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View related content: Energy and the Environment
Resident Scholar Kenneth P. Green
It is rare that one finds a policy concept that unites policymakers not only of the left and right, but between countries, particularly, these days, in the contentious field of energy policy. But there is such a thing, and that unifying idea is the fatal conceit that government planners can outperform free energy markets at finding the sweet spot at which consumer demand for energy is reliably met with supplies reflecting the true costs of production at use. One of the most prevalent mechanisms by which planners choose to exercise their influence over the market is by way of subsidies to various forms of energy. Such subsidies can be transparent, such as when a government gives a straight price subsidy or tax reduction for the use of certain kinds of energy or energy technology. Or, subsidies can be less transparent, such as when a government regulation creates an artificial market for less competitive forms of energies.
Energy subsidies have become a perennial favourite in the United States. The last basket of energy subsidies were given to the corn industry, via Congressional mandates for the use of ethanol in gasoline. The hottest subsidies discussed today are headed toward the coal industry, which is salivating over the prospect of a lavish spread of subsidies heading their way under the banner of “energy independence.” As the New York Times recently reported, the U.S. Congress is considering loan guarantees for coal-to-liquid plants; tax credits for the sale of coal-based fuel; automatic subsidies to keep coal-based liquids competitive if oil drops below $40.00 per barrel; and allowing the air force to sign 25-year contracts for coal-based liquid fuels.
Environmental groups rightly point out that coal use is anything but environmentally benign, and can cause serious environmental harms in both mining and burning. But looking beyond the environmental question is a more fundamental issue: energy subsidies are bad public policy, no matter where they are, which party supports them, or how good the intentions of a government might be.
Just as Soviet planners could not simply determine how many shoes of what sort the people would want in 5 years, politicians cannot determine how many liters of a particular fuel their people will want in 5 years, nor the price they’ll be willing to pay.
First, subsidies breed corruption. They don’t create incentives for honest people that already have a market-worthy product–such people can already sell their goods into the market easily. Rather, subsidies create a fertile garden for rentseekers who are unable to sell their goods competitively in a free-market, and prefer to tap the coercive and redistributionist force of government to lever their uncompetitive good into the market at the public’s expense. Rather than contribute to overall social welfare by giving consumers the best goods at the least cost, or even maximizing the efficient use of people’s taxes, rent-seekers undermine social welfare by foisting inferior or over-priced goods onto the market while taking money from people that could be used for other important purposes. This is a particular problem in countries with relatively weak property rights regimes, and countries with legal institutions insufficient to prevent it.
Second, subsidies are usually inequitable. High gasoline taxes create an incentive that favours new fuel-efficient cars–in a sense, creating a subsidy for high-mileage vehicles. But only people in higher economic brackets can afford new cars, and poorer people are left to drive less efficient vehicles, and spend more money on gasoline taxes. When the California government wanted to subsidize electric vehicles (EV), they offered over $8,000 to people who leased GM’s EV1–but the only people allowed to do so were households that earned over $100,000 annually, and who had a regular gasoline-powered car as their primary mode of transportation. As if that weren’t bad enough, lower-income earning California’s non-EV driving taxpayers were out of pocket for a network of $20,000 EV charging stations so celebrity EV boosters could charge up between production meetings.
Third, subsidies pave the way for adverse consequences that inevitably result when planners decide that their few hundred heads are wiser than the nearly infinite number of nuanced economic decisions made by their millions of constituents. As The Economist has pointed out, governmental efforts to protect the environment are rife with unintended consequences. Mandating higher fuel-efficiency vehicles led people to drive more, not less. Automobile manufacturers receive subsidies for selling flexible-fuel vehicles that most people never run on anything but gasoline, allowing the company to then sell an SUV that gets ruinous mileage and still maintain their proper “average” fuel economy. The list of perverse consequences of bad energy policy is virtually endless.
Last, but certainly not least, subsidies subvert efficient functioning of energy markets. Free markets, as economics tells us, are the only mechanism that can efficiently determine how much of a given good is desirable at a given price. Just as Soviet planners could not simply determine how many shoes of what sort the people would want in 5 years, politicians cannot determine how many liters of a particular fuel their people will want in 5 years, nor the price they’ll be willing to pay. The idea that they can make this prediction is, as Nobel prize-winning economist Friedrich Hayek observed, the fatal conceit of planners.
Everyone wants to protect the environment, and everyone loves the idea of ultra-efficient devices, cutting waste, having stable and affordable energy supplies, and so forth. Many of the people pushing energy subsidies are undoubtedly motivated by the best of intentions. But, just as the road to hell is paved with good intentions, the road to energy hell is paved with subsidies doled out with good intentions. The best thing to do for world energy markets is to strike all energy subsidies, tax the verifiable environmental harms energy creates and let markets sort out the rest.
Kenneth P. Green is a resident scholar at AEI.
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