Taxing Local Energy Externalities01 January 2020
There is a fundamental problem of scale in the governance of industrial development. For some of the fastest-growing U.S. industries, the negative impacts of development fall primarily at the local level, and the benefits tend to accrue more broadly to states and the federal government. These governments accordingly have inadequate incentives to address the very localized negative externalities of development. Yet states also increasingly preempt most local control over some forms of development. This creates a regulatory void, in which state and federal regulations are inadequate, and local governments lack the power to use traditional Pigouvian tools such as regulation, taxation, and liability to address local harms. Without these Pigouvian sticks, local governments are also constrained in their use of Coasean bargaining, in which they could threaten regulation or taxation to bring industry to the table and negotiate for private solutions. This gap is particularly evident in the energy space, in which oil and gas and associated pipelines, wind energy, and solar energy have strong local effects, but local control is constrained to varying degrees. This Article explores the reasons for this governance gap, including federalism concerns, political economic factors, and views about the relative competency of local government, and it proposes solutions that take these drivers into account. The Article uses the areas of renewable energy, oil and gas production, pipelines, and natural gas export terminals to demonstrate the highly localized externalities of energy development, explore the Pigouvian and Coasean tools available to address these externalities, and analyze state preemption of local governments’ use of these tools. Based on the lessons from these industries, it argues that a combined system of taxation and negotiation incentives would best fill the regulatory void in local energy law while addressing the concerns that have created this void.