Low-Energy Fridays: Should the government insure permits?
A new idea has emerged in the federal permitting reform space: “de-risking” permits via a government-managed insurance program. The context for this development is that investors lack confidence in their ability to secure federal permits due to the power of political appointees at permitting agencies to delay, cancel, or revoke permits. This has resulted in a new permitting reform priority: “permitting certainty,” or the notion that a permit, once granted, won’t be reversed under a future administration. While this is a laudable goal, policymakers must appreciate that government interventions can make these problems worse.
The specific policy proposal for permitting insurance comes from the bipartisan FREEDOM Act. Recently introduced by Rep. Josh Harder (D-Calif.), the bill contains several provisions to “de-risk” permits; however, there are two novel mechanisms worth exploring.
One is to fine government agencies up to $100,000 per day for failing to meet permitting deadlines, with the requesting party receiving those funds as a form of compensation. The other is to create an insurance program where project sponsors can buy in at an annual premium of 1.5–3.0 percent of the capital cost and receive a payout if the permit is revoked or delayed. Let’s examine these in turn.
The problem with the idea of fining agencies for permitting inaction or revocation is that government agencies don’t have their own money—they have other people’s money. If a president directs an agency to revoke a permit without good reason, thereby causing the agency to incur a fine, neither its functions nor its payroll are materially affected. However, if penalties interfere with an agency’s directed functions, Congress will likely just appropriate more funding (i.e., taxpayer money) to carry them out.
This isn’t just theory—there are real-world examples of government liabilities changing nothing. The Nuclear Waste Policy Act states that the federal government is ultimately responsible for the final disposal of spent nuclear fuel from civilian reactors. To facilitate this, the government planned to construct the Yucca Mountain Nuclear Waste Repository, a project that President Barack Obama axed. Courts have since ruled that the federal government must compensate the civilian nuclear industry for its failure to act, and the Government Accountability Office noted in 2021 that $8.6 billion had been paid out, with full liabilities potentially reaching $168 billion. Yet despite the liabilities to taxpayers, there has not been much political pressure put on any administration to act—and thus, no progress made on building Yucca Mountain.
While permitting agencies would likely prefer to avoid fines, political headwinds against a permit may be sufficient to overcome the agency’s motivation to avoid liability. As a result, the financial risk of permit revocation is shifted to taxpayers—just as in the Yucca Mountain example.
Regarding the insurance-style program proposed in the FREEDOM Act, it’s unlikely to work as intended because it’s mechanically divorced from what a good insurance program should look like. Insurance for any form of risk is intended to disperse risk across a pool of entities, and the premium charged must be proportional to the risk covered. Getting that wrong on either end is a problem. If premiums are too low, then the insurance program collapses from lacking the funds to cover payment; but if premiums are too high, then the program’s risk pool becomes too small to be effective.
Under the FREEDOM Act, the premium would be determined by Congress rather than by a proper estimation of risk. But because risk changes faster than Congress can react, it’s unlikely the program would function as intended. Some high-risk projects would view the rate as a subsidy and opt in to the program, while low-risk projects would opt out—meaning the program would either collapse from insufficient payments or would need taxpayer funds to keep the program afloat.
Worse yet, the existence of such a federal program will likely interfere with private-sector risk mitigation efforts. Projects at high risk of permit revocation would opt for the government insurance, thereby disrupting the formation of a pool to mitigate risk. Again, this is not a theory, but something with a real example of failure. Under the National Flood Insurance Program (NFIP), high-risk entities are subsidized and incentivized to invest in areas at risk of flooding. The existence of the NFIP crowds out private-sector insurance markets that can’t compete with politically determined, subsidized premiums.
In the permitting space, a government-managed insurance program would have a similar effect. We have ample experience proving that government is worse than private insurance at mitigating risk. Even though industry investors may desire a form of insurance for permits that ought to be left to markets that can do it better, as government programs that shift risk to taxpayers distort investment decisions.
Ultimately, trying to create permit certainty via fines or government-managed insurance relies on two premises: That agencies care about losing money and that government insurance programs accurately price risk. However, the government’s record in both those spheres is exceptionally poor. While I applaud the intent behind the notion of government-insured permits, solutions must focus on removing the politicization of permits rather than shifting the financial risks of permitting uncertainty onto the public. The former reduces risk by fixing government failure, while the latter merely disperses the costs of government failure to other parties.