Policy Whiplash & Its Consequences

Good, stable public policy helps keep the energy markets healthy and benefit its citizens. Is that what we've seen in the U.S. to date? 

The United States is currently experiencing a dramatic shift in how the federal government views its role within energy markets. The federal role went from a pro-fossil fuel set of regulations and incentives since World War II, to an “all-of-the-above” policy in the Obama years, to Biden’s industrial policy that was pro cleantech, to Trump’s executive orders (not yet legislation) that declare an energy emergency, but exclude renewable energy from the equation.

You may argue that any one of these policy shifts was not right, went too far, or didn’t go far enough. However, conventional wisdom is that markets need a stable regulatory and incentive environment for businesses to make good short- and long-term investment decisions.

Let me lay out a couple other axioms while I’m at it:

• Libertarian, free-market principals hold that government should play a neutral role within a market.
• Businesses in countries where their governments support them with subsidies or favorable regulations will gain competitive advantage in global markets, such as energy, automobiles, and information technology.
• Market forces will lead to negative public outcomes unless externality costs are captured in the pricing of its products. For example, we won’t see greenhouse gas reductions unless the costs of climate change adaptation and the health effects of pollution are reflected in energy prices.
• Poor market results are typically due to a poor or incentive structure. The U.S. healthcare system with its high costs, poor customer experiences, and negative health outcomes is a case in point.

So, with that in mind, here are a few thoughts about the potential impacts of this current policy shift. EDITORIAL NOTE: As you can guess by the name “cleantech insiders,” we’re for more investment and innovation in cleantech.

Energy Prices Will Remain High. Declaring a National Energy Emergency states, “The United States’ insufficient energy production, transportation, refining, and generation constitutes an unusual and extraordinary threat to our Nation’s economy, national security, and foreign policy.” However, it neglects renewables even though solar and wind are now the cheapest forms of energy generation. Is the emergency that we don’t have enough energy, or that it costs too much? 

The proclamation tilts to traditional sources, specifically “… oil, natural gas, coal, hydropower, biofuels, critical minerals, and nuclear energy resources.”  These were developed in the post-war era and are controlled by well-funded special interests. We currently produce more oil and gas than we use. The increased production will be exported, particularly liquified natural gas, and prices will swing with international impacts, e.g., wars, unsafe shipping lanes, etc. If we want to lower prices, taking advantage of our vast solar, offshore wind, and geothermal resources would have a positive domestic price impact.

Greenhouse Gas Emissions Continue to Climb. Federal incentives have long favored fossil fuels. I have argued with free marketers that the U.S. government has and currently favors fossil fuels through drilling incentives, use of public lands at below-market rates, funding roads and bridges, saving U.S. auto manufacturers during market crashes, and more. These policies prop up the use of individual vehicles with internal combustion engines at the expense of mass transit and electrifying transportation options. This had a positive economic benefit in the post-WW II era, but the cost of the externalities (e.g., pollution, oil spills, asthma, disaster relief, climate change adaption) have never been factored into the cost at the pump. Until those externalities are reflected in pricing, we’ll go on polluting.

You can’t quantify it, if you can’t measure it. The Prioritizing Accuracy in Environmental Analyses proclamation disbands the Interagency Working Group on the Social Cost of Greenhouse Gases (IWG), and “… any guidance, instruction, recommendation, or document issued by the IWG is withdrawn as no longer representative of governmental policy.”

Global Competitiveness of U.S. Auto Manufacturers Erodes Further. Eliminate the Electric Vehicle (EV) Mandate removes “unfair subsidies and other ill-conceived government-imposed market distortions that favor EVs over other technologies.” I remember the 1980s. Japanese automakers were making reliable, price competitive, and highly efficient cars; while U.S. manufacturers were focused on the profit margins of their less reliable, less efficient models. The Japanese companies gained a big market share, Toyota became (and still is) #1 in global sales, and U.S. cars became less competitive domestically and abroad.

Today, Chinese auto manufacturers are switching to EVs, capturing market share globally, and are able design and manufacture new, competitive models more quickly than U.S. or European manufacturers. I would argue that any federal policy that doesn’t encourage U.S. automakers to make the EV shift – whether it’s helping build out EV charging networks, ensuring domestic supply chains, or incenting EV purchases – is to doom them to become less competitive. They will be out muscled from every market outside the U.S. and Canada, and less competitive with imports at home.

Housing Will Become Less Insurable and Perhaps Less Affordable. One of the hidden costs of climate change is that extreme weather events, wildfires and sea-level rise are making more areas of the country uninhabitable from two perspectives. First, insurance companies are not insuring mortgages in high-risk areas, therefore homeowners are exposed and may not be able to get home loans. Second, Federal flood insurance and disaster relief is being stretched thin. Rebuilding in areas prone to fire and flood is becoming unsustainable. If policy makers do not take this situation seriously and continue to point fingers and shirk responsibility, the national housing crisis will continue, and some markets will collapse. Policies that ignore climate change will leave communities vulnerable. 

These outcomes are all man-made, so Federal policy makers could course correct. States and municipalities could respond to local challenges, but they rely on Federal funding for many of their programs. Plus, the energy market and environmental forces are global in nature.

There’s no substitute for good, stable Federal public policy to keep the energy markets healthy and benefit the country’s citizens.