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The Good, the Bad, and the Early in the Senate Spill Bill

Posted By Nicolas Loris On July 28, 2010 @ 12:00 pm In Energy | Comments Disabled

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The Senate just released its proposed legislative response to the Deepwater Horizon oil spill. Fortunately, earlier efforts to load the spill bill down with extremely costly and unrelated measures like cap and trade have given way to a more targeted approach.

Nonetheless, the bill still contains a number of problematic provisions, and in any event comprehensive legislation is premature at this time as there is much more that needs to be learned about the causes of the spill. At the very least, Senators should refrain from the instinct to “do something” on the oil spill and take a close look at the legislative proposal on the table.

The Good
The best thing about the Senate energy bill is that the worst proposals have been taken out of it. Initial attempts to add cap and trade or a renewable electricity standard (RES) appear to have lost out to a desire to create a scaled-down version more likely to pass. This is very good news. Simply put, cap and trade—in reality a tax on fossil fuels—is a costly and ineffective solution to the greatly overstated threat of global warming, and Senate measures to address it were justifiably stalling out before the Deepwater Horizon spill. Like cap and trade, an RES (essentially a mandate for more wind power and other expensive alternatives) would do nothing to help clean up the spill or reduce the likelihood of a recurrence, but it would raise energy prices on consumers and businesses, cost trillions of dollars, and kill over a million jobs [2].

It should be noted, however, that these truly horrible ideas could subsequently be added back. Many are worried that such measures could be revived in the lame duck session of Congress.

The Bad
Even the scaled-down bill contains some problematic provisions unrelated to the spill response. For example, it includes full funding for the Land and Water Conservation Fund. Under this 1965 program, a fee on offshore oil is used to fund acquisition of private land by the federal government. As it is, far too much land is in federal control already. Washington should be considering selling some off, not acquiring more [3]. For one thing, federal ownership of land often means taking it out of productive use (mining, logging, farming, ranching) and thus harms the local and state economies by destroying jobs and eroding the tax base. Also, the federal government has proven to be a poor landlord, and in many cases federal mismanagement has led to environmental harm.

The bill also includes subsidies for natural gas trucks and electric cars. Time and again, Washington has learned the hard way that it is not very good at picking winners and losers amongst alternative energy sources and alternative vehicles. The prospects for success are no higher now.

Similarly, the bill devotes $5 billion to subsidize home improvements that save on energy. As with the newfangled vehicles, such economic activity, if it made sense, would go on without federal handouts. So called “cash for caulkers” also raises a fairness issue: Should all taxpayers, including those who don’t own homes, subsidize renovations for those who do?

Further, such programs can have long-term effects on consumption patterns in the United States. If consumers come to expect a handout from the government, they may hold off on buying a new product. When the government provides subsidies, whether it is to businesses or individuals, it creates a dependence that isn’t easily forgotten.

Granted, as far as superfluous measures to the spill bill go, these items are not nearly as damaging as cap and trade or an RES, but they still are a step in the wrong direction.

The Early
The bill focuses on reducing the likelihood of a repeat spill, an improved cleanup plan so any future incidents are more effectively addressed, and beefed-up liability provisions. But such legislation would be premature, since there are still many more questions than answers surrounding the causes of the April 20th Deepwater Horizon explosion and subsequent leak. The federal investigations into the spill have scarcely begun, and it makes no sense to enact laws before they have concluded.
The bill’s authors have not concealed their anger at BP, admitting that the bill is designed to ensure that “BP pays for the damage they have inflicted [4].” But the liability provisions miss their intended target and would hurt smaller energy companies operating in the Gulf (and their employees) more so than BP and other oil giants, reducing domestic oil production and increase pump prices for consumers. A new economic analysis [5]of the Senate energy bill from the American Petroleum Institute found that employment in the United States would fall by 175,000 jobs per year between now and 2035 and domestic oil production would drop by 27 percent if such rules and regulations were implemented and the drilling moratorium remained in effect.

Instead of lifting the cap or raising it to another arbitrary number, Congress should wait to collect a more definitive estimate of how much the Gulf oil spill will be in terms of secondary costs. Since BP committed to pay all costs incurred by the oil spill, including legitimate liability, which could exceed the total $1.075 billion available, there is no urgency in a policy change.

Moving forward, however, Congress should thoughtfully address the liability cap and the artificially low $75 million figure. A new system is needed that accurately assesses the risk of offshore oil and gas operations without socializing that risk. A better approach would be for Congress to create a tiered insurance program for lease holders and to work with the oil and gas industry to establish mechanisms that use analysis and transparency to lower the insurance premiums paid by lease buyers—although not artificially. Permits to engage in offshore oil and gas operations in federal waters should depend on a company’s ability to cover the risk of its activities.
If a robust and comprehensive insurance program is in place, then there should be no need to have a trust fund to compensate for additional damages. Industry could ensure lower risk premiums by supplementing the new tiered liability system with an independent organization of participating industry players to collect and distribute safety data, share best practices, and work with federal regulators.

Further, Congress should require that, to conduct offshore oil and gas operations, industry and federal agencies responsible for oil clean-up have a demonstrated response already prepared and proposed if another spill were to occur. All three pieces—insurance, preparedness and inspection, and response—although separate, should work together to reduce premiums, reduce the likelihood that a future spill will occur, and minimize the economic and environmental damage of future spills.

Ben Lieberman co-authored this post.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2010/07/28/the-good-the-bad-and-the-early-in-the-senate-spill-bill/

URLs in this post:

[1] Image: http://www.foundry.org/wp-content/uploads/LiveFromGulf2.jpg

[2] but it would raise energy prices on consumers and businesses, cost trillions of dollars, and kill over a million jobs: http://www.heritage.org/Research/Reports/2010/05/A-Renewable-Electricity-Standard-What-It-Will-Really-Cost-Americans

[3] Washington should be considering selling some off, not acquiring more: http://www.heritage.org/Research/Commentary/2009/07/Uncle-Sam-realty-Nows-the-time-to-sell

[4] BP pays for the damage they have inflicted: http://www.capalphadc.com/wp-content/uploads/2010/07/2010-07-27-reid-energy-outline.pdf

[5] new economic analysis : http://www.scribd.com/doc/34950965/Potential-Impacts-of-Proposed-Increases-in-Regulations-Taxes-on-Deepwater-Drilling-in-the-Gulf

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