New York’s Pipeline Fiasco

Monday, October 28, 2019
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New York faces serious energy shortages today, largely due to Governor Andrew Cuomo’s insistence on banning fracking and blocking construction of new pipelines to import cheap natural gas from outside the state. He hopes to wean the state off of fossil fuels, which are said to drive global warming. Though the evidence concerning global warming and its deleterious consequences is quite thin, let’s assume, for the sake of argument, that the dire predictions of climate disaster are correct. If so, it becomes even more imperative to pick both the right sources of energy and the right way to get them to market.  Solar and wind are too erratic to do the job, so we have to depend on some form of fossil fuel. Natural gas is high on that list. Unfortunately, the retrograde environmental policies of politicians like Cuomo is a key reason why New York faces an escalating energy predicament.

Today’s deep fear of climate change unthinkingly translates into abiding hostility toward any new technology for extracting and shipping fossil fuels. This regressive approach gets it backwards. As a rule of thumb, every new technological breakthrough results in higher levels of production with lower levels of risk. Therefore, it follows that we should encourage the displacement of old technology to capture these gains. The ideal way to proceed considers both the amount of pollution taken out of circulation and the amount of pollution added.

In most cases, new technology is better in every relevant dimension. Accordingly, the process of permit review under both federal and state environmental statutes should apply the same output measure to both systems and approve any permit for new technology that takes older technology offline. It should be evident that the easiest targets for displacement are the oldest, and least efficient, facilities.

In one of the great blunders of American environmental policy, government permitting under the National Environmental Policy Act (NEPA) ignores the obvious performance improvements of new technologies and instead compares them to the New Source Performance Standards (NPSP), which rely on some variation of the “best available technology,” or BAT standard.

This absolutist standard misses the central point of sound economic policy, where choices should always be made at the margin. In its simplest form, consider the choice between introducing technology A, which eliminates 90 percent of a certain pollutant at a cost of $100, or technology B, which eliminates 99 percent of that same pollutant at a cost of $1,100. If both of these technologies are currently available and cost is not a factor, technology B is clearly superior.

But the correct environmental approach does not ask which standard produces the lowest level of pollution, ignoring cost. It asks about the overall incremental gains from replacing technology A with technology B. It is highly doubtful that there is ever any reason to require technology B when it takes ten times as much money to eliminate the last 9 percent of pollution than it does for the first 90 percent. It is far better to save the $1,000 and use that money to tackle high levels of pollution elsewhere.

Nonetheless, if an environmental hawk says that cost is no object, technology B is preferred. But what that analysis misses is that a rational firm, presented with only technology B, will sensibly decide not to make any upgrade at all, leaving in place its older equipment—equipment which is vastly inferior to either technology A or B. It is not enough to key new technology to performance standards. It is also necessary to select the right standards.

It is just this structural problem which infects the elaborate pipeline permitting process at both the state and federal levels. An effective test for issuing permits for new pipelines should only ask whether the proposed pipelines are safer than the modes of transportation they displace—a trivially easy question when the alternative is to ship crude oil by truck or by rail, where the risk of crashes and spillages are far greater. Most roads and railroads of necessity are routed near or through high population areas, so their use for oil and gas transport leads to the worst of both worlds—higher risk of failure and higher losses of lives and property.

Given this situation, the grant of new permits should be a trivial matter. But the permitting process under NEPA never considers the gains that are realized by displacing inferior technology. Instead, it obsesses over trivial technological flaws that make the new pipelines less than perfect. The best approach is to capture the big gains today by granting a permit, while catching any glitches during the construction phase of the project.

In response, it could be argued that such a process will aim too low and only achieve results marginally better than the status quo. But that scenario won’t happen. A company will reduce its costs of transmission by making state-of-the-art pipelines. In addition, other constraints are also in play. First, issuing a permit should never insulate a pipeline company from liability for harms that a spill could cause to life and property—but the risk of a pipeline spill is almost always small compared to the dangers from the refineries upstream and operating plants downstream. Still, that liability should always be strict, with the companies protected against only sabotage or natural disaster. Next, the pipelines should be required to carry liability insurance to cover these risks, which will subject the pipeline construction and maintenance to additional oversight. As with all large construction projects, interim inspections should be made to ensure that construction plans are on track.

This expedited permitting system cuts delay and allows better technology to get online sooner. The huge savings in administrative cost would also allow for speedier pipeline deployment, avoiding a repeat of the current Texas spectacle of flaring off huge amounts of natural gas in the process of getting oil, because of a lack of pipeline infrastructure. Any risk of fossil fuel emissions after the shipment should be regulated at the site of emission, where supplies of clean natural gas can displace the dirtier and more costly heating oil now needed to keep New York’s businesses open.

Politicians like Cuomo are not the only ones who have problems with pipeline construction. Federal court judges have erratically applied the standards of review under the Administrative Procedure Act (APA). It is settled law that all agency decisions to grant or deny pipeline permits are subject to judicial review. The key question is how to determine whether the decision of an agency should be set aside on the ground that it is “arbitrary and capricious.” The difficulty arises in pipeline cases because the term “arbitrary and capricious” has been interpreted in two diametrically opposed ways depending on context. 

Where a particular project has been approved, judicial review under NEPA looks for little nits to justify a stoppage of construction. Under a “hard-look” standard of review, a judge can set aside an approval if the agency considers even a single fact that is not relevant or ignores a single fact that is. Any complex administrative determination involves dozens, if not hundreds, of factors, so it is easy to poke holes in any approved application.

In contrast, the standard of review plummets when an agency denies a permit. For example, the New York State Department of Environmental Conservation denied a permit to the Constitution Pipeline Company in 2017 to build a pipeline to get natural gas into New York. In order to slow the process down, the New York regulators insisted that the Constitution Pipeline Company make detailed, individualized determinations as to how the pipeline should be routed underneath the state’s many streams. The company proposed using the more expensive trench method for the larger streams, which requires water diversion, and the cheaper system of horizontal directional drilling for the smaller ones, which does not require any diversion. But New York’s environmental watch guard insisted on a stream-by-stream determination of which method should be used, greatly driving up Constitution’s planning costs.

The Court found that requiring these ad hoc determinations was not arbitrary and capricious. Yet the benefits of these ad hoc demands, which killed the pipeline project, were never explained. The correct approach would have let the firm pick its general strategy, subject to the obligation that it cover the tab for any environmental damage caused by its methods.

Ultimately, the federal government overruled the state on the ground that it had not acted on Constitution’s application in a timely manner, but the state is likely to continue on with its rearguard action to make good on its policy of endless permitting delay. All the while, New Yorkers will continue to face energy shortages.


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