The Keystone Conundrum

Is Congress starting to come to its senses about energy and environmental policy?

It remains to be seen whether the House and the Senate can resolve their differences on the latest budget bill, but the Senate version promises to back the Obama administration into an uncomfortable corner with regard to the proposed Keystone XL pipleline. As part of Saturday’s 89 – 10 vote to extend payroll tax cuts for another two months, the Senate gave the president a sixty-day deadline to make a decision on the Keystone project. The White House had rejected the idea including outright approval of the project in the bill, but said that the two-month deadline was acceptable.

Assuming that the House and Senate can agree on a compromise bill, it’s likely that the Keystone provision will survive and that will be interesting. Obama has been loath to pick a side on the pipeline issue. On the one hand, if he kills the project, the president opens himself to criticism for denying Americans access to a plentiful source of North American crude and for losing this opportunity to create a plethora of jobs without spending any tax dollars. Yet, if he allows the project to move forward, Obama is sure to annoy the environmental activists who form part of his base.

It’s hard to believe that environmentalists have any other places to go in the coming election and it’s almost as unlikely that they would choose to stay home out of pure petulance over the pipeline. Nonetheless, the Obama team has always been ultra-cautious when it comes to its perceived base and this is another example of the phenomenon.

Pressed to make a decision on the pipeline, the president instead kicked this particular can down the road last month. The administration decided to study an alternative route for the pipeline, which would conveniently have delayed any decision until after the 2012 election. It was the best of two political worlds in a lot of ways. By postponing the decision, Obama could tell environmentalists that he was duly evaluating every bit of data before coming to a decision, while he could simultaneously claim not to have shut down the project out of hand.

By imposing a sixty-day deadline, the Senate bill would force the president to pick a side, something he clearly hates to do. If the budget bill goes through, as it seems destined to, the administration will be forced to decide who it is willing to offend. Environmentalists will be offended if Obama approves Keystone XL, while trade unions will be equally upset if he decided to kill it.

The basics of the Keystone XL project are fairly straightforward. The pipeline would ultimately deliver over 800,000 barrels per day of Canadian crude to refineries in Texas and the Gulf Coast. That’s about 10 percent of daily US consumption, which is not an insignificant amount. Construction of the pipeline would add several thousand jobs directly, in terms of those actually involved in construction. More importantly, it would result in creation of over one hundred thousand jobs indirectly throughout the multi-billion dollar supply chain.

Most importantly, the jobs and wealth created would not require a penny of public sector spending. Government doesn’t have to subsidize Keystone XL in any way, which is all a friend of free markets should need to know. Keystone XL makes sense because it pays for itself. If it didn’t, there is no way that the private sector would line up to fund the project.

Objections to the project range from the bizarre to the absurd. Some opponents claim that the Canadian crude that Keystone XL will deliver is far more expensive to process than other sources of crude. But, if that were the case, why on earth would private sector investors line up to throw money at such a project?  Others claim that because this crude carries more contaminants that some other crudes, it will therefore cause more pollution. That objection is equally silly since US refineries are subject to the same emissions limits at all times, no matter what sort of raw material they start with.

The House version of the bill contains another provision that is sure to upset environmentalists: a directive that would force the EPA to stop implementation of rules targeting industrial boilers. The Boiler MACT rules are a classic example of regulatory overreach, hugely expensive with very little environmental benefit in return. Killing Boiler MACT would be a boon to American’s beleaguered manufacturing sector and would provide some certainty to businesses that are trying to plan future capital investments.

Both the pipeline and the boiler rules are but a piece of the larger budget issue, but it is interesting to find that both have found a place at the negotiating table. It may be a sign that Congress is starting to come to its senses about energy and environmental policy. That would be good news indeed.

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