Policy Integrity senior advisor Michael Livermore represented the plaintiff in Center for Sustainable Economy v. Jewell, a lawsuit challenging the Bureau of Ocean Energy Management’s (BOEM’s) 2012-2017 leasing plan for the Gulf of Mexico and the Alaskan coast. The Center for Sustainable Economy (CSE) argued that incomplete and flawed economic analysis leads the government to sell resource leases too quickly and too cheaply, potentially costing the American public billions of dollars and leading to high-risk drilling. Today, the U.S. Court of Appeals for the D.C. Circuit ruled against CSE in the case. However, part of the ruling could lead to major changes in how the government values the natural resources it leases.
Livermore argued that government agencies engaged in leasing decisions should account for option value—a concept widely used in financial markets that analyzes the value of delaying irreversible decisions until more information is available. Applied properly, an option value analysis would guide leasing away from areas with the greatest uncertainty, and help BOEM optimally time leases.
The court’s decision acknowledges that there is “a tangible present economic benefit to delaying the decision to drill for fossil fuels to preserve the opportunity to see what new technologies develop and what new information comes to light.”
The court found that BOEM’s failure to quantify option value was reasonable at this time because the methodology is not yet “readily quantifiable.” It stated: “Our holding is a narrow one…the agency is not permitted to substitute qualitative assessments for well-established quantitative methods whenever it deems such substitutions convenient.” The court further noted: “Had the path been well worn, it might have been irrational for Interior not to follow it.”
“The ruling strongly suggests that advancements in option value research could compel the government to alter its leasing practices and better quantify risks,” said Livermore. “This change could pay enormous dividends to the American public.”
The Institute for Policy Integrity is currently exploring new research on the quantification of option value, with the aim of improving natural resource valuation and leasing decisions at BOEM and other federal agencies.
The sections of the court’s opinion that pertain to option value can be found here.
Issue(s): Energy and Environment
The Supreme Court will soon hear a challenge to the EPA’s Mercury and Air Toxics Standards (commonly known as the MATS rule). Policy Integrity has submitted an amicus brief in support of the EPA for this case.
The case focuses on whether the EPA unreasonably refused to consider costs in determining whether to regulate hazardous air pollutants emitted by electric utilities. As our brief argues, the MATS rule reflects the EPA’s rational consideration of costs and benefits during the appropriate phase of the rulemaking process, consistent with statutory design, federal executive orders, case law, longstanding regulatory precedents, and analytical best practices.
The MATS rule is massively cost-benefit justified, delivering tens of billions of dollars in net benefits each year, including thousands of lives saved annually plus other significant health and environmental improvements. When all direct and indirect effects are quantified, this rule’s monetized benefits (independent of any existing air quality standards) range from $37–$90 billion per year, substantially outweighing the $9.7 billion in costs. The EPA followed standard best practices in its economic analysis, as was confirmed by the Office of Information and Regulatory Affairs. For these and other reasons, our brief argues that Court should affirm the judgment of the court of appeals and uphold the MATS rule.
The Court will hear oral argument for this case on March 25th.
The U.S. Court of Appeals for the D.C. Circuit will soon hear the first set of cases challenging President Obama’s signature climate change initiative—the EPA’s Clean Power Plan. We recently filed an amicus brief for West Virginia v. EPA, one of the cases challenging the as-yet unfinalized regulation.
The case focuses on whether the EPA has the authority to regulate greenhouse gases from power plants in the face of the uncertainty about the content of Clean Air Act section 111(d), due to the different House and Senate amendments to the provision passed in 1990.
Our brief addresses two main points:
- Ever since Section 111(d) was amended in 1990, the EPA has consistently, over 25 years and through administrations of both parties, interpreted the provision in ways that would support the agency’s ability to issue a flexible pollution regulation like the Clean Power Plan.
- Petitioners’ reading of Section 111(d) could prevent the agency from using that section’s flexible compliance mechanisms, which could force the agency to use other command-and-control style regulations that impose higher costs.
The brief can be found here.
Oral argument will take place on April 16.
Policy Integrity’s multi-year effort to make the government account for “option value” in its natural resource leasing decisions has begun to pay off. In its new proposal for offshore oil and gas leasing from 2017-2022, the Department of the Interior’s Bureau of Ocean Energy Management (BOEM) devotes 12 pages to option value and related resource valuation concepts, which will now be considered in leasing decisions. Much of this language closely resembles the arguments Policy Integrity has made to the agency repeatedly since 2009.
Policy Integrity has long argued that incomplete and flawed economic analysis leads the government to sell resource leases too quickly and too cheaply, potentially costing the American public hundreds of billions of dollars. We have suggested that government agencies engaged in leasing decisions should consider option value—a financial concept widely used in markets that places value on delaying irreversible decisions until more information is available. The language of BOEM’s proposed plan suggests that option value considerations could likely raise the minimum bids for lease sales and delay leasing in sensitive areas. However, BOEM has still failed to quantify option value, so Policy Integrity will continue to push for major improvements in the final plan.
Our work on this issue began in 2009, when Policy Integrity sent comments to the Minerals Management Service (the precursor to BOEM at the Department of the Interior) requesting that the agency incorporate option value into its assessments of offshore drilling lease sales. Those comments later formed the basis for an article by Michael Livermore in the Colorado Law Review, “Patience is an Economic Virtue: Real Options, Natural Resources, and Offshore Oil.” Policy Integrity is also serving as counsel for the Center for Sustainable Economy in a lawsuit against BOEM. The case, Center for Sustainable Economy v. Jewell, focuses on BOEM’s 2012-2017 leasing plan for the Gulf of Mexico and the Alaskan coast. In September 2014, Michael Livermore represented the Center at oral argument before the U.S. Court of Appeals for the D.C. Circuit. A ruling is expected soon, and the case could have significant implications for all government natural resource leasing programs.
Issue(s): Energy and Environment
Policy Integrity has submitted comments to the Department of Energy, encouraging DOE to improve its economic justification for a proposed energy efficiency determination. DOE has determined that energy conservation standards for mercury vapor and metal halide high-intensity discharge lamps are not “economically justified” as required by statute, even though such standards could save up to 1.6 quadrillion British thermal units of energy. By reducing electricity demand at and pollution from fossil fuel-fired power plants, such energy savings would generate environmental and health benefits. However, at no point in DOE’s documentation does the agency discuss environmental and health benefits as part of its analysis of “economic justification” and “national impact.”
The failure to consider these benefits is inconsistent with the agency’s practice in prior energy efficiency rulemakings. Given that the agency has a readily available methodology for quantifying and monetizing some of the key environmental and health benefits generated by energy savings, we suggest that the final determination should include such quantified benefits, whether or not they would change DOE’s final determination on whether the standards are cost-benefit justified.
Our full comments are available here.