Federal Lands and Fossil Fuels: Maximizing Social Welfare in Federal Energy Leasing

Abstract

Pursuant to several statutes, the Department of the Interior (“Interior”) is tasked with managing the nation’s mineral resources under the principles of “multiple use” and “sustained yield” and must earn “fair market value” for the use of federal lands and their resources. In recent years, Interior’s coal, oil, and natural gas leasing programs have been criticized for failing to keep pace with developments in modern technology, shortchanging taxpayers, and failing to adequately account for climate change and other environmental effects. This Article suggests a rational path forward for federal fossil fuel leasing that has the potential for bipartisan appeal. Just as a private company would seek to maximize net revenue in its operations, Interior should seek to manage its program to provide maximum net benefits to the public. Yet distinct from a private actor, Interior is the steward of federal lands for current and future generations and must balance production with environmental preservation. This Article recommends that Interior account for all of the costs and benefits of leasing — including environmental and social costs — and adjust the fiscal terms of its fossil fuel leases to recoup unmitigated externality costs. In doing so, Interior can arrive at a social welfare-maximizing leasing program. The Article describes how a social welfare-maximizing framework is consistent with the best interpretation of Interior’s statutory mandates as confirmed by legislative history, judicial precedent, and principles of executive level review in place since the Reagan administration that instruct agencies to maximize the net benefits of their policy choices. The reforms suggested here can significantly increase revenue for states and the federal government while reducing greenhouse gas emissions, illustrating the utility of using fiscal reform as a policy lever in the absence of comprehensive climate change legislation.

Keywords: Natural Resources, Environmental Law, Regulatory Policy, Cost-Benefit Analysis, Public Lands, Royalties

JEL Classification: Q38, Q48, Q58, H23, H41, H82, H75, K23, K32