Only days after the Glasgow Climate Pact called for a phaseout of fossil fuel subsidies, the Biden administration opened auctions for oil leases in the Gulf of Mexico on Nov. 17. Buyers such as Chevron, Anadarko, and Exxon bid $191 million for 1.7 million acres at an average price of $112 per acre.
Media reports called this an about-face of Biden’s primary campaign promise for “no more subsidies for the fossil fuel industry” and “no more drilling on federal lands…including offshore.” Environmental groups such as Earthjustice filed lawsuits. Many others voiced disapproval.
Is this sale a subsidy to fossil fuels? And why didn’t environmental groups try to block development by buying the leases themselves? A recent analysis in the journal Science I authored with a team of economists and law professors addresses these questions.
We point out that environmentalists are precluded from federal auctions for minerals, forests, grazing land, and water, due to “use it or lose it” stipulations common in the U.S. and around the world. You can’t lease public resources with the intent to leave them be, as environmental activist Terry Tempest Williams learned in 2016. Upon winning a federal oil and gas lease and revealing that she intended to keep the oil in the ground, the Bureau of Land Management canceled the leases, arguing she violated the “diligent development requirement” of the 1920 Mineral Leasing Act, which requires lessees to have an intent to produce.
Use-it-or-lose-it rules made sense a century ago to discourage waste and prevent speculation, but today they prevent willing buyers from expressing their preferences for conservation via market bidding. Revising federal policies to allow non-use would give people a way to buy conservation through voluntary leasing, rather than by joining interest groups to push for it through political, legal, and administrative channels. Allowing them to bid would redirect money toward durable conservation, rather than toward influencing short-term policy decisions that change with political whims, as demonstrated by Biden’s flip-flopping on campaign promises.
Updating laws to allow broader participation would also end the subsidy implicit in public auctions. The status quo keeps prices lower for extractive interests because they don’t have to pay a full market price that includes the demands of environmental interests.
Would environmentalists buy offshore leases at $112 per ace if allowed? Consider that Earthjustice alone spent $95 million on litigation over 2019 to 2020 and other groups with comparable budgets, such as the Natural Resources Defense Council and the Sierra Club, also spend on litigation. But this is just the tip of the iceberg: Environmental groups are well equipped to tap the $12 billion crowdfunding market for donors wanting to support climate causes.
Moreover, federal auction sales need not require non-use bids to be as high as extraction bids. If the bid is for non-use, then fossil fuels remain underground and this preserves what economists call the “option value” of using them after leases expire. Proper bid pricing should account for that option.
The upshot is that use-it-or-lose-it rules for fossil fuels in federal jurisdictions need to end. Getting rid of them will be a loss for politics and certain industries — but a win-win for free markets and the environment.