Regulatory Lag and Trying to Plan Our Energy Future

Posted on April 3, 2013 by E. Donald Elliott

Two items hit my inbox on the same day:

(1) The U.S. is predicted to become the world's largest oil producer and North America to become a net petroleum-exporting region according to the International Energy Agency, and

(2) The Obama Administration is renewing its commitment to wean U.S. cars off of petroleum.

Some might argue that it makes sense to wean cars off petroleum even if we have a lot of it because of the threat of global climate change, but instead the stated justification was “to create jobs and help lower energy costs for middle class families.”

Then came the news that the operating unit of China's largest solar panel company, Suntech Power, recently filed for bankruptcy.  Meanwhile, the Obama Administration proposes the creation of a $2 billion Energy Security Trust, funded by revenues from offshore oil leases matching those provided by the Chinese, to subsidize investments in this supposedly vital emerging field.

The disparity between such news and the government actions being taken started me questioning whether it is possible for governments to manage a field as dynamic and ever changing as future energy supplies.  "Regulatory lag" has long been a familiar concept in utility rate regulation: by the time regulators get around to approving new rates, the situation has changed.  And human beings are justly famous for "winning the last war": by the time that we understand something well enough to develop a broadly-shared consensus, the situation has changed.

This is nothing personal against the Obama Administration or support for renewable energy.  I have been teaching a course at the Yale Law School this semester on the history of energy policy in the U.S. since World War II.  A theme that runs throughout the course is how policies designed to manage energy supply, regardless of political outlook, lag as much as a decade or two behind the times.  For example, Nixon's 1971 oil price freeze lasted until 1981; Eisenhower's 1959 oil import quotas lasted until 1973.  In both instances, government policy did a lot of unnecessary harm because the energy supply situation changed much faster than government policies do.

I often wonder why environmental law and energy law are so different.  One difference is that environmental problems tend to stand still (or get worse) long enough for us to mobilize the slow processes of government to solve them. We studied and debated acid rain for over a decade before the 1990 amendments to the Clean Air Act, which mandated a 50% reduction in sulfur dioxide emissions over the following decade.  Energy markets change within months as new sources of supply and technologies come on line.  It makes one wonder whether government policy will inevitably be a day late and a dollar short when it tries to manage future energy sources.

Comments (1) -

Mike McCauley United States
4/4/2013 2:02:51 PM #

Thanks for this very interesting and valid observation.  There does not seem to be a solution to the "regulatory lag" problem.  It has always been there (in virtually all regulatory programs), and given the imperfection of human institutions (both public and private), it always will be.  However, on occasion, it is good to be reminded of the reality (and the inevitability) of this.  And to recognize that the fundamental complexity and uncertainty concerning Climate Change (as it relates to human activity) only serve to exacerbate the imprecision and "lag" connected with any proposed regulatory solutions aimed at addressingthe phenomenon.

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