Wayne H. Winegarden, the Sr. Fellow in Business & Economics, Pacific Research Institute, and Marc A. Miles, the President of Global Economic Solutions, have written a guest blog for Petro Primer on their report, the 50 State Index of Energy Regulation:
Recently we conducted a study for the Pacific Research Institute that analyzes and compares the impact of state energy regulations on economic efficiency. The 50 State Index of Energy Regulation ranks the states from those with the most economically efficient energy policies to those where regulation impedes efficiency the most.
The state results have important lessons for state energy regulations as well as the expanding federal regulations on energy.
Ideally, entrepreneurs and workers should be empowered to constantly reallocate their time, resources and effort toward the activities they believe create the most value for their current and potential customers. Guiding these allocation decisions are the signals provided by relative prices.
Federal and state regulations often distort relative price signals. Due to these price distortions, resources are diverted from more productive uses to less productive uses; consumers and firms are burdened with excessive costs; and, ultimately, our economy’s rate of growth suffers.
The telecommunications industry exemplifies the difference the right regulatory structure makes. Through the 1980s, telecommunication regulations codified inefficiencies, such as granting each “Baby-Bell” a regional monopoly. These regional monopolists stifled competition and thwarted innovation. Regulatory reform during the 1980s eliminated the regional monopolies, incentivized economic efficiency, and enabled the telecommunications revolution that spurred the tremendous advances that today permit our smart phones and iPads at reasonable prices.
However, just like the telecommunications industry before deregulation, our Index uncovered that state energy regulations often promote economic inefficiencies across the country. The negative consequences are particularly troubling due to the essential role that energy plays in our daily lives.
For instance, many states require that utilities generate a certain proportion of electricity from renewable sources such as wind or solar. Often, these renewable sources are more costly and less reliable than fossil fuel based energy sources. Households and businesses, consequently, must spend more money to purchase the same amount of electricity than if the generation decisions had not been distorted by the state mandates. Economic efficiency is diminished, and economic growth suffers.
Mandated renewable production is only one example. Low carbon fuel standards, such as California’s low carbon fuel standard, is another. California’s standard mandates that fuel producers reduce the carbon-dioxide intensity of their emissions. Just like with the renewable standards for electricity, a renewable fuel standard forces the use of certain fuels regardless of their costs or efficacy. Such regulatory distortions create economic inefficiencies and reduce overall economic growth.
State energy regulations promote many other inefficiencies, from restricting how utilities can price their services to requiring energy efficiency standards for appliances regardless of consumers’ needs and preferences.
The 50 State Index of Energy Regulation captured the relative degree of inefficiency from these types of policies in each state. The states were then ranked from those with the least economically inefficient regulations to those with the most. Topping the list were Alabama, Alaska, South Dakota, and Texas. The states that promoted the most economically inefficient energy regulations were New York, California, Wisconsin, and Connecticut.
Using the rankings, we found strong empirical support for the claim that economically restrictive regulations have an adverse impact on growth. For example, over the last five years the average growth rate of the top 10 states (the states with the most economically efficient energy regulations) exceed the growth of the bottom 10 states (the states with the least economically efficient regulations) by over seven and a half percentage points. Unsurprisingly, the higher rate of economic growth is also associated with faster employment growth.
Such burdensome costs arise because many economic regulations reduce economic efficiency – these federal and state regulations prevent consumers and producers from allocating resources to where they are most productive.
The results from The 50 State Index of Energy Regulation provide concrete confirmation that economic efficiency should be a primary consideration when promulgating energy sector regulations. Regulations that promote economic inefficiency diminish our economic vibrancy and prosperity. Alternatively, regulations that foster economic efficiency – such as the telecommunications reforms of the 1980s – stimulate the innovative spirit and generate lasting growth dividends for the U.S. economy.