This land is your land…. – Blog of the Institute of Energy
It’s time to reform the way we lease public land for fossil fuel extraction.
When I drove across the country in my late teens, the prairie wind blowing through my long hair and feather earrings from the open window of my 1981 Toyota Tercel, I had no idea that 28% of American lands belong to the federal government. Almost half of California is federal land to this day! When I learned about this, I first thought it had to be an effort to conserve and preserve valuable ecosystems for everyone to enjoy, like the national park system. This German hippie was shocked to learn that was not the case. The federal government leases land from private companies for commercial purposes such as cattle grazing and coal mining as well as oil and gas drilling. Is this a big deal? Yes! 40% of domestic coal, 22% of domestic oil and 12% of domestic gas come from federal lands.
Now that I am older, perhaps wiser, but certainly a better trained economist, I would have no problem with this, if the land were leased at rates reflecting its full opportunity cost. But it’s not. The rates do not reflect the actual current value of the land, nor do they include local air pollution or climate damage caused by fuels extracted from these lands (or a variety of other damages). Let me focus on climate damage. In this economist’s dream world, where greenhouse gases were assessed at their true damage (which is difficult to understand and probably underestimated), a carbon price would “deal” with this damage by internalizing it somewhere along the supply chain. But we don’t have a federal carbon price. So what to do? It’s not just me asking this question. President Biden in Executive Decree 14008 instructed the Home Secretary to make a recommendation “to adjust the royalties associated with coal, oil and gas resources extracted from public lands and offshore waters, or to take any other appropriate measure, to take account of the corresponding climatic costs ”.
A new framework for royalties
One of the great econometricians of our time, Jim Stock, and a rising star in our field, Brian Perst, have written a set of possible solutions to this “shovel-ready” problem in a new super cool working paper. The document presents a neat framework that recognizes two key issues. First, they take into account the possibility that a decrease in oil and gas production on federal lands could “spill over” into increased production on private lands, thus offsetting the effectiveness of a surtax. Second, they examine how such a surtax would interact with more comprehensive carbon pricing policies at the federal level. The vanishing point provides an empirically testable hypothesis (my favorite type). The paper shows empirical evidence that the leaks are incomplete, a fancy way of saying that for every ton of carbon reduced on federal land, you get far less than a ton of extra production from private land.
The second part of the paper helps us think about how we should measure the effects of a royalty adjustment. One measure could be the additional income collected. Three reasons why this can be a meaningful measure. First, the royalties are divided between the federal government and the state in which the resources are extracted. Therefore, these royalty increases could be used to help communities suffering from the demise of the fossil fuel extraction industry. Second, the royalty maximization solution does not completely stop extraction, but it drastically reduces emissions. Finally, federal revenues could be used for all sorts of good things (eg, brilliant new renewable energy technology, more teachers, lower income taxes) because the owners of that land (you! ) Are finally paid for their value. Another measure, which might be more appealing to the “money is bad” crowd, is simply reducing greenhouse gas emissions.
Let’s focus on income for a second. There is currently no demand for coal leases, EVEN WITH THE EXISTING CRAZY SUBSIDY (yes, the outdated and low rates the federal government is currently charging tenants are a subsidy) AND NOT BILLING FOR CARBON (that is a good thing if you care about Mother Earth). The document therefore focuses on oil and gas. These two fuels have different prices and carbon contents. Therefore, the document shows results for a uniform carbon charge per tonne of CO2, a uniform percentage point increase in the charge, as well as different carbon charges for each fuel. In summary, so far we have a framework for thinking about the problem as well as a number of solutions and measures of their impact.
The last part helps us to think about how to choose between the different policy options. There are three possible options. The first possible measure is simply the maximization of income. The higher the fees, the lower the production. Since income is the product of both, this is a subtle dance where you want to get the price right.
The second metric, which requires a bit of fancy nerd technology (also known as math), is to estimate the welfare impacts of the policy. This approach takes into account the impacts of the policy on consumers (who demand fossil fuel resources) and producers (who make a profit), as well as on wasted resources.
Finally, one could see how successful these policies are in terms of phasing out new federal fossil fuel leases by a specific date, which could be consistent with a trajectory towards net zero emissions.
Quantification of policy solutions
So what do they find? For a single supplement, they show that revenue is maximized by increasing the current federal royalty rate from 12.5% (18.5% overseas) to 51%, which translates into additional annual revenue of 6%. billion dollars (WOWZA!). This approach would lead to a drop in global emissions (including leaks!) Of around 37 MMT CO2e / year, or about 40% of what one would get from an outright ban on rentals.
If we look at welfare maximization, “the common surtax is estimated at 19% and 44% for CCSs of $ 50 / tonne and $ 125 / tonne respectively”. Even better could be done by charging separate charges for oil (higher) and gas (lower). These have the potential to reduce emissions from 25 to 88 MMt CO2e / year and raise 4 to 5 billion dollars / year.
So, in summary, this is insane research, incredibly timely and important. The federal land use reforms proposed here improve the situation of society. Here and there and everywhere. The additional income generated can help communities affected by the inevitable decline in fossil fuel extraction in this painful transition. And this policy can be implemented without a long parliamentary and partisan battle. It is simply a brilliant proposition. Even my 19 year old hippie self would have approved.
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Suggested citation: Auffhammer, Maximilian. “This land is your land….” Blog of the Institute of Energy, UC Berkeley, March 22, 2021, https://energyathaas.wordpress.com/2021/03/22/this-land-is-your-land/