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Rhetoric Matters: The Subsidy vs. Externality Distinction

Earlier this week, an article in The Guardian by John Abraham on fossil fuel subsidies piqued our interest and we granted it a coveted spot in our daily news roundup, In the Pipeline:

But I think it deserves a bit more attention.

As the above excerpt indicates, Abraham’s article is a paean to a study that seeks to redefine subsidy. According to the study’s authors and to Abraham, rather than subsidy meaning a benefit given by the government to groups or individuals, usually in the form of a cash payment or grant, the term should encompass “environmental costs like global warming” that are not taken on by an industrial outfit.

Here’s the thing though: we already have a well-known term in the economics nomenclature for this concept: externality. An externality is a side effect or consequence of an industrial or commercial activity that affects other parties without this being reflected in the cost of the goods or services involved.

Externalities can theoretically be negative (think: local water pollution) or positive (think: a neighbor’s garden, which you do not pay to maintain, yet from which you nevertheless derive visual and olfactory pleasure). But the costs and benefits from externalities are notoriously difficult to assess.

Now, I haven’t yet had the opportunity to wade into the study Abraham is promoting, but I think we can safely assume the future costs it attributes to the fossil fuel industry rest upon the dubious “social cost of carbon” (SCC) or another similar metric.

The SCC and its counterparts, however, are far from scientifically valid.

As IER commented in its official submission to the Executive Branch to challenge use of the SCC in rulemaking:

[T]he use of the SCC as an input into federal regulatory actions is totally inappropriate. The Administration is treating the SCC as if it is a scientifically valid, objective fact of the external world, akin to the charge on an electron or the boiling point of water at sea level. However, the SCC is no such thing, at least in our present state of understanding. Rather, the SCC is an arbitrary output from very speculative computer models. It can be adjusted up or down as the analyst wishes, simply by changing a few key parameter choices. Simply by adjusting the parameter and modeling choices in plausible ways, a knowledgeable economist can generate SCC estimates that are very high, very low, or even negative—meaning that carbon dioxide emissions actually shower “positive externalities” on humans beyond the direct benefits to the emitters, and therefore should (according to the Administration’s logic) receive federal subsidies.

It isn’t just IER that’s unimpressed by the SCC, MIT physicist Robert Pindyck takes a similarly dim view. In the abstract for his paper Climate Change Policy: What Do the Models Tell Us?, he answers the titular question:

Very little. A plethora of integrated assessment models (IAMs) have been constructed and used to estimate the social cost of carbon (SCC) and evaluate alternative abatement policies. These models have crucial flaws that make them close to useless as tools for policy analysis: certain inputs (e.g. the discount rate) are arbitrary, but have huge effects on the SCC estimates the models produce; the models’ descriptions of the impact of climate change are completely ad hoc, with no theoretical or empirical foundation; and the models can tell us nothing about the most important driver of the SCC, the possibility of a catastrophic climate outcome. IAM-based analyses of climate policy create a perception of knowledge and precision, but that perception is illusory and misleading.

As we suggested with our newsletter commentary, there’s a measure of equivocation at play here. Abraham disseminates the figures produced by the study without the slightest indication of the study’s methodology, let alone critiquing it. Furthermore, like IER’s Robert Murphy said in 2013, the context-switching use of “subsidy” is a sort of rhetorical trick. The typical reader, busy with the more pressing concerns of life, will not pursue an in-depth evaluation of the study, but is likely to remember the staggering subsidy claims being made about the fossil fuel industry. And Abraham, of course, knows this.

Scientific topics require deliberate thought, but it is all too often omitted from popular discourse on climate and environmental economics. Readers of The Guardian deserve better than to have “close to useless” metrics, like the social cost of carbon, promulgated as ironclad science.

Key Vote: YES on Rep. Davidson’s Amendment #388 to Focus Dept. of Defense Resources on National Security

The U.S. government has no duty more paramount than ensuring our national security. Unconscionably, Executive Order 13693—like its recently repealed counterpart 13653—jeopardized that imperative by diverting the Armed Forces’ scarce resources toward goals falling far outside their missions. By prioritizing carbon dioxide emissions targets, fleet requirements for low and zero emission vehicles, and aid for local governments to “go green” Executive Order 13693 takes capacity away from our defense capabilities.

Representative Warren Davidson’s amendment #388 to H. R. 2810, the National Defense Authorization Act, would prevent the Department of Defense from continuing to implement the Executive Order in question.

The insertion of ideological and politically-drive considerations into the operations of the Department of Defense dilutes the efforts of our brave men and women in uniform by placing irrelevant concerns on par with the critical security matters that they must weigh. By blocking the implementation of this pernicious Executive Order, Rep. Davidson’s amendment will redirect both material resources and human capital back toward the Armed Forces’ sacred mission of safeguarding our liberty.

The American Energy Alliance strongly supports and urges all members to vote YES on Rep. Davidson’s amendment #388 to H. R. 2810.

Fracking’s Overlooked Local Benefits

The economy-wide, macro-scale benefits of hydraulic fracturing have been well-documented and are indeed palpable in our everyday experiences in the form of noticeably more affordable energy. With the influx of shale oil on the market, for example, we’re seeing lower gasoline prices this summer than we have in over a decade. The national average is currently around $2.25-per-gallon—$1.30 less than it was three years ago. Multiplied by the 140 billion barrels of gasoline American drivers use each year, this means a total savings of $180 billion than can be put to use elsewhere in our economy.

Nevertheless, fracking remains a misunderstood and maligned technique for energy development. Earlier this year Maryland became the third state to ban fracking outright, with Governor Larry Hogan signing the bill in April.

“The possible environmental risks of fracking simply outweigh any potential benefits,” Hogan said. “This legislation, I believe, is an important initiative to safeguard our environment.”

Taken at face value, Hogan’s statement portends care and concern for the people of Maryland. As with any technology, we should absolutely evaluate the potential risks and weigh them against the potential benefits. The problem is that Hogan’s calculation doesn’t pass muster.

Any risks that fracking poses, it stands to reason, would be felt most intensely by those who live, work, and play closest to fracking infrastructure. Those same people, however, have the most to gain from fracking.

As other states’ experiences have shown, the value of fracking accrues most directly to the people closest to it who benefit not only from the economy-wide impact, but from leasing contracts, royalties, and private sector investments. While Marylanders will continue to experience fracking’s positives that resonate throughout our economy—lower prices—they’ll miss out on a great deal.

In Texas, for instance, a new study from the Academy of Medicine, Engineering, and Science of Texas, titled Environmental and Community Impacts of Shale Development in Texas, yielded the following findings:

  • In 2014, shale development in the Permian, Eagle Ford, and Haynesville plays accounted for $27 billion in royalties paid to private landowners.
  • Oil and natural gas production generated over $1.5 billion in property tax revenue for Texas schools in FY2014.
  • The Permanent School Fund—a state education endowment supporting K-12 public schools—received $676 million in FY2014 from oil and natural gas revenues.
  • Roughly 230 independent school districts are located in areas where oil and natural gas producing properties generated at least $1 million in property tax revenue in FY2014.
  • The Permanent University Fund—an endowment supporting the University of Texas and the Texas A&M University systems through oil and gas royalties on certain state-owned lands—was at the time valued at $21.8 billion.

These are the sorts of benefits that Maryland’s politicians are denying to its citizens—particularly those in the rural, less developed western portion of the state. If Texas seems too distant and incomparable, Maryland need only look north to its neighbor Pennsylvania to see another state reaping the benefits of fracking.

While the rural counties of western Maryland languish, counties just 200 miles away in eastern Pennsylvania are seeing the rewards that come with shale development.

In its decade of operation in the Keystone State, Cabot Oil & Gas—just one company—has now paid over $1 billion in royalties and nearly $500 million in lease bonuses to landowners in Wyoming County and Susquehanna County. Rightfully, the people of Pennsylvania recognize the relationship as a win-win.

“A billion dollars flowing into our rural economy is an extremely big deal,” said Pennsylvania State Representative Jonathan Fritz. “Being pro-jobs and pro-business, I extend my appreciation to Cabot Oil & Gas. The energy industry has been a blessing to our area and I look forward to Cabot’s continued success and the widespread economic benefit that comes along with it.”

Cabot’s investment has indeed been massive, with $4.6 billion put into the region to build its network of 557 wells.

“Royalties from natural gas development have provided additional income during tough economic times,” said State Senator Gene Yaw. “Whether it’s expanding a farming operation, supporting area businesses or simply putting money away for a child’s college fund, royalties have greatly benefited rural Pennsylvanians.”

“Let’s face it, most municipalities and the county government, they live paycheck to paycheck,” Susquehanna County Commissioner Alan Hall said. “When you start breaking down all the municipalities, and the money that they’ve been able to use without borrowing money, that’s all a savings to the taxpayer.”

When Larry Hogan signed Maryland’s fracking ban in April these are the opportunities he threw away. Sadly, the people of Maryland are worse off economically than they should be, all because state politicians failed to account for these real and direct benefits.

AEA Statement on the Bears Ears National Monument Interim Report

WASHINGTON — American Energy Alliance President Thomas Pyle has issued the following statement regarding Secretary Zinke’s 45-day interim report on Bears Ears National Monument:

“The Antiquities Act allows the president to designate archaeological sites and historical landmarks as off-limits to development, but stipulates that the protected space shall encompass ‘the smallest area compatible with proper care and management.’ Barack Obama stepped beyond that boundary with his Bears Ears designation by granting unnecessary protection to 1.35 million acres—an area nearly as large as the state of Delaware.

“The Bears Ears monument designation was one of the final actions taken by the Obama administration—and one of the most telling. The designation took land out of the hands of Utahans and placed it into those of the federal government. By reducing the size of the monument, the Trump administration will rightfully return to the people of Utah the power to use the land in the manner that best suits their interests. Energy development, land stewardship, and recreation are all important considerations; this decision respects that importance and gives agency to the people for whom Bears Ears has the most significance.”

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AEA Commends President Trump for Keeping His Promise to the Forgotten Man

WASHINGTON — American Energy Alliance President Thomas Pyle has issued the following statement regarding President Trump’s decision to withdraw the United States from the Paris Climate Agreement:

“President Trump has a very clear vision of making this country a champion of energy development and economic progress. Withdrawing from the Paris Agreement reinforces his commitement to that vision and the American Energy Alliance applauds him for doing so.

“The Paris Agreement was a bad deal from the start. It committed the U.S. to unilateral economic disarmament by saddling the economy with unnecessary regulations and would have driven energy costs sky-high for American families. Further, U.S. taxpayers would be on the hook for billions of dollars to subsidize green energy projects around the world.”

“By keeping his promise to cancel our involvement, President Trump has taken another positive step toward resetting a generation of failed energy and environmental policies. Withdrawing from the Paris deal signals to the world that America is committed to economic prosperity at home and lifting millions of people out of energy poverty abroad.”

Projections run by NERA Economic Consulting show that the Paris Agreement’s concomitant regulations would result in staggering losses. In NERA’s core scenario, the U.S. GDP loss would be about $250 billion in 2025 and increase to about $420 billion per year on average. The cumulative loss would be about $4 trillion between 2022 and 2031. NERA reports that, “The losses become larger in the long run as the ‘mid-term’ deep decarbonization target constrains the economy significantly. The U.S. economy could lose about 6% of its GDP on average between 2034 and 2040 amounting to a loss of greater than $2 trillion annually and a cumulative loss of $14 trillion.”

Meeting our so-called nationally determined contribution of a 28 percent reduction in net greenhouse gas emissions from 2005 levels by 2025 would have required inundating our economy with a flood of new and heightened regulations. Estimates by the Heritage Foundation hold that the agreement would have cost the United States an overall average shortfall of nearly 400,000 jobs, an average manufacturing shortfall of over 200,000 jobs, a total income loss of more than $20,000 for a family of four, an aggregate GDP loss of over $2.5 trillion, and an increase of between 13 and 20 percent on the average household electricity bill.

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AEA Launches StopParisAgreement.org

WASHINGTON – Today the American Energy Alliance (AEA) launched a new initiative urging President Trump to keep his promise to withdraw the United States from the Paris Climate Agreement. The initiative, hosted at StopParisAgreement.org, asks citizens to voice their concerns to the president by signing a petition demanding America withdrawal from the U.N. climate deal. American Energy Alliance President and former Trump DOE transition team leader Thomas Pyle has issued the following statement:

“Remaining in the Paris Climate Agreement would be an ‘America last’ approach—quite the opposite of what Donald Trump promised during his bid for the presidency. We urge President Trump to protect American families and businesses from unnecessary and burdensome climate regulations by withdrawing from the Paris deal.

“President Trump’s energy vision is to give American companies more freedom to explore and develop our vast natural resources, deliver lower cost electricity to American families, and remove the regulatory straightjacket that has hamstrung businesses both large and small. The Paris Climate Agreement would make that all more difficult by handing control of our energy destiny to foreign bureaucrats and their demands for increasingly stringent emissions limits and massive taxpayer handouts to pay for ‘green energy’ ventures in developing countries.

“President Trump has promised to represent the best interests of the American people; those interests entail a withdrawal of the United States from the pact signed onto by the previous administration.”

Click to here visit StopParisAgreement.org.

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President Trump’s Budget Prioritizes American Taxpayers

WASHINGTON — American Energy Alliance President Thomas Pyle has issued the following statement on the White House budget proposal:

“President Trump’s budget, dubbed The New Foundation for American Greatness, has many of the elements required to live up to that ambitious billing. At a fundamental level, this budget reconsiders and aims to restore the appropriate relationship between the government and the American taxpayers. By taking a taxpayer-first approach, the Trump administration signals to the American people that money will no longer be wasted in Washington on the pet projects of bureaucrats and cronies.

The budget requests $28 billion for the Department of Energy—a welcomed reduction of 5.6 percent from 2017’s annualized CR level. This figure ensures the Department’s core functions remain funded while trimming superfluous and uneconomical programs. For example, over the course of the next 10 years, the budget purports to halve the Strategic Petroleum Reserve (SPR), which will save $16.5 billion. The SPR is a relic from an era of undue supply concern; we now know, of course, that the United States sits atop billions of barrels of oil waiting to be tapped. One geographic area in particular that is flush with natural petroleum reserves—around the order of 10 billion barrels—is the Alaskan arctic region. Encouragingly, this budget anticipates oil and gas leasing in the Arctic National Wildlife Refuge starting in 2022, which will not only shore up domestic supply, but also fill government coffers with leasing revenue.

Even more promising than the DOE reductions, the 2018 budget request for the Environmental Protection Agency is just $5.7 billion—a whopping 31 percent reduction from the 2017 annualized CR level. The lower budget will prompt EPA to focus its attention on the issues of highest national priority, while releasing power for many regional initiatives back to states and municipalities.

President Trump’s campaign built much of its support by promising to shake things up in the nation’s capital. This budget does just that. For the first time in recent memory, the executive branch is adopting the perspective of the American taxpayers. With that perspective comes a much-needed shrinking of the Washington spending machine.”

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Senate Fails to Protect American People from Methane Regulation

WASHINGTON – Today the Senate failed to move forward on a Congressional Review Act resolution to nullify the Bureau of Land Management’s costly methane regulation. American Energy Alliance President Thomas Pyle issued the following statement:

“The Senate just squandered an opportunity to protect American workers and families from a regulation aimed at making energy more expensive. The evidence against this regulation is overwhelming. Not only does this regulation fall outside of the BLM’s jurisdiction, but the energy sector is already significantly reducing methane emissions without this top-down directive from the federal government. The cost of complying with this regulation will ultimately fall on the shoulders of the American people. Fortunately, the fight isn’t over. It’s now up to the Trump administration to do what the Senate failed to do and protect the American people from this unnecessary and costly regulation.”

Click here to read Tom Pyle’s recent op-ed in Morning Consult.

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Coalition Urges Trump to Withdraw from Paris Climate Treaty

WASHINGTON – Today, the American Energy Alliance (AEA) and the Competitive Enterprise Institute (CEI), along with 38 free-market and conservative organizations, sent a letter to President Donald Trump urging him to keep his campaign promise to withdraw the United States from the Paris Climate Agreement and stop all taxpayer funding of United Nations’ global warming programs.

The letter outlines how the agreement is a treaty that commits the U.S. to actions that are contrary to President Trump’s energy agenda and not in the interest of the American people.

“Remaining in the Paris Climate Treaty would undermine the Trump administration’s efforts to protect American families from unnecessary and burdensome climate regulations,” said Thomas Pyle, president of the American Energy Alliance and former head of Trump’s DOE transition team.

“The treaty is based on the idea that from now on developed nations like the U.S. must live with less and pay more. That is not the American way,” said Pyle. “President Trump’s ‘America First’ energy plan is about making energy more affordable and giving Americans more say over their energy choices. The Paris treaty stands in the way of achieving that goal. It’s time for President Trump to fulfill the promise he made to the American worker and withdraw the U.S. from the Paris Climate Treaty.”

The letter argues the plain language in the Paris treaty does not allow the U.S. to renegotiate or lower our commitment to reducing the usage of fossil fuels, but instead would require more ambitious commitments to cut greenhouse gas emissions every five years in perpetuity. Further, failing to withdraw from the Paris treaty exposes key parts of Trump’s deregulatory energy agenda to unnecessary legal risk.

“The Paris Climate Treaty is an all pain for no gain agreement that will produce no measurable climate benefits and exacerbate energy poverty around the globe,” said Myron Ebell, director of CEI’s Center for Energy and Environment and former head of Trump’s EPA transition team. “The Paris treaty undermines American democracy and allows foreign bureaucrats to determine the direction of U.S. domestic economic and energy policy. Its main goal is to build a green industrial complex on the backs of American consumers and taxpayers.”

Click here to read the full letter.

Click here to read IER’s analysis on why the U.S. should withdraw from the agreement.

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Coalition Urges Senate to Pass Methane CRA Resolution

WASHINGTON – Today the American Energy Alliance and a coalition of free-market and conservative organizations sent a letter to the Senate urging them to pass the Congressional Review Act resolution nullifying the Bureau of Land Management’s methane regulation. Below is an excerpt from the letter:

This regulation comes with a high price tag. The American Action Forum estimates that this rule will cost roughly $297 million per year ($1.8 billion in total). The methane rule will decrease energy production on federal lands, leading to fewer revenues from royalties and higher energy costs, not to mention lost jobs. This regulation runs completely counter to the pro-growth agenda many of you ran upon in the 2016 elections.

The rule is entirely unnecessary. The EPA found that methane emissions fell by 13 percent from 2011-2014. The EPA also found that methane emissions from hydraulic fracturing fell 81 percent between 2012 and 2014. This drop in methane emissions occurred even as U.S. oil and gas production has significantly increased due to the shale revolution.

The oil and gas sector has been so successful in reducing methane emissions from venting and flaring, in part, because methane itself is a valuable resource that producers capture and sell. It is in their best interests to reduce methane emissions. Forcing this one-size-fits-all regulation on an industry that is already substantially reducing methane emissions is unnecessary and costly.

Some Senators have voiced concerns that CRA method precludes future regulations. This concern is misplaced. The rule, as written, is meant to regulate methane emissions for air quality. However, BLM only has the authority to regulate waste—the EPA regulates air quality and already has a methane regulation in place. Regardless of your position on the regulation, it is clear that the BLM is far afield from its jurisdiction.

AEA President Thomas Pyle also issued the following statement after reports that Senators Grassley and Thune may hold the resolution hostage over an ethanol waiver:

“The methane CRA resolution would protect American families and workers from an unnecessary and costly regulation. It is irresponsible and a disservice to their constituents for Senators Grassley and Thune to hold this resolution hostage over an ethanol waiver. The House passed this resolution more than two months ago and it’s past time the Senate does the same.”

Click here to read the full coalition letter.

Click here to read Tom Pyle’s recent op-ed in Morning Consult.

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