Today on National Journal’s Energy Experts Blog, I post a comment celebrating the Renewable Fuel Standard (RFS) as a triumph of centralized economic planning. You think I’m joking? Far from it. The RFS is working at least as well as other central planning schemes!

Well, okay, the RFS would be funny if it weren’t so destructive. A new report by NERA Economic Consulting warns that the RFS is heading for a “death spiral” — a vicious circle in which rising fuel costs, declining sales, and dwindling biofuel credits make compliance increasingly “infeasible.”

In one scenario analyzed by NERA, the death spiral produces a 30% increase in gasoline prices and a 300% increase in the cost of diesel fuel in 2015. Potential adverse macroeconomic impacts include a “$770 billion decline in GDP and a corresponding reduction in consumption per household of $2,700.” Ludwig von Mises coined a term for such debacles: “Planned Chaos.”

Last week, Reps. Fred Upton (R-Mich.) and Henry Waxman (D-Calif.) released the first White Paper in a series intended to help policymakers and the public review the RFS in light of the “wealth of implementation experience” accumulated over the past five years.

After poking fun at the mandate’s glorious achievements, my post concludes:

In all seriousness, Reps. Upton and Waxman are to be commended for launching a reassessment of the RFS. The exercise will be most valuable if policymakers gain a new sense of modesty about their ability to design markets and direct the future of economic evolution.

Dow Chemical CEO Andrew Liveris has been making waves of late with congressional testimony and a Wall Street Journal oped advocating restrictions on U.S. exports of liquefied natural gas (LNG).

To oppose “unfettered,” ”unlimited,” or “unchecked” LNG exports — in other words, to fetter, limit, and check the freedom of gas producers to sell their own products — Dow formed a business group called America’s Energy Advantage (AEA). Other members include Alcoa, Eastman, Huntsman, and Nucor.

AEA’s rationale for restricting gas exports (to quote Liveris’s oral testimony) is that when gas is not exported but instead is used to manufacture products, it creates “eight times the value” across the entire economy. That claim derives from a Charles River Associates (CRA) study sponsored by – drum roll, please – Dow. According to CRA, using gas as a manufacturing input trounces gas exports in terms of job creation, GDP growth, and trade-deficit reduction. Therefore, AEA argues, Congress and/or the Department of Energy (DOE) should constrain LNG exports in the “public interest.” AEA also warns that higher gas prices from increased overseas demand could destroy tens of thousands of manufacturing jobs and kill the U.S. manufacturing renaissance. AEA claims it is not opposed to all LNG exports, it just wants a “balanced” approach.

Economist Craig Pirrong (a.k.a. the “Streetwise Professor“) deftly pops this rhetorical balloon:

I am adding a new entry to my list of phrases that put me on guard that someone is trying to con me: “balanced approach.”. . . . In Obamaland, “balanced approaches” mean large tax increases now, and hazy promises of spending cuts in some distant future. In Liveris’s oped, “balanced” means imposing restrictions on exports of natural gas to lower the cost of his most important input. Funny, ain’t it, that things seem to tip the way of those advocating “balanced approaches”? In other words, if it helps me, it’s fair and balanced!

The whole thing is galling. Even if Liveris were correct and gas turned into chemicals generates “eight times” the economic value of gas sold abroad, such third-party assessments should have no bearing on how companies dispose of their own property. As American Enterprise Institute scholar Mark Perry points out, AEA companies did not invest a dime to develop fracking and horizontal drilling technology, construct the wells, or hire the rig workers, yet they presume to decide what happens to the gas after it’s extracted from miles under the Earth. Not unlike the Supreme Court’s Kelo decision, AEA’s implicit premise is that central planners have the right, nay the duty, to commandeer private property whenever the resource would add more value in someone else’s hands.

But do Liveris and AEA really believe the rationale they’re pushing, or only when it cuts in their favor? Here’s an easy way to tell. Dow, Alcoa, Eastman, Huntsman, and Nucor primarily manufacture intermediate goods, not final goods. As natural gas is an input to them, so their products are inputs to still other companies. AEA-produced chemicals, plastics, electronic components, aluminum, and steel reach the consumer only after other manufacturers “add value” by turning those “feed stocks” into paints, cosmetics, fertilizers, pharmaceuticals, computers, cell phones, automobiles, and so on.

So by AEA’s logic, the government should restrict exports of chemicals, aluminum, and steel to hold down domestic prices and make U.S. manufacturers of final goods more competitive. The “public interest” demands it! I’ll bet my salary against Liveris’s that he will never, ever agree that sauce for the goose should also be sauce for the gander.

It apparently has not occurred to anyone at AEA that their agenda could backfire. AEA and CRA are preaching free-lunch economics, which never works as intended. They assume Congress or DOE can curb shale gas exports and nothing else about the natural gas industry will change. There will be no decline in investment and production. Supply will remain high and prices low. Ridiculous!

It’s bad enough groups like the Sierra Club seek to shut down fracking and, therefore, block LNG exports. But at least their agenda is internally consistent. Gas companies won’t frack what they can’t sell, so greens oppose LNG exports to restrict U.S. gas company sales and global market share. Dow, on the other hand, wants both more fracking and constrained exports. That does not compute. The AEA campaign adds to the gas industry’s already serious political risks. Actually empowering bureaucrats to make “value added” determinations of which U.S. firms get to compete in the global LNG market would likely reduce oil and gas industry investment in the production of Dow’s beloved “feed stocks.”

AEA also fails to consider the risks its agenda poses to the broader global trading system. The AEA proposal conflicts with Article XI:1 of the General Agreement on Tariffs and Trade (GATT), which prohibits adoption of quantitative restrictions on natural resource exports to promote or protect domestic processing industries.

In September 2010, the U.S. steel workers and other manufacturing unions petitioned the U.S. Trade Representative (USTR) to investigate China’s restrictions on exports of rare earth elements (among other trade-distorting policies). In June 2012, the USTR requested the World Trade Organization (WTO) to set up a dispute resolution panel to examine China’s export restraints. Earlier this week, the U.S., EU, and Japan filed a complaint with the WTO challenging China’s rare-earth export restrictions. Reuters notes that, “The EU, the United States and Mexico won a similar case against China in January concerning other raw materials.”  Chemical, steel, and aluminum workers take note: The U.S. cannot flout the same treaty obligations and trade principles we invoke without looking ridiculous and undermining the “rules-based free trade” in which Mr. Liveris professes to believe.

Ed Pirrong’s comment on this point is suitable for framing:

Here’s a balanced rule for you, Mr. Liveris: Producers can sell to whomever offers them the highest price.  Short. Simple. Easy to understand.  No bureaucrats required.  And to show what a broad minded guy I am, I propose that the rule be applied to Dow.

The CRA study commissioned by Dow is partly a critique of a NERA Economic Consulting study, prepared for DOE to help the agency review a host of LNG export license applications. NERA estimated the economic impacts of different levels of LNG exports for a range of scenarios assuming different levels of demand, supply, and price. NERA concluded:

Across all these scenarios, the U.S. was projected to gain net economic benefits from allowing LNG exports. Moreover, for every one of the market scenarios examined, net economic benefits increased as the level of LNG exports increased. In particular, scenarios with unlimited exports always had higher net economic benefits than corresponding cases with limited exports.

NERA economist David Montgomery offers a concise rebuttal to the CRA study in this Q&A document. Here I’ll excerpt two paragraphs that seem to me most relevant to the issues discussed above.

Is there any possibility of a contraction of manufacturing because of higher energy costs?
No, as prior NERA studies have shown, the real threat for manufacturing is growing government regulation, of which export restrictions would be another part. The one thing about LNG exports that is certain is that they will grow slowly, and that any difference they make will be a small change in the rate at which manufacturing expands. With the possible exception of a very small slice of the chemical industry [the nitrogen fertilizer industry which employed approximately 3,920 works in 2007], there is no chance that LNG exports could turn robust growth into decline.

Don’t the data show that 1 BCF [billion cubic feet] of gas in manufacturing generates more value than 1 BCF of exports?
Absolutely not, that is an error that any first year economics student would recognize. Value added in manufacturing is created by the labor and capital at work in the industry, not by physical inputs like natural gas. The value of natural gas is fully captured by the willingness of customers to purchase the natural gas – and if overseas purchasers are willing to pay more for natural gas than domestic producers from whom some gas might be bid away, then clearly natural gas generates more value as an export than when used domestically. That is the basis for NERA’s conclusions, not some revolutionary change in the structure of industry over the past few years.

On Friday (September 23, 2011), the House passed a bill that would block two of the administration’s flagship Clean Air Act (CAA) regulations targeting coal-fired power plants. It would also establish a new Cabinet-level committee to examine the “cumulative and incremental impacts” of a dozen EPA actions affecting the electric power sector. The bill, known as the Transparency in Regulatory Analysis of Impacts on the Nation (TRAIN) Act (H.R. 2401), sponsored by Rep. John Sullivan (R-Okla.), passed by a vote of 233-180.

The TRAIN Act declares that two EPA regulations “shall be of no force and effect”: the Cross State Air Pollution Rule (CSAPR), finalized in August, and maximum available control technology standards regulations for hazardous air pollutants from electric generating units (Utility MACT Rule), finalized in May. EPA would be prohibited from promulgating a new cross state air pollution rule until three years after the multi-agency committee submits its regulatory impacts report to Congress (due August 1, 2012). EPA would also be prohibited from promulgating new hazardous air pollutant regulations for electric generating units until one year after the committee submits its report.

The inter-agency committee would assess the cumulative and incremental impacts of various EPA actions on U.S. global economic competitiveness; national, state, and regional electricity and fuel prices; national, state, and regional employment; and the reliability and adequacy of U.S. bulk power supply.

EPA actions to be assessed include two Bush administration rules — the 2005 Clean Air Interstate Rule (CAIR) and 2008 national ambient air quality standards (NAAQS) for ozone — plus several Obama administration regulations: Boiler MACT Rule, Utility MACT Rule, Coal Combustion Residuals Rule, Primary (health-based) national ambient air quality standard (NAAQS) for Sulfur Dioxide, Primary NAAQS for Nitrogen Oxides, Cement Plants MACT Rule, New Source Performance Standards (NSPS) addressing greenhouse gases, New Source Review pre-construction permitting requirements addressing greenhouse gases, Title V operating permit requirements addressing greenhouse gases, any rule establishing or modifying a NAAQS (such as new standards for ozone), and any CAA rule addressing motor fuels.

The TRAIN Act gets its name from the claim, voiced by the agency’s critics, that EPA is engineering a “regulatory train wreck.” By imposing too many new regulatory requirements on coal-fired power plants within too short a time frame, critics contend, EPA is creating a high risk of service disruptions, premature unit retirements, and increases in electric rates, which in turn will lead to job and GDP losses.

The American Legislative Exchange Council’s (ALEC) was the first to make a detailed case that EPA is on a disaster course, publishing EPA’s Regulatory Train Wreck: Strategies for State Legislators in February 2011.  The Congressional Research Service, in EPA’s Regulation of Coal-Fired Power: Is a Train Wreck Coming? (August 8, 2011), came to a different conclusion, arguing that although EPA’s rules would accelerate the retirement of old inefficient coal plants, electric supply and reliability would not be affected and consumer price impacts would be moderate.

In a report published last week, Potential Impacts of EPA Air, Coal Combustion Residuals, and Cooling Water Regulations, NERA Economic Consulting argues that EPA’s Cross State Air Pollution, Utility MACT, Coal Combustion Residuals, and Cooling Water Rules would:

• Lead to the premature retirement of 39 gigawatts of coal-fired capacity in 2015 (equivalent to 12% of U.S. coal-fired capacity in 2010).
• Increase electric-sector compliance and capital expenditure costs by $127 billion from 2012 through 2020.
• Increase natural gas generation by 19.7% and natural gas prices by 10.7%, which in turn would increase industrial, commercial, and residential natural gas costs by $58 billion over the 2012-2020 period.
• Decrease net employment by 183,000 jobs per year during 2012-2020.
• Decrease cumulative GDP by $190 billion during 2012-2020.

After Friday’s vote in the House, Greenwire (subscription required) summed up the political state of play:

With the Senate controlled by Democrats and the White House promising a veto, the TRAIN Act is unlikely to ever become law. But it puts pressure on President Obama, who recently told EPA to wait on stricter smog standards because of concerns about the economy.

House Republicans will use this fall’s floor agenda to keep fighting the agency’s rules. In two weeks, the House is scheduled to vote on bills that would overturn EPA’s new limits on mercury and other toxic emissions from industrial boilers and cement kilns.

“The ozone rule is just the tip of the regulatory iceberg,” Energy and Commerce Chairman Fred Upton (R-Mich.) wrote in an op-ed published today in the conservative journal Human Events. “If the president is really serious about job creation, he must do much more to rein in EPA’s overreach.”

File this one under regulatory trainwreck. NERA Economic Consulting has just published a study on the combined economic impacts of EPA’s Clean Air Transport (CATR) Rule and Utility Maximum Available Control Technology (MACT) Rule.

NERA estimates the rules will impose $184 billion in cumulative costs on the electricity sector, increase average U.S. electricity prices in 2016 by 12%, and reduce net U.S. employment by 1.4 million jobsduring 2013-2020.

“It is important to note that this report only covers CATR and Utility MACT,” comments Brandon Plank of the Republic Policy Committee. ”It does not include the costs of EPA’s greenhouse gas regulations under the Clean Air Act, New Source Performance Standards for refineries and utilities, ozone and particulate matter standards, reclassification of coal ash, etc.” (See chart below.)

Here is the NERA study’s summary of key results:

• Coal unit retirements would increase by about 48 GW
• Electricity sector costs would increase by $184 billion (present value over 2011-2030 in 2010$) or $17.8 billion per year
  • Includes coal unit compliance costs (including $72 billion in overnight capital costs), fuel price impacts, and costs of replacement energy and capacity
• Coal-fired generation in 2016 would decrease by about 13% and electricity sector coal demand in 2016 would decrease by about 10%
• Natural gas-fired generation in 2016 would increase by about 26% and Henry Hub natural gas prices 2016 would increase by about 17%
  • Increased natural gas prices would increase natural gas expenditures by residential, commercial, and industrial sectors by $85 billion (present value over 2011-2030 in 2010$) or $8.2 billion per year
• Average U.S. retail electricity prices in 2016 would increase by about 12%, with regional increases as much as about 24%
• Net employment in the U.S. would be reduced by more than 1.4 million job-years over the 2013 – 2020 period, with sector losses outnumbering sector gains by more than 4 to 1.