Regulators should use a new model that captures the full impact of fossil fuel extraction to inform climate reforms.
With experts worldwide calling on governments to transition away from fossil fuels to prevent catastrophic levels of climate change, the Biden Administration is in the midst of reconsidering the federal government’s oil, gas, and coal leasing programs. Reforms to these programs could bring U.S. energy policy closer in line with climate reality by reducing the extraction of fossil fuels from public lands.
Predictably, the fossil-fuel industry and its allies have opposed these reforms. These groups have dredged up old government analyses to argue that restricting domestic energy supply will shift production overseas, purportedly removing business from the United States while doing nothing to solve the climate problem. The logic goes that, because fossil fuel extraction will continue in other countries, the United States should keep making money from extraction while the world burns.
This argument has been coined by experts as “perfect substitution.” But this climate nihilism has been widely debunked for violating basic economics.
Federal courts have repeatedly rejected analyses that relied on perfect substitution to justify irresponsible levels of extraction. Policymakers should not take the argument seriously but should instead be guided by rigorous science and economics in shaping domestic policies to reduce emissions and address climate change.
The notion of perfect substitution violates basic supply-and-demand principles. Fossil-fuel companies want to extract from federal lands mainly because it is a cheap supply option. If such leasing became less available, fossil-fuel producers would have to turn to more expensive alternatives, causing fossil-fuel consumption to fall and renewable substitutes to become more competitive.
Given its vast market power, the federal government could level the playing field for sustainable fuels if it prioritized conservation, recreation, and renewable energy production on federal lands and waters rather than tying up so much land in fossil-fuel extraction.
That is why, after the federal government justified coal leasing in 2010 on the grounds that it would have no climate impacts due to perfect substitution, a federal appeals court unanimously rejected the approval. The three-judge panel, including one judge appointed by President Ronald Reagan, described perfect substitution as “irrational” and “contrary to basic supply and demand principles.”
The argument should have died there, but it did not. With perfect substitution off the table, the U.S. Department of the Interior developed an economic model—known as MarketSim—finding near-perfect substitution. Using this model, the Interior Department concluded that, although reducing extraction on federal lands does reduce consumption, this reduction is exceedingly small due to substitution effects. Using this model, the Obama, Trump, and now Biden Administrations have moved forward with major extraction plans after the Interior Department claimed that these fossil-fuel projects would barely budge—or, in many cases, even decrease—total greenhouse gas emissions.
But two federal courts recently rejected major leasing plans relying on this model, which was based on several faulty inputs.
For instance, in Center for Biological Diversity v. Bernhardt, the defendants’ environmental impact statement, which was based on the MarketSim model, completely ignored impacts on foreign energy consumption, falsely assuming that consumption abroad would be unaffected by a reduction in global supply. As the U.S. Court of Appeals for the Ninth Circuit explained last year, this error helped produce the model’s “counterintuitive result.”
Although the Interior Department has recently attempted to correct the error identified by the Ninth Circuit, the MarketSim model suffers from other key shortcomings that overstate substitution effects. Most notably, the model effectively disregards the long-term growth of solar and wind energy by assuming that global oil and gas consumption would continue unabated for the next 70 years.
This premise is incompatible with global efforts to mitigate climate change. In essence, the government assumed that nothing would be done to combat climate change and then used that premise to justify climate-damaging policies. This self-fulfilling pessimism is not a reasonable basis for government decision-making.
To be fair, reductions in domestic fossil-fuel supply do result in partial substitution, because additional supply from other locations meets demand. But that substitution is far from total: research shows that the effect is only about 50 percent, meaning that eliminating one barrel from domestic oil supply decreases global supply by roughly half a barrel. And this 50 percent figure could be further reduced through border adjustments or other efforts to account for climate change in U.S. trade policy.
Although reducing domestic fossil-fuel extraction will not solve climate change by itself, it can make a tangible dent in global emissions. This maxim is more broadly true of U.S. climate leadership. History shows that American policies to reduce climate pollution drive real climate progress by spurring reciprocal foreign emission reductions.
For instance, Obama-era climate policies helped to prompt China’s most meaningful climate commitments. And after the Biden Administration committed to halve U.S. emissions by 2030, many countries—including Japan, Canada, and Brazil—significantly strengthened their own pledges.
In contrast, when America abdicated its climate leadership during the Trump Administration and rolled back key measures to reduce emissions, a period of little international progress ensued.
A recent study shows that every ton of climate pollution that the United States pledged to reduce has resulted in foreign nations pledging to reduce their emissions by over six tons in return. When the United States transitions away from fossil fuels, geopolitical and market adjustments make clean energy more competitive globally.
As the Biden Administration moves ahead with plans to overhaul federal fossil-fuel leasing, it should be guided by the best evidence on fuel substitution and climate change. The Administration must throw out the economically flawed, judicially rebuked substitution model previously used to justify leasing and replace it with an evidence-based model that properly accounts for the true impact of domestic climate action.
In short, the Biden Administration must reject the tired arguments of the fossil-fuel industry and proceed with ambitious reforms that meet the climate crisis’s urgent demands.
