We think it’s time for both liberals and conservatives to rethink the energy subsidy arms race. Policymakers should free the energy industry from dependence on government, get rid of energy subsidies and let the best fuels and technologies win.
Why should liberals cut off clean‐energy subsidies? Because that’s a small price for ending the enormously larger handouts that drive destructive drilling, mining, polluting power plants, and gas‐guzzling pickups and SUVs. Why should conservatives eliminate incentives for more oil, gas and nuclear energy production? Because with energy prices so high, subsidies simply aren’t needed to encourage investment in new supply.
The intellectual case for killing energy subsidies instead of adding more is fairly straightforward:
- First, if private investors are unenthusiastic about, say, investments in nuclear power plant construction, it’s probably for a good reason. Do politicians really know more about the wisdom of that investment than the individuals who stand to lose their shirts if they make the wrong economic bet?
- Subsidies distort useful and important price signals. If the unsubsidized cost of hydrogen cars, for instance, is more expensive than the unsubsidized cost of hybrid cars, that means the resources to produce hybrid cars are more abundant than those to produce hydrogen‐powered cars.
- Subsidies often do as much harm as good for their intended beneficiaries. By providing some protection from market forces, they deaden incentives for economic and technological innovation. Recipients too often grow fat and lazy at the federal trough. Look at the ethanol industry, which, after decades of massive subsidies, still can’t compete without them.
That’s not to say government has no role in energy markets. Energy generation and consumption are two of the most significant sources of industrial pollution. At the same time, air and water sheds are shared by all who live within them. Those who believe government should protect property rights should demand their government fight pollution to protect the value of their property and their health. So, for instance, the federal government should not override state and local governments that want to block LNG terminals or transmission line construction, as proposed by the House and Senate bills.
Is subsidizing green energy the best way to protect the environmental commons? No. Rather than tell the market what to invest in, government should simply dictate sound environmental standards and let investors and plant owners decide how best to meet them.
Those with little faith in markets should reflect for a moment on the alternative — faith in the pork‐barrel. Decades of experience tell us subsidies have always been based on political — not economic or environmental — merit. Both parties have given well‐established and economically powerful industries in politically key states government favors and preferences at the expense of the public interest.
So what would a “zero‐subsidy” energy bill look like?
- It must be even‐handed. Environmentalists aren’t about to let subsidies to green industries disappear while subsidies to polluting energy sources survive.
- Second, it should cut deep, eliminating the worst and the largest subsidies. While a list of subsidies is long and expensive, highlights for elimination should include special tax breaks for the coal, oil and gas industries and other extraction and depletion benefits.
Particularly egregious are the “nonconventional” fossil fuels and “enhanced” oil recovery operations, “clean” coal subsidies, and coal bed methane programs. We must also drop exemptions from the gas tax provided for ethanol use. A subsidy‐free bill also would end production tax credits for wind energy, production mandates for ethanol and renewable energy and targeted energy research and development programs.
- Finally, the bill should repeal the Price‐Anderson Act (which shields nuclear power plant owners from liability when accident damages exceed a certain amount) and reject the new generations of nuclear subsidies larded into both energy bills.
If senior analysts at the Cato Institute and the Sierra Club can agree on such a daring initiative, it’s time Republicans lived up to their rhetoric on fiscal responsibility and for Democrats lived up to theirs about corporate welfare.