Markets vs. Mandate: the American energy dilemma

New York State’s fracking ban has evoked strong polarising sentiment. Local anti-fracking supporters welcomed the ban as a necessary intervention against corporations pursuing profits at the expense of local safety. The fracking industry on the other hand, saw it as a political move; an example of political interference in the markets at the expense of jobs, energy security and the principles of enterprise and free markets that America stands for. This dynamic is symptomatic of a bigger tension between markets and mandate within the US energy industry; one that that lies at the heart of hotly contested issues like the Keystone pipeline and the proposed TTIP EU-US free trade agreement.

And against the backdrop of a President carving out climate action as a top priority, historic US commitments to reducing emissions, a Republican House majority that views Obama’s Environmental Protection Agency as big-government interventionism, and America’s emergence as a global energy producer, how this tension is resolved affects not just the future of American energy, but has wider global ramifications.

Six years ago I wrote in the Financial Times about the need for less interference in European energy markets to enhance competitiveness; a perspective I still find myself inclined towards today, and for good reason.

Take energy security for example. Shifting responsibility for energy security from suppliers to government would reduce, not increase, security. A liberalised market provides strong incentives for producers to diversify supply and respond to consumer demand. OPEC’s current oil price war might even eventually strengthen a fracking industry forced to become more technically innovative and cost efficient to survive, despite the shorter-term challenges.

Then there is the danger of vested interests influencing a wide government mandate and effectively using government as a proxy for their own interests as illustrated by recent alleged links between energy company Devon Energy and Oklahoma Attorney General Scott Pruitt.

And of course there is the notion that climate change justifies state intervention to make cleaner renewables more competitive against oil and gas. But while this is a logical argument, its worth noting that government intervention is at least partly to blame for renewables having less market share in the first place. Federal research for US oil and gas as well as tax credits and subsidies totalling $10 billion between 1980 and 2002 dwarfed state support for renewables, ensuring there was never a level playing field to begin with. And modern-day fracking could not have developed without federal research and demonstration efforts in the 1960s and ’70s.

But as valid as all this is, it fails to tell the whole story.

What makes the energy industry unfortunately unique is the speed with which it could environmentally impact our planet; a factor so exceptional it justifies exceptional action in addressing it, including, if need be, some level of market intervention.

The real problem with the US energy debate is its deep ideological polarisation. Energy discourse is too often pulled towards dogmatic extremes; between those who believe strong government intervention is necessary to further centralise and regulate energy markets, sometimes to the point of protectionism, or conversely those who, as economist Paul Krugman put it when describing the GOP, “believe climate change is a hoax concocted by liberal scientists to justify Big Government, who refuse to acknowledge that government intervention to correct market failures can ever be justified”.

A healthy balance is probably somewhere in-between with sound market based interventions that do not plan energy markets or pick winners through polices like the ethanol blending mandate, but instead couple responsibility for environmental damage and carbon emissions with individual companies and consumers. A carbon tax could help achieve this by using market incentives to strengthen cleaner energies and encourage efficient consumption. After all, why should the burden of carbon emissions, which have a cost, not be factored into a transaction?

And just as timely market adjustments within the financial sector could have averted the worst of the 2008 financial crash and subsequent government bailouts, a carbon tax today would prevent a more drastic future government response to disasters that rising CO2 emissions would undoubtedly cause if left unchecked.

Yet with the looming 2016 Presidential elections, the potential for politicised narratives and populist slogans to take priority over any meaningful measured balance in the US energy discourse is all too real and present.

Somewhere between climate deniers, including prominent GOP members, refusing to acknowledge the need for any climate action, and those attempting to address the problem in a vacuum without considering how sweeping interventionist solutions undermine economic competitiveness (an approach that creates an inevitable political, business and electoral backlash), lie more sustainable, effective solutions. It is vital moderates across the political aisle work together to reach them.

Vicente Lopez Ibor Mayor is currently Chairman of one of Europe’s largest solar energy companies – Lightsource Ltd. He is former General Secretary of Spain’s National Energy Commission between 1995-1999 and was previously a member of the Organizing Committee of the World Solar Summit and Special Advisor of the Energy Program of UNESCO (1989-1994).

Greenpeace really is getting desperate here

Desperate in the sense that they're now claiming that if the people whose lives get disrupted by fracking get a share of the money from fracking then this would be bribery. Rather than what we might normally call it, compensation:

Jim Ratcliffe, the 61-year-old industrialist who founded the chemical giant Ineos, is promising to hand more than 6% of future shale gas revenues to those sitting on the reserves or affected by their extraction, in an effort to replicate efforts in the US where shale gas has created scores of new millionaires. The situation in America contrasts starkly with that of the UK, where efforts to develop the controversial new energy source have been delayed by landowners, environmental groups and the planning system.

Simon Clydesdale, UK energy campaigner at Greenpeace, said: “This is just more of the same bribes and bulldozers approach that has already proved a failure. With one hand the fracking industry goads the government into steamrolling people’s right to oppose fracking under their homes, with the other it offers cash incentives.

“The industry forgets people have legitimate concerns about fracking that won’t be easily assuaged by cash sweeteners."

It's all very Dave Spart isn't it?

Leaving the Trotskyist Hippies aside the interesting part of this is that we seem to have reversed, to some extent, the nationalisation of fossil fuel reserves that happened many decades ago. It's a standard of landowning law that the landowner owns the minerals underneath it. Except for gold and solver and then later we added fossil fuels to the list nationalised. Given that there would therefore be no benefit to landowners of fracking under their land there's been a certain resistance to allowing it.

However, the government has lowered the tax rate on gas and oil brought up through fracking: allowing that Coasean bargain to be struck again between the drillers and the landowners. There's now room in the sums for compensation to be offered: and thus compensation is being offered.

Will fracking lead to a UK energy renaissance?

Jared Meyer, policy analyst for Economics21 at the Manhattan Institute, wrote an op-ed for City AM detailing the barriers that still prevent the UK from taking full advantage of fracking:

For the first time in six years companies are able to bid for natural gas exploration licenses in the United Kingdom. The UK became a net importer of petroleum and natural gas last year and domestically-produced natural gas now accounts for only a third of consumption. Prime Minister Cameron’s decision to go “all out for shale” is a welcome sign and will aid in reversing the trend away from energy independence. If done correctly, increased energy exploration will also help the economic recovery gain strength.

Three problems still inhibit the UK from taking full advantage of potential gains from fracking. First, the energy exploration permitting process is far too time-consuming. Second, private landowners do not own the mineral rights beneath their lands, leaving them with little incentive to support energy exploration in their backyards. Addressing both these issues will help overcome strong environmentalist opposition, the third obstacle.

This article was originally published in City AM. Read the full article here.