The Proper Role of Government in Energy

Since tomorrow’s election is heavily focused on the appropriate scope of government, I have spent a little time lately reflecting upon the proper role of government in the energy sector.

In regards to the U.S. Presidential race, I will refrain from analyzing the respective policies and stances concerning energy of the two candidates.  This recent article from Fortune does a not-bad job of that.

Rather than get down into the weeds with an inordinately long list of specific ideas for a highly complex economic sector, I prefer to keep this discussion at a high-level, articulating basic principles that offer suggestions to guide elected officials and bureaucrats on how energy policies and regulations should be set.

This would be my short-list:

  1. Establish marketplace rules with long-term clarity to enable best investment decisions on long-lived assets and business strategies
  2. Ensure externalities from free-riders causing economic harm to society are fully internalized into market pricing signals
  3. Deregulate those services that can be provided competitively, force breakups where there is excessive market power preventing competition from being effective, and aggressively regulate services where competitive alternatives don’t exist (providing incentives for cost efficiency and non-discrimination)
  4. Promote full disclosure and transparency of information to all market participants to help in making optimal decisions
  5. Privatize public sector assets in competitive market sectors, and hold (potentially acquire?) assets in non-competitive segments to eliminate the possibility of exploitation by for-profit monopolists
  6. Set minimum standards of health, safety and environmental compliance, ensure these standards are met by all market participants, and enforce via meaningful penalties
  7. Facilitate responsible development and production of energy resources – as long as all health, safety and environmental standards are fully met
  8. Provide tax credits for pre-commercial research on new energy technologies to spur further innovation
  9. Structure incentives or mandates based on desired market, social or environmental outcomes rather than technological outcomes

As you can see, I am a big believer in the power of markets to most efficiently allocate capital and drive consumer behavior.   But, that doesn’t mean that the energy sector should be completely unregulated, and that the government should have little role in it.

Dating back all the way to Adam Smith over 200 years ago, it is widely-accepted among economists (at least non-Marxist ones) that free markets only produce efficient outcomes for the economy as a whole — and even then, don’t necessarily produce equitable outcomes — when (1) no participant in the market has undue power (i.e., no monopolists or monopsonists), (2) all information is available to all parties, and (3) there are no externalities (or they have otherwise been folded appropriately into market prices).

Alas, these pre-conditions do not widely apply to the current state of play in the U.S. energy sector.  As a result, even without considering questions of fairness, there is a clear need for government intervention to ensure socially-efficient outcomes.

The principles above are my thoughts on the extent and limits of proper intervention.

And, it should be noted that the principles I outlined above will only work well to produce socially-efficient outcomes when they’re all followed pretty faithfully.  For instance, without fully internalizing the social costs of carbon emissions in energy prices as stipulated in my second principle, other artificial mechanisms (e.g., renewable portfolio standards and renewable fuel standards, focused government R&D programs on low-emission energy technologies) in violation of my eighth principle are sometimes “second-best” solutions to make up for deficient attention to the second principle.

It should be evident that neither Romney nor Obama are particularly beholden to my proposed set of principles, as their campaigns pick and choose some to trumpet and disregard or oppose others.

How would you characterize what the role of government in the U.S. energy sector should be?  While it may influence how you might vote tomorrow, don’t expect either Presidential candidate ultimately to have much impact, as the U.S. President has less influence on the energy sector than is generally supposed.

At the outset of the October 16 debate, the candidates were asked by a citizen what they would do to push down gasoline prices.  Both Obama and Romney responded by touting how they had, or were going to, increase domestic production of oil (as well as natural gas).  That can help drive down prices a little, but the impact is pretty marginal:  oil and gasoline prices are set by conditions in world markets, by factors well beyond the control of the President of the United States.

Bluntly, the underlying premise of the question was horribly flawed:  the President can’t move gasoline prices, and the President can only move supply and demand a very little bit…and even then, only over an extended period of time (for instance, as new auto fuel efficiency standards come into effect or as expanded oil exploration and production opportunities are brought into play).

By the fundamental structure of the Constitution, all powers not reserved for the Federal government are delegated down to the States.  And, in many issues pertaining to energy, it’s really state policy that matters.  That allows the energy economy of California to look increasingly like the energy economy of Germany, while the energy economy of Louisiana looks more like the energy economy of Saudi Arabia.

The most one can expect from a U.S. President, when it comes to energy, is the espousal and dedicated ongoing pursuit of general principles akin to those I outlined above.  He (or someday, she) has a bully-pulpit to argue for pressing ahead on a broad vision, and taking supportive actions with lots of little strokes — many of which are far more symbolic than substantive.  (Remember Jimmy Carter placing solar thermal panels on the roof of the White House?  Remember Ronald Reagan taking them off?)

When choosing between Obama and Romney — at least for me, at least when it comes to energy — it’s a choice of lesser-among-two-evils.  Both of them are beholden to the over-simplistic dogma of their respective parties.  Neither of them is able to discard outdated or ineffective planks of his party’s overall energy platforms, or to embrace new ideas not typically advocated by his core constituencies.

Even though our choices are far from perfect — on energy policy and a whole range of other important matters — I urge all Americans to uphold their civic duty and exercise their right to vote.  As my aunt Doris used to say, you have no moral authority to complain about the government if you don’t vote.

Meanwhile, my proposed principles of energy policy remain, standing by, for some future American leader to consider.

2 replies
  1. TJCSF
    TJCSF says:

    An interesting example to analyze would be the governments large investments in battery-powered automobiles. In retrospect, we would be better positioned and much further along w/r/t a non-oil transportation alternative if we had instead focused on nat gas fueled transportation. This appears to be an example of government believing that they are smart enough to pick the winner (it turns out they didn't), instead of putting in place incentives for the "best" alternatives to emerge.
    Same exact scenario is now happening in the water heating world, where the government is focused on the non-economic heat-pump water heater solution as "the answer". It turns out that a distributed architecture water heating solution is a better solution at no incremental capital cost….but try swimming upstream against government resources.

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  1. […] Since tomorrow’s election is heavily focused on the appropriate scope of government, I have spent a little time lately reflecting upon the proper role of government in the energy sector. In regards to the U.S. Presidential race, I will refrain from analyzing the respective policies and stances concerning energy of the two candidates.  This recent […] Cleantech Blog […]

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