It’s hardly a surprise when politicians fail us. Last week, with energy policy in play, we saw disappointments galore.
But the biggest surprise of the week was a bill introduced by Congressman Devin Nunes, a California Republican, that may, if enacted, lead to a dramatic improvement in U.S. energy policy. It has been a long time since someone in Washington thought outside the box. The brilliantly crafted Nunes bill marks the third-term Congressman as a rising star in the Republican Party.
Nunes’s proposal is for the government to help eliminate some of the uncertainty surrounding efforts to develop alternative energy by supporting long term futures markets in alternative fuels. Developers could buy an option to sell the fuel at a fixed price, say three years or five years hence. Because the contract reduces uncertainty for the developer, it should reduce the costs of financing and otherwise encourage investment into facilities.
The price of these futures contracts would, under the Nunes bill, be set at auction. Accordingly, the policy would probably raise revenue in near-term forecasts. In the long run, taxpayers would be taking on a risk that oil prices will drop, but that risk is a natural one for them take.
If oil prices fall so low that the government must pay lots of money to alternative fuel providers who have purchased these options, then that would mean the economy will be booming because of the low energy prices. In addition, tax revenue will be flowing in, and the Treasury’s coffers will be full.
Of course in this world it looks like the government would have to choose which alternative fuels get a futures market subsidized (by taxpayers, but don’t worry, the promise is that it will be cheaper than current energy policy). I’m not sure that the “low oil price = booming economy = tax revenue flowing in” element is quite thought out, but perhaps true in approximation. Arnold Kling has a good suggestion:
I don’t think that you need an alternative energy market. Oil prices and the price of alternative energy will be highly correlated enough. All you need to do is extend the oil market to include a contract dated, say, January 3, 2015 another one dated January 3, 2020, and another one dated January 3, 2025. Then abolish the Department of Energy and have the government spend some of that money going “long” on those contracts.
Kling’s approach has the advantage of simplicity, and keeps the government out of the business of picking market favorites.
Overall, however, an interestingly minimalist approach to policy, particularly in Kling’s variant. Worth additional study.