TAXING LOCAL ENERGY EXTERNALITIES.

• Author: Wiseman, Hannah J.

INTRODUCTION 564 I. WIDESPREAD BENEFITS, LOCALIZED BURDENS, AND UNEVEN LOCAL CONTROL 572 A. Oil and Gas Development 573 B. Pipelines 577 C. Utility-Scale Renewable Energy Development 580 D. Liquefied Natural Gas Terminals 584 II. LOCAL GOVERNANCE TOOLS AND THE REGULATORY VOID 585 A. Regulation 587 1. Federal and State Regulation That Incidentally Addresses Local Externalities 588 2. Direct Regulation by Local Governments 589 3. Local Land Use Regulation 590 B. Tort Law 592 C. Monetary Tools, Including Taxes 594 1. Defining Taxes, Fees, Exactions, and Bonds 594 2. Property, Goods, and Services Taxed 596 3. Timing of Tax or Fee 598 4. Location of Tax and Distribution of Revenue 599 5. Taxation Amounts 600 6. Limits on Local Taxation 601 D. Negotiation 602 1. Private Negotiation 602 2. Government Negotiation 603 III. DRIVERS OF THE REGULATORY VOID 607 A. Federalism 607 B. Government Resources, Competencies, and Ethics 608 C. Transaction Costs 609 D. Responses 610 IV. EMPOWERING REASONABLE LOCAL CONTROL 611 A. Lessons from Pennsylvania 612 B. An Effective Local Tax-Negotiation Approach 614 CONCLUSION 617 INTRODUCTION

Some of the fastest-growing U.S. industries generate primarily localized externalities, yet local governments have varied, often inadequate authority to address intensely local harms. (1) In the worst circumstance, these governments lack any of the classic Pigouvian "polluter pays" tools--regulation, taxes, or common-law liability--to force industry to internalize its harms. (2) The absence of these traditional tools, and the presence of high transaction costs, also weakens Coasean market-based solutions, in which communiues would bargain with developers to place a price on damages. (3) Without an endtlement to regulate the industry, tax it, or threaten meaningful liability, the local government has a weak bargaining chip, if any. (4)

The energy sector offers a key example of this conundrum. Energy is necessary for human survival and economic growth. (5) Although the need for energy is constant, new forms of energy development are transforming the U.S. economy and landscape. In the past decade, companies have drilled several hundred thousand new oil and gas wells in the United States due to the rise of hydraulic fracturing ('Tracking") technologies. (6) Developers have similarly capitalized on technological and price-based advances to build thousands of new wind and solar installations. (7) These industries continue to grow at a breathtaking pace, with a projected 41,000 miles of new oil and gas pipelines to be built in fewer than twenty years, (8) and solar energy generation projected to double in the next five years. (9)

The rapid transformation of the U.S. energy sector has generated employment and wealth benefits, many of which accrue at the state and federal levels, (10) but the costs of this development, such as noise, road damage, traffic congestion, and light pollution during project construction, tend to fall locally. (11) In many cases, local governments would prefer to allow energy development for reasons of revenue and job growth, but they also want to control the negative externalities that accompany these benefits. (12) Federal and state governments typically lack adequate incentives to regulate, in part because they primarily experience benefits. (13) This leaves to local governments the challenging task of adequately controlling energy-based externalities. In some contexts, such as the construction of liquefied natural gas (LNG) export terminals and wind and solar farms, local governments have the ability to address harms through regulation or negotiation for community benefits. (14) In contrast, many local governments are preempted from regulating, and have few bargaining chips, in the oil and gas production and interstate natural gas ("gas") pipeline contexts. Many of the states with substantial levels of oil and gas production bar local governments from controlling the externalities of development, (15) and the federal government bars nearly all local control over natural gas pipelines. (16) For the most problematic cases, there is little federal regulation of the industry, state regulation is also sparse, and states have preempted most forms of local government control over the industry. (17) Under this aggressive preemption regime, local governments cannot use ex ante strategies such as regulation to address local externalities. (18)

Local governments do not just experience pure regulatory preemption in the oil and gas production and pipeline contexts. They are hamstrung under both a Pigouvian and a Coasean approach to externalides. A Pigouvian solution would force industry, rather than society, to pay for its externalities by avoiding them altogether, paying a tax or fee to cover the damages, or paying damages under a legal liability regime. (19) But many communides lack adequate regulatory or fiscal authority over energy industries with very localized effects. (20) Further, state tort policy does not generally favor either private individuals or local governments in these cases. (21) Under an alternative Coasean framework, private individuals or local governments would pay industry--which has a property entitlement allowing it to operate--to produce fewer externalities. (22) But local governments often only have limited power, if any, to control the harm-producing activity. (23) In many states, the oil and gas industry holds the bulk of the initial entitlement--the ability to operate free of many local legal interventions--and thus might not even come to the bargaining table, let alone accept a payment for limiting externalides. (24) And even if there were more incentives to bargain, the transaction costs of entering into extensive negotiations with hundreds of different local governments would further impede negotiation.

In short, some communities that host energy industries with very localized effects--particularly oil and gas and pipelines--operate within a regulatory void caused by state preemption. Without the option of regulation, (25) fiscal tools, liability, or adequate negotiation, empirical data suggests that many governments experiencing these externalities would simply choose the extreme solution of banning the industry (26) or resorting to scaremongering-exaggerating the real risks of energy development and even inventing unproven ones. (27) This has the effect of wholly blocking development rather than achieving a middle ground. (28)

There are several factors that cause this void. First, local governments start from a position of relative powerlessness with respect to regulatory and taxation powers. The dominant legal presumption is that local governments are merely an arm of the state and possess only the powers delegated to them from states. (29) Second, higher-level governments are wary of delegating too much authority to local governments--sometimes due to concerns about local competency, (30) but also for purely political-economic reasons. Powerful national industries like oil and gas operators, pipeline developers, and wind energy companies have concentrated influence that may allow them to effectively lobby for weaker local authority. Their power is most pronounced at the centralized national or state levels, where lobbying resources are most efficiently deployed and can be focused on efforts to preempt local control. (31) Federalism concerns, too, cause states to resist allocating power to local governments. Governments worry that a patchwork of conflicting regulations will impede development, lead to a race to the bottom, or simply interfere with centralized goals. (32)

The regulatory void produced by these factors in the oil and gas and pipeline context offers a stark contrast to the relative powers of local governments in the renewable energy and liquefied natural gas terminal contexts. (33) This Article proposes tools that local governments should have at their disposal in all energy contexts. Specifically, it argues that Pigouvian taxation and other financial instruments--combined with a framework to encourage limited Coasean negotiation--should be available to local governments. Through this solution, states would create a uniform tax or fee that local governments could choose to levy on industries that generate disproportionately localized externaliues. And because designing a tax that fully addressed local externalities while not overcontroUing them would involve too many transaction costs, the federal government or states should mandate or incentivize developer negotiation with local governments. (34)

From a political economy perspective, giving local governments limited powers to tax industry to compensate for its local externalities--essentially a Pigouvian "polluter pays" tax--may be more politically palatable than granting them broad regulatory authority or modifying tort liability. It will also address the federalism concerns associated with a conflicting patchwork of local regulations, and, because the tax would be administered by the state, it would alleviate worries about the comparative competence of local governments.

Part 1 of the Article documents the highly localized externalities of some of the fastest-growing U.S. energy industries as compared to the broader benefits that these industries produce. Part II then explores the Pigouvian and Coasean tools available to address these localized externalities, including traditional regulation, tort law, revenue-generating financial tools, and government negotiation with industry for community benefits or mitigation of impacts. This Part also documents the regulatory void, in which local governments lack access to many of these tools, particularly in the oil and gas production and pipeline contexts. Part III then analyzes the factors that cause this problematic void, some more legitimate than others. These include concerns relating to government competence, federalism issues...