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Ed Dolan

Ed Dolan

Edwin G. Dolan holds a Ph.D. in economics from Yale University. Early in his career, he was a member of the economics faculty at Dartmouth…

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Fast-Tracking the Keystone XL Pipeline and the Need for a Comprehensive Energy Policy

The administration is coming under increasing pressure to accelerate approval of the Keystone XL pipeline, designed to carry increased U.S. imports of bitumen from Canadian oil sands. The latest form of pressure is a Senate bill that would fast-track KXL in exchange for a two-month extension of the payroll tax cut and other items. After some resistance, it now appears the House will go along with the proposal. It is a bad idea.

What’s wrong with the Link?

The new legislation proposes a trade-off of short-term economic stimulus for fast-tracking a long-term project that is vehemently opposed by environmentalists. Part of the problem is that so little is being offered. Short-term tax cuts are among the least effective forms of fiscal policy. Has everyone forgotten the Bush administration’s one-shot tax rebate in the spring of 2008? It shot one big hole in the budget, reducing future fiscal room for maneuver, but it created only the most transient of boosts to economic activity. On top of that, social security itself is in need of long-term restructuring. Undermining its funding in the name of short-term stimulus just doesn’t make sense.

The obsession with short-term issues is not a partisan problem, nor is it confined to Congress. Senate Democrats and Republicans joined in a rare display of bipartisanship to propose the tradeoff of a payroll tax extension for a pipeline decision. The White House also seems to be looking only at the short-term issues. In urging approval of the Senate bill, they asked people to send in dramatic stories of how big a difference $40 per week would make to their lives, while staying quiet on the long-term environmental issues raised by KLX.

What’s Wrong with KXL?

If the Keystone XL pipeline really offers big benefits, it should be able to win approval on its own merits. The reason the Senate is trying to sneak the project through as a rider on unrelated legislation is that its benefits are largely illusory. I have written about KXL in detail elsewhere. Here is a quick summary of what is wrong with it:

• Sourcing hydrocarbons from Canada does little to improve U.S. national security. True, the United States now imports too much oil from unstable and unfriendly sources. However, most of the national security threat of that energy dependence is transmitted via the periodic price spikes that afflict world oil markets. The spike associated with the recent Libyan conflict was an example, although a minor one compared to the probable effects of something like an Israeli attack on Iran or a civil war in Venezuela. Getting oil from Canada would do nothing to insulate the U.S. economy from the risk of price spikes, unless we imagine that, during a crisis, the kindly Canadians would sell their oil at a discount from world prices.

• Bitumen from Canadian oil sands is a high-carbon energy source. The worst of it, by some estimates, is as dirty as coal. True, as KXL proponents point out, some bitumen deposits are cleaner than others. Life-cycle studies indicate that the best Canadian oil sands are no worse than imports the United States now gets from Venezuela and Nigeria. Even some thermally extracted heavy crude from California is dirtier than the cleanest Canadian bitumen. The problem is that as things now stand, there are no adequate regulatory or economic incentives for Canadians to fill the KLX pipeline with bitumen from the lowest-carbon deposits extracted using the least harmful methods. At a minimum, that issue needs to be addressed before KLX is authorized.

• KXL is also being sold as a jobs program. Some boosters claim direct and indirect jobs in the six figures. Such numbers lack all credibility. Even the State Department, which broadly backs the pipeline, thinks 5,000-6,000 direct jobs, few of them permanent, is a reasonable number. Of course, even 5,000 temporary jobs would be welcome if they were good jobs that add value to the economy. They would do so only if producers, refiners, and pipeline operators bore all the internal and external costs associated with producing, transporting, and using the bitumen. At present, we cannot be sure that would be the case, since neither Canada nor the United States has a regime in place to charge environmental damage back to the parties that cause it. In the absence of a comprehensive energy policy (preferably on both sides of the border), there is no guarantee that KXL pipeline jobs are of the value-adding variety.

What Kind of Energy Policy Do we Need?

The fact is we should not be making decisions like whether to build KXL on a piecemeal basis. We should be making them in the context of a comprehensive energy policy, one based on the TANSTAAFL principle—There Ain’t No Such Thing as a Free Lunch. That would mean a policy that imposes full costs (including national security costs, local air and water pollution, and global climate change) on producers and users of energy.

There is room for discussion about how best to bring those costs to bear. Alternatives include energy taxes, cap-and-trade schemes, and legal reforms that would give pollution victims the standing they need to recover damages through the courts. (See here for a detailed discussion of the pros and cons of each approach.) The problem is that at present, we use none of those alternatives. Instead, we have an energy policy based on the myth of “affordable energy.” We are basing our energy economy on the illusion that if we are all allowed to shift our costs to someone else, we will all become more prosperous. Sadly, the world just doesn’t work that way. The one thing we cannot afford is “affordable energy.”

The bottom line? It is not possible to reach reasoned decisions on issues with long-term strategic implications, like construction of the Keystone XL pipeline, without a comprehensive energy policy. If a policy of full-cost pricing of all energy sources were in place, lower total energy demand and higher supplies of natural gas and renewables might well make Canadian bitumen uncompetitive. At the same time, a price-smoothing oil tax could adequately address the security risks posed by global price spikes. The very fact that pipeline backers are trying to force a quick decision on KLX without even an up-or-down vote in Congress suggests they fear that the project could not withstand close scrutiny.

By. Ed Dolan

"This post originally appeared on Ed Dolan's Econ Blog at Economonitor.com, and is reprinted here with permission."

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Leave a comment
  • Les Mcfalls on December 30 2011 said:
    I wouldn't worry about it. Under Obozo's starvation of USA energy supplies he will no doubt veto it. At least he will be on the record about it before the election. This time he won't be able to get away with voting "present".

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