Getting The Energy Regulatory Balance Right
Sensible environmental regulations play an indispensable role ensuring that public lands are sustainably managed. But, as Earth Day’s 47th anniversary is celebrated, it is important to recognize that sensible regulations should also encourage the responsible development of new and existing energy sources.
Without cheap and affordable energy, not only would we be poorer and less healthy, our environment would also be worse off. As people become wealthier they are able to create cleaner production processes, devote a greater share of their income toward environmental causes, and tend to care more about broader environmental issues.
For instance, the Korean peninsula is geographically similar, but divided by an arbitrary political line. The same is true on the island of Hispaniola (where Haiti and the Dominican Republic are also divided by an arbitrary political line). A 2013 story in The Economist, noted how forests on the poorer side of these regions were significantly worse off. More broadly, The Economist illustrated that regions with higher incomes planted more forests and saw healthier biodiversity than regions with lower incomes.
These cases exemplify how policies that thwart economic growth can also lead to adverse environmental outcomes. These lessons are not just applicable to broader economic policies, they also apply to federal and state oil and natural gas regulations.
Oil and natural gas regulations on federal lands, and many state lands, are excessive. These regulations create no additional environmental benefit, but impose consequences such as lost jobs, lost income, and lost economic vibrancy. A forthcoming report I authored from the Pacific Research Institute documents the consistency of these negative impacts across areas with overly-burdensome regulations on oil and natural gas production. Several themes emerged across the case studies.
First, as the old adage goes, time is money. For instance, drilling for oil and natural gas on state lands in California, or federal lands nationally, are subject to long delays. When coupled with the large price volatility inherent in the oil and natural gas markets, the costs from delays create significant risks for producers and discourage production on these lands.
Second, prohibitions are costly. For instance, New York State bans fracking – hydraulic fracturing techniques that inject fluids into the cracks of rock formations allowing more oil and gas to be extracted. Drilling bans, by definition, eliminate all activity related to the oil and natural gas sector in the banned areas. As illustrated in the border communities between New York and Pennsylvania, states that impose complete production bans face bleaker economic outcomes than those states that enable responsible use of the latest drilling technologies.
Third, regulatory uncertainty matters. California also exemplifies this problem. California overly-empowers activists whose ultimate goal is to completely eliminate the production of oil and natural gas. The constant threat that current or future production projects will be thwarted due to new regulatory impediments (such as the threat from local fracking bans) increases the risks for producers, and decreases the production of oil and natural gas.
Fourth, states are better positioned to regulate oil and natural gas production in their borders than the federal government. State regulators not only have greater local knowledge, but the divergence in regulatory approaches enables states to learn from one another and implement the most effective regulatory structure. In contrast, the federal government often defers to one size fits all regulations that will fail to incorporate important local environmental considerations.
Finally, the overall regulatory environment matters. As the disproportionate production along the North Dakota side of the North Dakota-Montana border exemplifies, the broader regulatory environment can discourage production, just as these overly burdensome regulations discourage any business from expanding its activities. Higher workers compensation costs, an overly litigious legal environment, and expensive land use regulations all raise the costs on oil and natural gas production leading to less overall economic activity.
When regulatory authorities impose overly-burdensome costs, or unnecessarily ban modern drilling techniques, the economic contribution from the upstream energy industry is diminished. The costs from diminished economic growth are many and, ironically, can include worst environmental stewardship. The lesson for policy is clear: It is imperative that regulators get the balance right.
Wayne Winegarden, Ph.D. is a senior fellow in business and economics at the Pacific Research Institute and a contributing editor to EconoSTATS. His paper “Regulating the upstream energy industry: Getting the balance right” is forthcoming from the Pacific Research Institute in May 2016.