The Coal Fired Power Plant Quagmire


Leiden, a.d. XVI Kal. Feb. MMDCCLXIX A.U.C.,

A few weeks ago the Dutch lower house (Tweede Kamer) decided to start phasing out coal fired power plants (CFPPs). Three energy companies, who recently built three CFPPs immediately threatened to sue the Dutch government for €6billion. This provides a good example of an issue I discussed in an earlier post: the trade off between property rights protection and democracy. Once a government allows a company to make a certain investment, it is quite difficult to make large u-turns on policy. The Netherlands is a democracy, so when the Dutch government allowed the three companies to build CFPPs, this was a democratically legitimate decision. Yet, at the same time, it is obvious that building CFPPs in this era is extremely shortsighted, because coal plants have gigantic externalities. Moreover, governments are not always perfect agents of the people, because people can only correct parliament after new elections. So maybe parliament took measures which were not supported by the electorate. So, two different approaches to justice are at play here, democracy vs property rights. However, the public discussion on how to deal with such issues in the future, potentially saving taxpayers billions of euros while protecting property rights, still has not started yet.

With regards to the critique that investment treaties would allow companies to sue the Dutch government: once more, this is already possible. But strangely, no public discussion has started yet on how to solve this issue. We are still in need of legislation which protects citizens from humongous fines as the price to protect themselves and their environment from ecological or medical disasters. Meanwhile, it is still true that property rights matter, as I discussed before, so high fines for whimsical government policy are still in order, to protect investors (including our own pension funds) from high losses.

A solution could be that certain decisions on expensive infrastructure from now on would have to wait until the next elections. If parties expect to be able to gain votes by being against this infrastructure, they can run a campaign against them, and people will have the opportunity to let their voice be heard on those issues. Moreover, seeing the high stakes of such expensive infrastructure, it allows parties more time to campaign against the issue, thus giving citizens more time to inform themselves of the issue.

This will limit whimsicality by the government, while providing more legitimacy for decisions made on expensive infrastructure projects. It provides an extra democratic check against reckless government action, but also protects the public from expensive fines because of policy changes, while continuing to protect property rights.

However, it is not a perfect solution. It might be possible that the extra check against policy, in other words the introduction of an extra veto point, might stymie legislation. Extra veto-points  are known to make legislation more difficult, think about it, the more people that are needed to agree, the harder it is to get something done. So the question is, to what degree the introduction of an extra check will hamper legislation on infrastructure. Moreover, time can be scarce: what if there is no time to wait until the next elections?

Lastly, often large infrastructure investments are not decided on through one specific law, but via existing legislation. For instance if a power plant meets the criteria laid down in an existing law, it only has to get a license. This license is not necessarily awarded by the national government, but can also be awarded by a local government. In the case of CFPPs in the Netherlands, the province and the Ministry of Economic Affairs have to award the license, which in turn can be appealed in Dutch courts. In such cases it is not always clear whether the local government has the right to deny a license, if the new infrastructure meets the criteria set out by the national parliament, who is to (morally and legally) blame if the legislation passes both local government and courts on legal grounds, etc. I do not know about Dutch law to know who has to pay those companies now they are bound to lose billions of dollars (I suspect Dutch national government, as the Groningen province did not legislate against CFPPs, and seeing the high degree of centralization of the Dutch government), but it is certain that multi-level governance makes it more difficult to introduce vetopoints which apply to all levels. In other words, two-termed decision making processes can be extremely tedious to actually execute if they need to be applied to all levels of government.

In an earlier post I hypothesized about this solution: ” Maybe countries could start selling different kinds of leases, in which externalities to a certain limit are allowed, and compensated through the purchase of leases and rental payments, but when they transgress that limit, there is some mechanism to stop the operation without having to pay too much in compensation. This way companies know in advance that if they cause massive amounts of pollution, they could lose money. Something like this, could be a way to relieve the tension between legitimate concerns about externalities and the legitimate concerns of investors. However, such a policy will only work if we have an absolutely impartial judiciary, as to prevent such contracts from becoming bad excuses for expropriation or whimsical changes in policy.”

By now, I would like to add that this only works if we know in advance certain kinds of pollution are harmful, and there is an agreed level of pollution which cannot be surpassed. If public opinion on that level shifts, or if new information about the detrimental effects of that pollution or about new pollution becomes available, this solution is useless. Maybe if we translate all pollution into certain degrees of negative environmental and health impact, that is, ‘only so many people are allowed to die so many years younger and so many birds can die due to your project’ we can at least capture new information on adverse effects of projects?

So I am curious to hear other alternatives.

Bottom Line: Public debate still has not addressed how to save taxpayers from having to pay billions of dollars to enact fair legislation. A solution could be to demand legislation on large projects is passed in two parliamentary/presidential terms.

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