as “fossil fuel pollution” now has a patina of legal seriousness.

Okay, but what about indirect impacts? The obvious risk of increased CO2 emissions is global warming and the indirect health impacts that accompany it (there are other costs occurring elsewhere, such as those stemming from sea level rise, but I’ll focus on the Montana‐​specific costs identified in the Order). The Order discusses at length the impacts of two of these changes: temperature increases and air pollution from wildfires. Both issues are important but received a very one‐​sided discussion in the Order.

Temperature: Studies suggest extreme cold weather may be more fatal than extreme hot weather, and it stands to reason that the impacts of cold weather would be more acute in a high‐​latitude state like Montana. Government data also suggest people living in rural areas are at higher risk of cold‐​weather fatalities, and Montana’s population density ranks the third lowest in the nation (only Alaska and Wyoming have lower population density) according to 2020 Census Bureau data. The judge’s focus on the physiological impacts of heat (and lack of focus on the impacts of cold) is an unbalanced discussion of the temperature impacts. For example, p. 118 states: “Exposure to extreme heat can cause heat rash, muscle cramps, heatstroke, damage to liver and kidney, worsening allergies, worsening asthma, and neurodevelopmental effects.” The Order ignores the health impacts of extreme cold, which is not appropriate given Montana’s latitude.

Wildfires: The connection between CO2 emissions and wildfires is tenuous at best. Bjorn Lomborg used data from the National Aeronautics and Space Administration to show that the total land area of the world burned by wildfires has trended downward in recent years. Roger Pielke, Jr. examined the treatment of wildfires in reports by the Intergovernmental Panel on Climate Change (IPCC)—he concluded that the IPCC “has not detected or attributed fire occurrence or area burned to human‐​caused climate change.” Personally, I suffered acute illness from the wildfire smoke that covered the Washington, DC area for several days this summer. I can vouch for the unpleasantness of inhaling wildfire smoke and the health impacts. However, an objective look at the data does not reveal a link between CO2 emissions and wildfires, certainly not the causal link needed in a court setting. That causal link may be shown eventually, but the IPCC reports do not provide the degree of attribution certainty required in a lawsuit.

Conclusion

We should be clear about what CO2 is and is not. It is a GHG that is increasing in concentration and contributing to climate change, but it is not harmful to breathe in concentrations 10 times higher than exist in the atmosphere. Calling it “fossil fuel pollution” is a rhetorical device that obscures and confuses the debate over climate policy. Sadly, the court Order gives an undue legal endorsement to such one‐​sided rhetoric. It also doubles down on the flawed arguments that 1) heat represents a greater health risk than cold, especially in high latitudes, and 2) increased CO2 concentrations are associated with (or even cause) more wildfires.


[1] There are disagreements about how surface temperature should be averaged (and to what extent the average is biased upward by the urban heat island effect); however, it is important to acknowledge the warming trend.