The Politics of National Energy Policy Reform

 

Takeaway

  • Tax regulations reduces public support for policy reform.
  • Companies prefer taxes over marketable permits.
  • Many industries will incur significant costs for regulatory compliance.

An Interview with David Spence

With the introduction of the Lieberman-Kerry energy bill earlier this month, energy legislation is again on the Senate agenda. My colleague David Spence has been doing research on energy policy and the legislative process and is the McCombs expert on this topic.

When I look at the various proposals I get the impression that our Congress prefers complicated, rather than simple, solutions. For example, I would like to see a simple tax on oil, coal and natural gas that is proportional to their carbon content. Is there an inherent bias against simple solutions, or are these solutions “simplistic” rather than just simple? Would you say we have complicated proposals because we have complicated problems, or are the proposals complicated because we have a complicated process?

David answers: Economists have favored emissions taxes over other regulatory instruments since the earliest days of environmental regulation in the United States, yet Congress almost never chooses that option. Companies tend to prefer taxes over marketable permits or other forms of regulation as well, because taxes provide cost certainty in pollution control. By contrast, marketable permit prices can vary wildly, as we've seen in the European carbon trading scheme. Environmental groups distrust environmental taxes because it is difficult to predict exactly how much pollution will occur at any given tax rate, and they fear that the rate would be set too low. They also tend to believe that the American the acid rain program, a marketable permit system for sulfur dioxide emissions from coal-fired power plants, has worked well. However, the most likely answer to your question is a logically unsatisfying one. In American politics, “tax” is a four letter word, and has been for several decades now. Public support for regulation wanes when regulation is described as a "tax." This may be because consumers associate taxes with higher energy prices more readily than they do other forms of regulation. Taxes may also be associated with "big government" in public mind. Members of Congress have no preference for complex policy solutions, except when complexity can be used to disguise costs. They have a strong preference for policies they think their constituents want, and an even stronger aversion to policies that they fear might be portrayed as harmful to their constituents in the future. Hence, marketable permits have been the instrument of choice in all of the recent climate change bills. There was speculation that the bill that Senators Kerry and Lieberman unveiled recently would substitute a carbon tax for marketable permits in the regulation of the oil industry. Instead, the bill tries to provide more cost certainty for the oil industry by "setting aside" a number of emissions allowances (marketable permits) on a quarterly basis, and refiners will then purchase the allowances they need for that quarter at that the price for that quarter. Hardly a simpler solution.

If this is anything like health care, we can expect substantial division between Democrats and Republicans on this energy bill. Can you very briefly where these differences are likely to arise? Do you think these differences arise because of philosophical differences (such as different views on big government) or because of their different constituencies?

David answers: It appears as though the partisan split in Congress, particularly the Senate, is every bit as stark on this issue as it has been with healthcare. Lindsey Graham (R-SC) who was part of the "Gang of Three" who tried to develop a bipartisan Senate bill, dropped out of the process a short time ago. While he cited displeasure over the administration's immigration reform proposals as the reason, some commentators believe that Graham was under tremendous pressure from his party not to cooperate with Democrats on energy. The partisan split can be traced to differences over particular issues, as well as differences over basic philosophy. The fact that these bills would impose significant regulatory costs on a wide swath of industry makes small government Republicans wary. Carbon capture and sequestration will impose very large costs on coal-fired power plants. A national renewable portfolio standard for electric utilities would impose significant costs electric utilities, particularly in parts of the country with few renewable energy resources such as the southeast, where Republican support is very strong. In addition, the base of the Republican Party views climatologists’ consensus view -- that the earth is warming, and that human activity is very likely driving that warming -- with great skepticism. These claims are the very factual foundation of the effort to address climate change: that is, they are what justifies the costs these bills would impose. Naturally, one who disbelieves these claims will see no purpose to bearing those costs.

Finally, can you make a guess of the likely outcome of this process? Do you think we will have new legislation by the end of the summer? Any guess on what it will look like?

David answers: This is very difficult to predict. Right now, the prospects for passage of a bill in the Senate look very bleak. Public support for action on climate change is actually declining. On the other hand, catalyzing events, like the oil spill in the Gulf of Mexico, can change political dynamics quickly. For now, the administration seems more focused on financial reform. If that legislation passes, with Democratic support overcoming Republican opposition (as it did with healthcare), Republicans may revisit their strategic and tactical approach to major regulatory legislation, which could also change the political dynamics of the energy bills. Add to that the midterm elections coming up in the fall and it is anybody's guess what will happen. If I had to guess, I would guess that's we will get either (i) no energy legislation during this Congress, or (ii) relatively weak legislation which offers more financial incentives for conservation, efficiency and development of nuclear power, but no mandatory reductions in greenhouse gas emissions, efficiency standards for buildings, or national renewable portfolio standard.

Disclaimer

The views expressed are those of the author and not necessarily The University of Texas at Austin.
 

Faculty in this Article

David Spence

Professor, Business, Government & Society

Professor Spence's research and teaching focus on business-government relations with emphasis on energy and environmental regulation. He received his...

David Spence teaches in the Texas Executive Education program, featuring open enrollment, custom and certificate classes for executives and organization teams.

About The Author

Sheridan Titman

Walter W. McAllister Centennial Chair in Financial Services, McCombs School of Business

Sheridan Titman is a professor of finance at The University of Texas at Austin and a research associate of the National Bureau of Economic...

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