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).