Low-Energy Fridays: Should we care about permitting uncertainty?

A common argument against policy change is that the resulting “uncertainty” is disruptive, with the downsides of changing a bad policy potentially outweighing the benefits of adopting a better one. I was reminded of this when hearing a Trump administration official respond to a question about their rejection of permits for offshore wind projects. The administration’s position is that because these projects were uneconomical without subsidies, they were economically harmful to pursue and therefore, the administration should use available policy tools to course correct. This seems to make sense because, as noted in a past Low-Energy Fridays post, the subsidy costs for mature technologies tend to outweigh the benefits. However, the administration’s actions would rescind permits rather than eliminate subsidies. This could introduce a “chilling effect” on energy-related projects, with investors declining to fund new projects out of fear that a future administration will reject their permit.

A lot of economic activity requires federal permits. One thing we don’t know is how much economic activity does not occur because potential investors don’t think they can secure a permit or because they’re afraid their status may change before the project is completed. While an administration may be correct in determining that a policy failure has led to an economically harmful project proposal (e.g., a subsidy-reliant wind farm), rejecting a project on such grounds introduces a new layer of risk to investors in projects that are economically beneficial and must be approved by a current or future administration.  And because future administrations will likely also target projects they don’t view as permit-worthy, today’s investors in projects that will require federal permits years from now must consider the possibility that a future administration may reject their permitting request if they don’t like the project.

Importantly, the Trump administration did not start this trend. A prime example of the politicization of permits was the Obama administration’s rejection of the Keystone XL Pipeline. The first Trump administration went on to approve Keystone XL, only for the Biden administration to reject it again. There are many examples of this political permitting tug-of-war, including the Twin Metals mine in Minnesota, the short-lived moratoria on oil and gas leases in 2021, the curtailment of offshore energy leases in 2023, and the recent rejections of permits for offshore wind projects, among others.

In all of these cases, policymakers proposed reasoned arguments to appeal to their constituents. But from an economic perspective, even if one administration is right or wrong, there’s clearly something wrong with the process—and we may be paying for it in ways we can’t evaluate. A large body of research confirms that securing a federal permit takes a very long time, which negatively affects the industries that rely on such permits. The more political the permitting process gets, the more likely it is that other potentially beneficial projects never materialize.

For example, S&P Global estimated that securing a permit for a new mine in the United States takes 29 years on average. It’s not unreasonable to believe that many potential mines have never been pursued because of how extraordinarily difficult it is to secure the necessary permits. This is further evidenced by the recent surge of mining permits under review by the current administration compared to the prior one. Extrapolating this to other industries, we can see how uncertainty about whether one can get a permit diminishes their investment.

But we shouldn’t focus too heavily on which administration rejects which permits. The genie is well out of the bottle by this point, and norms have been thoroughly smashed. It may be tempting to think that my politician is right and their politician is wrong about which projects to approve and reject, but the truth is that politicians of all stripes are generally bad at steering investment.

This is a classical Hayekian knowledge problem, in which policymakers operate with imperfect knowledge and make inefficient decisions. Economic outcomes are better when those decisions are dispersed more broadly and the parties that stand to gain or lose the most have the most say in what gets built.

In other words, the economy is better off when Washington’s meddling in investment decisions is minimized, and investments are maximized when permits are granted swiftly and free from politics.

While permits have been a staple of political controversy for four administrations now, the concern over rejecting renewable energy permits should further motivate Congress to adopt permitting reform. The one thing investors can always be sure of is that politics are highly uncertain; therefore, the best way to encourage investor confidence is to make the economy less susceptible to politicking.