Can we please stop with the DPA already?
The administration, with a bipartisan blessing from key senators, has invoked the Defense Production Act (DPA) to expedite the production of critical minerals needed for clean energy technology—lithium and cobalt in particular. Just a few weeks ago there were musings that the DPA should be used to boost fossil fuel production to address high gasoline prices, and the R Street Institute (RSI) explained why such moves would be bad. Using the DPA to boost critical minerals production is also a bad idea. Fundamentally, politicians are trying to use their emergency powers to play whack-a-mole against the barriers to production they have created from their own governmental expansion, and the use of the DPA threatens to only worsen that by further undermining our most powerful tool for growth of prosperity: the dynamism of the free market.
By way of background, the DPA is a Cold War law giving the government emergency powers to intervene in markets to address national security needs. While ostensibly the law is intended to address extreme scenarios that might occur during wartime—like retooling factory production as was done during World War II—such limiting principles are not enumerated in the law itself. The DPA today typically is used to redirect resources in post-disaster relief, which is uncontroversial. The DPA was also used during the pandemic to try and boost ventilator production. Occasionally politicians, like moths to a flame, are drawn to the DPA to address their pet concerns, and this was seen when the previous administration nearly used the DPA to try and boost the coal industry.
The latest target is now critical minerals. Recent research from Citizens for Responsible Energy Solutions (CRES) highlighted the scarcity of minerals needed for a global clean energy transition with today’s technology. For some resources, such as cobalt and lithium, CRES found that multiple studies estimate mineral demand for a global clean energy transition to exceed global reserves. Addressing this scarcity is a worthy policy focus for politicians.
Unfortunately, the DPA is exactly the wrong tool to utilize to address any concern related to a long-term issue of market scarcity. This is because—by failing to address the underlying reasons for scarcity through government exemption—the DPA creates perverse incentives for cronyism in both the market and politics.
Minerals underproduction in the United States is caused by artificial reasons, namely an outsized regulatory regime that is more geared toward addressing litigation liabilities than environmental outcomes. This has been noted in past RSI research, which found that the largest share of energy projects that encounter the highest level of environmental review requirements are clean energy or conservation related. In its research, CRES also noted a specific lithium project that encountered regulatory difficulties that seem to ignore the broader environmental benefits of enhanced lithium production. While it may seem easy to handwave away these concerns by just using the DPA to overcome them expediently, the problem is that by failing to address the root cause of barriers to market entry, other worthwhile production efforts are being occluded from the market.
If politicians try to address barriers to market entry by simply broadening the list of opportunities that are blessed by the party and then get an express lane through regulations—which, ostensibly, are supposed to protect consumers and the environment—we end up with a market in which technologies are not allowed to compete on their merits, but rather on their political favorability. Under such a system, firms would not be incentivized to invest in productivity or quality, but rather in lobbying and public relations.
The fundamental problem is that American prosperity, and indeed global prosperity, is intrinsically tied to being able to produce more—either in quantity or quality—while utilizing less. In the words of Paul Krugman, “Productivity isn’t everything, but in the long run it is almost everything.” The free market delivers an incentive for productivity improvements in the economy through competition, whereby firms’ best tool for increasing profits is productivity improvement, as raising costs would sacrifice market share to lower-cost competitors. A system in which the government plays favorites is fundamentally antithetical to this core concept of economics.
The defense of the DPA’s usage for critical minerals comes in two forms—both of which can be refuted. The first is that without the DPA, a greater opportunity for climate progress would be missed. But this argument exaggerates the role of the United States in critical minerals productive capacity. While the United States has considerable lithium reserves of 750,000 metric tons, the projected total lithium required for a global clean energy transition is roughly between 26 million metric tons and 45 million metric tons. Use of the DPA is not a make-or-break moment for global climate change.
The second potential defense of the DPA is that criticisms of it being a Pandora’s Box of bad policy (as RSI previously called it) are overblown or a slippery slope argument. But this would ignore that the DPA has been coming up in political discourse more and more frequently. In 2018, the DPA was considered to boost specific energy production—namely coal—in the name of grid reliability. In 2020, the DPA was used to attempt to expand production of medical equipment. In early 2022, politicians were calling on the use of the DPA to expand oil and gas production. Now, the DPA is being called on to increase minerals production. More and more frequently, the DPA is being looked at as a wish-granting genie for policy. It is not an exaggeration to say that if the DPA is used for critical minerals, it will be used again in the future, and each time it is used it further erodes the quality of the market and distorts incentives.
Most concerning, though, is not that politicians are once again considering utilizing the DPA to address a scarcity issue but that it is being considered to address a scarcity issue that government could resolve without using the DPA. There is no natural barrier to the expansion of critical minerals production in the United States; the barriers are artificial. Extremely long permitting timelines are a major barrier to new mineral extraction in the United States, and they are the primary reason the administration is considering using the DPA. It would not be an exaggeration to call it downright alarming that politicians are more willing to use emergency authority intended for wartime than to take an honest look at how to remedy their policy failures.
A compounding of errors is not the way politicians ought to go. While stakeholders that benefit from the immediate use of the DPA are applauding these efforts, there is a real risk of missing the forest for the trees. Addressing big challenges like climate change or energy security is best served by having a market that is flexible and able to respond to issues of scarcity through innovation and productivity. Politicians in Washington simply do not have perfect knowledge as to how to run the economy, which is why a free market that allows individuals to choose for themselves works best. Politicians should operate with humility and identify opportunities to pare back artificial barriers to market entry rather than creating a wall of regulations that only the politically privileged have a fast lane through.
Image: Sergey Milovidov