U.S. Energy Policy: We Don’t Need One

By Kenneth Costello -- June 27, 2019

“Probably more than anything, the legacy of past energy policies is advancing special interests – the energy industry, climate activists and environmentalists, governmental activists, and others – rather than the general public.”  

“Why then do we even need an energy policy? After all, we don’t have a computer policy, a clothes policy, or a food policy. Experience has shown that the country would be better off without one.”

The Green New Deal is just the latest in the long line of despicable energy policies proposed or implemented in the U.S. One has to go back to the 1970s (when I first entered the energy-policy debate) to find energy thinking this far off the track.

Why the demand for aggressive governmental intervention given its counterproductive promise and results (supply/demand distortions from mispricing; subsidies; unintended consequences).

Eight reasons come to mind.

(1) The desires of special-interest groups (they are not disinterested parties);

(2) The pursuit of an end based on single-point projections, which often are applied as targets, that inevitably turn out to be wrong (no surprise!), sometimes significantly so. After all, setting targets reduces the flexibility of decision-makers, as markets are too dynamic and unpredictable to set targets;

(3) A failure to account for uncertainty, opportunity costs, and tradeoffs – (e.g., cost of subsidies, cost of distorting price signals);

(4) Overemphasizing the cost of not taking immediate action relative to the cost of taking premature action;

(5) Relying on studies with an excessively low analysis-to-recommendation ratio (which one would expect from advocacy studies);

(6) Mistakenly correlating technological feasibility with being affordable/economical to society;

(7) Making dubious assumptions that drive the results of energy analyses – for example, thinking the future is more certain than it is and, thus, falsely conveying the claim that governmental actions incorporate little or no risk (policymakers should be mindful of the wisdom of Mark Twain’s “Prophesy is a good line of business, but it is full of risks.”);

(8) Understating the benefits of markets to tackle present or emerging problems, for example, by muting the responses of consumers and suppliers to higher prices caused by supply constraints. 

We can ask today whether the time is ripe for promoting new sources of energy by transitioning away from existing sources, particularly fossil fuels.

If the government’s intent is to offer subsidies or other forms of special treatment for the development of certain energy resources, should it target those subsidies only at emerging and promising new sources of energy?  How do we know that such special treatment passes a valid cost-benefit test?  Most energy policies neglect to include such a test, probably because the advocates know that their favored policies would fail.

In an idealized libertarian world, there would be no favoritism toward any energy source or energy-using technology.  The reality is, however, that the federal governmental has historically chosen, and invariably will continue to choose, certain energy technologies and sources as “winners” in the rent-seeking contest for governmental favoritism that seems to be inherently embedded in U.S. energy policy.

What is the one major lesson can we draw from past U.S. energy policies? The combination of overstating the problem being addressed, failing to recognize the role of market dynamics in mitigating the problem, and understating the cost of policy initiatives (e.g., the costs of promoting energy efficiency and new sources of energy, the costs of subsidies) seems to be that one lesson.

What this says is that energy policies have tended to exaggerate the negative effects of market imperfections and underestimate the real cost of governmental intervention. Advocates of governmental intervention are pessimists or Malthusian in their mistrust of markets to remedy problems.

The evidence confirms that rent-seeking motives, rather than public-interest intentions, drive U.S. energy policy. Government often ends up doing the wrong thing because of accommodation to rent-seekers, in addition to acquiring bad information from poor forecasts or distorted visions of the future under different states of the world — i.e., erroneous governmental appraisal of the future and the current state of affairs. 

Probably more than anything, the legacy of past energy policies is advancing special interests – the energy industry, climate activists and environmentalists, governmental activists, and others – rather than the general public.  

Starting in the 1970s, U.S. energy policy has been driven by the objective to reduce our dependency on foreign oil through efforts (which have been generally unsuccessful). More recently, energy policy has focused on climate change and how to wean ourselves from fossil fuels. In both cases, governmental actions have achieved outcomes detrimental to society’s interest for the reasons given above.

Climate advocates want immediate and radical policies to disrupt the energy sector. With uncertainty so extreme, it seems ill-advised to spend huge sums of money today. Typically, advocates of a particular energy policy are alarmists who want to push their agenda beyond what is analytically supportable. Such support would call for incremental policies to mitigate the risk of unanticipated events and specious information.    

Energy policies and the underlying analyses tend to impart a “no regret” solution to some real, perceived, or contrived problem.  They are often inflexible, and, as they say, “It’s a bad plan that cannot be changed.”  This is exemplified by targets like price floors or caps, and renewable energy mandates, which generally produce unintended consequences because markets are too dynamic and unpredictable to know presently what the optimal target should be for the future. 

Many proposed energy policies seem on the surface to be morally, economically, socially, and politically correct.  If you look at them superficially, you would think that only an unreasonable or immoral person would not embrace them. It takes some real work to flush out what their real effects will be. But when one does, one realizes the intent is almost always to serve a special interest at the expense of the public good. 

Energy policies often communicate the fantasy that we can have everything without paying a price  – to an energy policymaker, there is a free lunch, at least that is what is often conveyed.  In the real world, however, individuals and businesses have to constantly make tradeoffs – not everyone benefits from governmental actions even though occasionally we may be moving closer to a Pareto-superior condition.  Energy policy is no exception to this reality.

As the saying goes, “Those who ignore history are bound to repeat it.” We will inevitably have bad energy policies in the future. Why would we expect otherwise? 

Why then do we even need an energy policy? After all, we don’t have a computer policy, a clothes policy, or a food policy. Experience has shown that the country would be better off without one.