It’s time to reform how we lease public lands for fossil fuel extraction.
When I drove across the country in my late teens, the wind of the prairies blowing through my long hair and feather earrings from the open window of my 1981 Toyota Tercel, I had no idea that 28% of US land is owned by the federal government. Almost half of California is federal land to this day! When I learned this, I at first thought that this must be an effort to conserve and preserve precious ecosystems for everyone’s enjoyment, akin to the National Parks System. This German hippie was shocked to learn that was not the case. The federal government leases land to private firms for commercial uses such as grazing of cattle and mining for coal as well as drilling for oil and gas. 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, maybe wiser, but definitely a more well trained economist, I would not have a problem with this, if the land were leased at rates reflecting its full opportunity cost. But it is not. The rates don’t reflect the true current value of the land, nor do they incorporate the local air pollution or climate damages caused by the fuels that are extracted from these lands (nor a variety of other damages). Let me focus on the climate damages. In this economist’s dream world, where greenhouse gases were priced at their true damage (which is hard to figure out and likely underestimated), a carbon price would “take care” of these damages by internalizing them somewhere along the supply chain. But we have no federal carbon price. So what to do? It is not just me asking this question. President Biden in Executive Order 14008 charged the Secretary of the Interior to come up with a recommendation “whether to adjust royalties associated with coal, oil, and gas resources extracted from public lands and offshore waters, or take other appropriate action, to account for corresponding climate costs.”
A New Framework for Royalties
One of the great econometricians of our time, Jim Stock, and a rising star in our field, Brian Prest, have drafted a “shovel ready” set of possible fixes to this problem in a super cool new working paper. The paper lays out a careful framework that acknowledges two key issues. First, they account for the possibility that decreased oil and gas production from federal lands could “leak” to increased production on private lands thereby offsetting the effectiveness of a surcharge. Second, they consider how such a surcharge would interact with more comprehensive carbon pricing policies at the federal level. The leakage point provides an empirically testable hypothesis (my favorite kind). The paper shows empirical evidence that leakage is incomplete, a fancy way of saying that for each ton of carbon reduced from federal lands you get significantly less than a ton of additional production filling in from private lands.
The second portion of the paper helps us think through how we should measure the impacts of a royalty adjustment. One metric might be the additional revenues collected. Three reasons why this may be a meaningful measure. First, royalties are split between the feds and the state in which the resources are extracted. Hence these royalty increases could be used to help communities suffering from the dying fossil fuel extraction industry. Second, the royalty maximizing solution does not shut off extraction completely, yet it massively reduces emissions. Finally, federal revenues could be used for all sorts of good things (e.g., new shiny renewables tech, more teachers, lower income taxes), as the owners of these lands (you!) are finally paid their worth. Another metric, which might be more appealing to the “money is evil” crowd, is simply reductions in greenhouse gas emissions.
Let’s focus on revenues for a second. There is currently no demand for coal leases, EVEN AT THE EXISTING CRAZY SUBSIDY (yes, the antiquated and low rates the feds currently charge lessees are a subsidy) AND NOT CHARGING FOR CARBON (this is a good thing if you care about Mother Earth). So the paper focuses on oil and gas. These two fuels have different prices and carbon contents. Hence the paper shows results for a uniform carbon fee per ton of CO2, a uniform percentage point royalty increase, as well as different carbon fees 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 final part helps us think about how to choose between the different policy options. There are three possible options. The first possible metric is simply revenue maximization. The higher the fee, the lower production. Since revenue is the product of the two, this is a subtle dance where you want to get the price just right.
The second metric, which requires quite a bit of fancy nerd tech (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 the fossil fuel resources) and producers (who make profits), as well as wasted resources.
Finally, one could look at how well these policies do in terms of phasing out new federal fossil fuel leasing by a specified date, which could be consistent with a path to net zero emissions.
Quantifying the Policy Solutions
So what do they find? For a single surcharge, they show that revenues are maximized by increasing the federal royalty rate from the current 12.5% (18.5% offshore) to 51% resulting in an additional $6 billion in annual revenues (WOWZA!). This approach would lead global emissions to fall (accounting for leakage!) by about 37 MMT CO2e/year, which is approximately 40% of what one would achieve by an outright leasing ban.
If we look at welfare maximization, “the common surcharge is estimated to be 19% and 44% for $50/ton and $125/ton SCCs respectively”. One could do even better by charging separate fees for oil (higher) and gas (lower). These have the potential to reduce emissions by 25 to 88 MMt CO2e/year and raise $4 to $5 billion/year.
So in summary, this is a wonkish and incredibly timely and important piece of research. The reforms to the use of federal lands proposed here make society better off. Here and there and everywhere. The additional revenue generated can help communities affected by the inevitable decline of fossil fuel extraction in this painful transition. And this policy can be implemented without a lengthy congressional and partisan battle. It’s simply a brilliant proposal. Even my 19-year-old hippie self would have approved.
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Suggested citation: Auffhammer, Maximilian. “This Land Is Your Land….” Energy Institute Blog, UC Berkeley, March 22, 2021, https://energyathaas.wordpress.com/2021/03/22/this-land-is-your-land/
Maximilian Auffhammer is the George Pardee Professor of International Sustainable Development at the University of California Berkeley. His fields of expertise are environmental and energy economics, with a specific focus on the impacts and regulation of climate change and air pollution.