An Energy Policy Preview of President Obama’s Second Term

President Obama’s win last night means four more years of ever-more damaging regulation and ever-increasing difficulties in developing our oil, coal, and natural gas resources. President Obama announced his intentions to drive up energy costs in order to reduce energy consumption before he was elected and there is no reason to suspect that he will change course now.

The one difference between now and four years ago is that the House of Representatives is controlled by Republicans, instead of a Democratic House that gave President Obama tens of billions of dollars in subsidies and passed a cap-and-trade bill during his first two years in office. Therefore, it is unlikely that President Obama will be able to advance the more draconian aspects of his energy agenda through Congress, and instead, will be pursued through administrative regulation.

Within a few days, we can expect the EPA and other agencies to start issuing the regulations they have been withholding until after the election. These regulations will drive up the price of oil, coal, and natural gas by making their exploration, production, transportation and consumption more costly and uncertain. Because of the Obama administration’s regulatory agenda, Americans should expect to pay more at the pump, more for electricity, and more to heat their homes.

The Obama Administration’s Energy Regulatory Agenda

• New Source Performance Standards for Greenhouse Gas Emissions from New Fossil-Fuel Power Plants. EPA released the proposed rule in March, but has not issued the final rule. EPA insiders claim that more than 50 EPA staff are working feverishly on the rule to finalize it in the coming days.[1] The rule bans new coal-fired power plants that do not capture carbon dioxide emissions, and since it is cost-prohibitive to capture those emissions, this is effectively a ban on new coal-fired power plants. Earlier drafts of this rule included references to the same regulation applying to existing coal-fired power plants. EPA claims that the rule is not meant to regulate existing plants, but that argument is not on solid legal footing and current plants could be regulated when they seek to comply with other rules such as the Mercury and Air Toxics Standards.
• Greenhouse Gas Standards for Existing Power Plants and Refineries. EPA has been in negotiations with environmental special interest groups to create deadlines for greenhouse gas emission regulations for existing power plants and refineries. President Obama’s victory means that EPA and environmental groups will come to an agreement, but time for such an agreement does not appear to be of the essence.
• Ozone National Ambient Air Quality Standards. In 2008, the Bush administration tightened ozone regulations. The Obama administration wants to tighten them further. EPA has looked at tightening the standards, but regulations come at a steep price. It could cost 7.3 million jobs and $90 billion a year by 2020. According to the New York Times, President Obama decided to hold off on this regulation until after the 2012 presidential election, which displeased some of his strongest supporters in organizations opposed to the use of conventional energy sources. It is likely EPA will propose these new ozone regulations in the next couple months.[2]
• Tier 3 Motor Vehicle Emission and Fuel Standards. These “Tier 3” standards would regulate gasoline and the emission control systems on vehicles. EPA has expressed a desire to lower the allowable amount of sulfur in gasoline even further than the existing Tier 2 regulation. According to the best available study,[3] just a single component of the new Tier 3 proposal would impose upfront compliance costs of almost $10 billion on gasoline refiners, and cause a permanent increase in refining costs of 6 to 9 cents per gallon of gasoline.[4] EPA insiders say that the Tier 3 is near the back of the line behind the court-mandated regulations, but these rules will likely be issued over the next few months.
• Coal Combustion Residuals (Coal Ash). The Obama administration is considering classifying coal ash as a hazardous waste. The most significant problem with doing so is that currently millions of tons of coal ash are recycled every year and used for a variety of purposes including Portland cement, kitchen cabinets, and wallboard. This rule also increases the cost of using coal to produce electricity. The Obama administration will likely issue this rule sometime in the next few months.
• National Emission Standard for Hazardous Air Pollutants for Industrial, Commercial, and Institutional Boilers (Boiler MACT). This rule regulates air emissions from more than 200,000 industrial boilers and process heaters around the country. According to EPA, the 2010 version of this rule had an upfront cost of $9.5 billion and an annual cost of $2.9 billion. Boiler MACT has had a complex regulatory history, but the White House has had the final rule since May 17. Therefore, it is very likely EPA will announce a final rule before the end of the year.[5]
• Cement MACT. EPA proposed a rule to regulate air emissions from cement plants in June. The previous rule has been litigated and it is very likely the new rule will be finalized by the end of the year.
• Bureau of Land Management’s Hydraulic Fracturing Regulations. Currently groundwater and activities that affect groundwater are regulated by the individual states, even for activities on federal land. BLM will finalize regulations to regulate hydraulic fracturing on federal and Indian lands managed by the federal government—despite state groundwater regulations—in the coming months. This rule is estimated to result in economic costs between $1.4 and $1.6 billion each year.
• National Ambient Air Quality Standards for Particulate Matter (PM 2.5). This summer EPA agreed with environmentalists to finalize a new NAAQS for PM 2.5 by December 14^th.
• Renewable Fuels Waiver. Several states petitioned EPA to waive the renewable fuels standard due to the severe drought and smaller corn crop in much of the country. EPA postponed a decision until after the election indicating that EPA would likely not grant the waiver.
• Cellulosic Ethanol Mandate. Despite the fact that only 20,000 gallons of cellulosic ethanol have been produced this year, EPA will continue to mandate that millions of gallons of ethanol are mixed in gasoline. In previous years, when biofuel wasn’t being commercially produced, EPA still imposed millions in fines on the refining industry for failing to meet the mandate to use the non-existent biofuel. In 2013, the amount of cellulosic biofuel required to be blended into the fuel supply is 1 billion gallons of fuel—a far cry from this year’s paltry 20,000 gallons.

Other Federal Policies

• Subsidies. One key feature of the Obama administration’s energy policy is providing large subsidies to unaffordable and unreliable energy sources. Under the Obama administration, wind energy subsidies increased by 947%, solar subsidies increased 534%, and biomass subsidies increased a whopping 1731%. Much of this money was in the Stimulus and is now gone. One program that remains is the wind production tax credit (PTC). The wind PTC expires at the end of the year and the Obama administration will fight to keep this subsidy. A one-year extension of the wind PTC is estimated to cost $12.1 billion.
• Carbon taxes. During President Obama’s second term, we anticipate the administration will make a serious effort to impose a carbon tax in order to generate the additional revenues necessary to sustain the massive projected increases in entitlement spending. This is simply a version the “cap and tax” exercise pursued by the administration in its first two years, in that it serves to raise costs to consumers of energy products and those products made with them.
• Onshore leasing of federal lands for energy production. The Obama administration will continue to offer few lands for oil, gas, and coal development and they will continue their slowdown of issuance.
• Offshore leasing. Like federal leasing onshore, the Obama administration will continue its implicit moratorium on opening new lands for oil and gas development. Specifically, under the administration’s offshore drilling plan for the next five years, 85 percent of the Outer Continental Shelf—which holds 86 billion barrels of oil—will be off-limits to energy production.
• Alaska. The Obama administration will continue its token leasing in the National Petroleum Reserve-Alaska (NPR-A), half of which it closed off this year. These lands were originally set aside as part of the “Naval Petroleum Reserve” specifically to produce petroleum. The Obama administration will impose additional barriers to Shell’s drilling in the Chukchi and Beaufort Seas.
• Keystone XL. The Obama administration will likely continue to stall in approving the Keystone XL pipeline

Sweetheart Legal Settlements

A second Obama Administration can be expected to enter into more “sweetheart lawsuits.” In these lawsuits, organizations that support the administration’s agenda to reduce availability of affordable reliable domestic energy sue friendly agencies in order to achieve out-of-court settlements that meet both groups’ goals, without the usual scrutiny of the judicial system. This phenomenon, known as the “sue and settle” approach to changing regulation and administration of law, is particularly pernicious in that it skirts the proper separation of powers among the branches of government, including congressional intent, administrative procedure and judicial scrutiny. Much damage can be done to the Rule of Law and economic liberty as a consequence of these suits and organizations and the media must be ever vigilant to protect the constitutional prerogatives threatened by such shortcuts of the limits to government.

Cabinet Positions and Personnel

Department of Interior. There is a decent possibility that Secretary Salazar will remain at Interior. A second term with Salazar will see much of the same—suppression of oil, coal, and natural gas production on federal lands and continued promotion of renewables. If Salazar were to leave, possible replacements include deputy secretary David Hayes, former Colorado Gov. Bill Ritter, outgoing Washington Gov. Chris Gregoire, and Washington gubernatorial candidate Jay Inslee (if he loses his election). All of these potential candidates are strong supporters of increased subsidies and help for renewable energy.

Department of Energy. Secretary Chu is expected to depart his post at the Department Energy. The Nobel Prize-winning physicist was never a great fit in the political world, especially after the bankruptcies and investigations from the DOE’s loan programs. President Obama will likely tap a more politically savvy second term Secretary of Energy. Possible candidates include former North Dakota Sen. Byron Dorgan, former Michigan Gov. Jennifer Granholm, Center for American Progress President John Podesta, Duke Energy CEO Jim Rogers, Connecticut Department of Energy and Environmental Protection Commissioner Daniel Esty. These candidates all have been heavily involved with subsidizing energy.

Environmental Protection Agency. It is rumored that Lisa Jackson will depart her post at EPA. If Jackson were to leave, one possible replacement could be Deputy Administrator Bob Perciasepe, a career staffer. Another option would be California Air Resources Board Chairwoman Mary Nichols, but her confirmation hearings would be long and bloody. Another possibility is assistant administrator for EPA’s Office of Air and Radiation, Gina McCarthy, who was a senior environmental official in Massachusetts for Gov. Romney. Former Pennsylvania environment secretary and former Clinton Council on Environmental Quality director, Kathleen McGinty, would be another possibility.

Department of Defense. We cannot speculate on whether Secretary of the Navy Ray Mabus will stay or go, but we expect the Department to continue its “green energy” boondoggles such as buying exotic biofuels at $27-a-gallon fuel to power the “great green fleet.”

Congress

America voted for the status quo and that’s what it will get in Congress. Republicans will continue to control the House and Democrats will continue to control the Senate. A divided Congress will help keep the Obama administration in check with respect to comprehensive energy legislation. However, there is a possibility that in order to do “something,” Congress could pass a hodgepodge of mandates and subsidies, combined with a modest attempt at increasing production on federal lands.

House Natural Resources Committee

• The chairmanship of the Natural Resources Committee could change depending on the chairmanship of the Rules Committee. If Rep. Hastings is tapped to helm the Rules Committee, Rep. Bishop is a likely replacement at the Natural Resources Committee. Rep. Hastings has been a defender and promoter of domestic energy production and Rep. Bishop will have similar priorities. Because Bishop is from a public lands state, there would like be some additional emphasis on public lands and empowering states to make more of the decisions, even on federal lands.

House Energy and Commerce Committee

• Rep. Upton will continue as chairman of Energy and Commerce. Some conservatives were concerned with the selection of Rep. Upton, but he has been a stalwart defender of free markets and energy production to date.

House Oversight and Government Reform Committee

• Rep. Issa will retain the chairmanship of the Oversight Committee. Under Issa, the committee has actively worked to hold the Obama administration accountable on key issues like the Section 1703 loan guarantee program that funded Solyndra, the Department of Labor’s manipulation of “green jobs” data, CAFE standards, and the faulty assumptions behind the administration’s rhetoric on oil reserves.

House Science, Space and Technology Committee

• House Science and Technology, which has held a series of hearings on the dubious science behind the many EPA regulations that would affect the energy sector, will have a new chairman in the next Congress. Current chairman Ralph Hall is term limited, leaving prior committee chairmen Jim Sensenbrenner and Lamar Smith as potential successors.

Senate Energy and Natural Resources Committee

• Sen. Wyden will likely become the Chairman of the Committee, replacing the retiring Sen. Bingaman with Sen. Murkowski as the ranking member. The Energy and Natural Resources Committee has long been politically moderate and with Wyden and Murkowski at the helm, it is expected to remain that way.

Senate Environment and Public Works Committee

• Sen. Boxer will retain the chairwomanship of the Committee, but Sen. Inhofe is term limited as the ranking member. Sen. Inhofe has been a tireless advocate for free market energy policies and he will be missed as the ranking member. Sen. David Vitter is next in line. He has a strong record supporting offshore energy development.

The States

Michigan’s 25×25 Constitutional Amendment. This election did not feature many energy issues at the state level, but the most important one was the attempt to enshrine a 25 percent renewable mandate in Michigan’s constitution by 2025. This constitutional amendment was defeated nearly 2 to 1 because Michiganders didn’t want to pay more for their electricity and putting a renewable mandate in the state constitution was a step too far.