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Apr 28

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Keystone Pipeline is good example of unintended economic consequences

Sociologist Robert K. Merton popularized the concept of unintended consequences through his 1936 paper, “The Unanticipated Consequences of Purposive Social Action”. Economists study unintended consequences that occur whenever one attempts to regulate or control activity through economic incentives that conflict with market forces.

An example involves the Keystone Pipeline, which continues to face regulatory challenges from President Obama based entirely on environmental grounds. I discussed this in a prior blog post. The Keystone Pipeline System would transport crude oil from the Athabasca Oil Sands in northeastern Alberta, Canada to multiple U.S. refineries.

President Obama postponed until 2013 his final decision. If the delays continue beyond that or the project is finally disapproved, the Canadians stated they will instead construct a pipeline to Canada’s west coast to allow crude shipments by tanker to Asia. At the risk of being obvious, the Canadians are not going to ignore their valuable natural resources and not sell the oil at all.

With shipment to Asia, the Canadian crudes would still be refined and combusted, and the resultant carbon dioxide would still be emitted into the atmosphere. The emissions would simply occur in another part of the world. There would be an overall increase in the amount of carbon emissions because of the transportation of the crude to Asia. U.S. interests would similarly be harmed because (i) the U.S. would still be using oil, but the alternative oil will come from countries that are not as friendly to U.S. interests as Canada and (ii) there are additional costs and emissions associated with shipping this other oil to the U.S.

Unintended consequences abound when government regulations attempt to alter economically-driven behavior involving activities outside of the regulators’ control.

 

About the author

David Nolte

I am a founding principal of Fulcrum Inquiry, an accounting and economic consulting firm that performs damage analysis for commercial litigation, forensic accountings, financial investigations, and business valuations. I am a Certified Public Accountant (CPA) and an Accredited Senior Appraiser (ASA), as well as having other professional credentials. I regularly serve as an expert witness involving damages measurement. My litigation-oriented resume is on Fulcrum's website.

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