Energy Development a Parachute for Fiscal Cliff

A recent article at Free Enterprise outlined U.S. Chamber President Tom Donohue’s suggestion for easing the problem of solving the so-called fiscal cliff: development of U.S. conventional energy resources. This would boost employment and output, lower energy prices for consumers, and bring in more revenue for various levels of government. If policymakers are serious as they wring their hands about the stalled economy and mushrooming public debt, then they should jump at this win-win solution.

The Free Enterprise article then cited several studies confirming Donohue’s claims:

A new study commissioned by the U.S. Chamber Institute for 21^st Century Energy found that unconventional oil and natural gas development will be responsible for 1.3 million new jobs by 2020, and an additional 1.8 million jobs by 2035. This activity will generate more than $2.5 trillion in tax revenues between 2012 and 2035, according to the study.

Another Chamber study, Project No Project, conducted in 2011 concluded that if the permitting process were accelerated, the planning and construction of 351 proposed energy projects would generate 1.9 million construction jobs and 790,000 permanent jobs.

Moreover, an American Petroleum Institute found that by 2018 another million jobs could be created by encouraging the development of new and existing North American oil and gas, as well as building the Keystone XL pipeline. Doing these things could also add hundreds of billions of dollars over time to federal, state, and local tax coffers.

Donohue’s proposal is the polar opposite of calls for a carbon tax as a “solution” to the fiscal cliff. A carbon tax would raise electricity and gasoline prices for consumers, and would stifle economic growth, especially if its revenues were used to fuel government spending, as opposed to offsetting cuts in other taxes. Because a carbon tax is more economically damaging than even an income tax, the projections of the extra trillion-plus in revenue it will bring to the Treasury are probably optimistic, as the overall tax base will grow more slowly because of the onerous burden on energy. One could argue that the environmental benefits (in the form of mitigated climate change damages decades in the future) are high enough to justify the costs of imposing a carbon tax, but the point is that a carbon tax would hurt the conventional economy.

In contrast, Donohue’s proposal to liberalize federal constraints on oil and gas development would bring in extra revenue while boosting the conventional economy. There is a fundamental difference between collecting more tax revenue because of a new tax (like a carbon tax), versus collecting more tax revenue because previously forbidden activities are now permissible. In a sense, it would be as if the Obama Administration currently has an “infinity tax” on the Northern Pipeline, but would be reducing it to the standard income tax rates by approving the project. Thus, even though more revenue would flow to the Treasury, the move should be interpreted as a “tax cut” in the grand scheme.

As policymakers fret about the tepid economic recovery, the horrible job market, and the ballooning debt, the obvious solution is staring them in the face: Stop restricting entrepreneurs from developing the generous deposits of oil and gas on U.S. land.