Should We Level The Energy Playing Field?

The world needs clean energy. Clean energy subsidies? Maybe not.

Consider the Fisker Karma, an electric car with a base price of $95,900.  A friend of mine bought one. He earned $7 million last year, and took advantage of a $7,500 U.S. federal tax credit available to buyers of electric cars.

Fisker itself got government help, too, in the form of $192 million from the U.S. Department of Energy. So did A123 Systems, which sold battery packs to Fisker; it got $129 million in energy department grants and another $125 million in tax credits and grants from the state of Michigan.

A123 filed for bankruptcy last year. Fisker is struggling to stay afloat.

Though these are, admittedly, extreme examples of clean energy subsidies that benefit the rich, there are others. When a Whole Foods Market in tony Brentwood, Calif., put solar panels on its roof, federal taxpayers paid some of the costs. And California’s residential solar subsidies are so generous that a $372,000 subsidy was paid out on a $2.2 million solar installation on a home in Sonoma County wine country.

The benefits have been modest, at best. A Congressional Budget Office analysis of the $7,500 federal tax credits for electric cars found that they “will have little or no impact on the total gasoline use and greenhouse gas emissions of the nation’s vehicle fleet over the next several years” and that they cost the government a whopping $230 to $4,400 per ton of greenhouse gas emissions avoided. (President Obama wants to increase the tax credit to $10,000, which would only increase those costs.) Meanwhile, solar power generates less than 0.3 percent of the electricity in the U.S., and thus has scant effect on emissions or anything else.

image via SolarWorld

image via SolarWorld

Of course, the fossil fuel industry enjoys government subsidies that, in absolute terms, are much bigger — tens of billions of dollars over the next decade, according to the Congressional Research Service. Globally, according to the International Monetary Fund, government subsidies reduce the costs of energy to consumers by about $480 billion per year. By shielding users from the full costs of energy, all subsidies reduce incentives for conservation or efficiency. As Joel Darmstadter, an economist with the environmental think tank Resources for the Future, wrote recently: “The prevailing pattern and magnitude of energy subsidies is a major impediment to rational energy, environmental, and — not least — sound economic policy-making.”

Here’s a simple, market-friendly alternative: Let’s phase out U.S. government subsidies for all energy, and let oil, natural gas, coal, solar, wind, nuclear, geothermal and efficiency compete. Let’s simultaneously enact a carbon tax on greenhouse gas emissions to remedy a glaring market failure: the fact that the environmental costs of burning fossil fuels are not reflected in their price. With the risks of catastrophic climate change growing, we can no longer allow Earth’s atmosphere to be used as a cost-free dumping ground. A carbon tax is an efficient and effective way to curb those risks.

That said, a carbon tax is not without drawbacks. By design, such a tax will raise energy prices. However, it could be structured to soften the impact on the poor and middle class by distributing tax revenues to households or reducing other taxes, such as payroll taxes. A carbon tax could also disadvantage carbon-intensive manufacturing in the U.S., so a carbon tariff might have to be applied to imported goods as well. The hope would be that, led by the U.S., the rest of the world would favor putting a price on carbon.

Conservative and liberal economists alike support a carbon taxbecause they understand that the best way to produce the low-carbon energy we need is to put the power of markets to work. Were a carbon tax enacted, big companies such as IBM and General Electric would pour research and development money into energy efficiency and low-carbon energy production. Entrepreneurs would come up with carbon-saving devices and technologies, and Silicon Valley would revisit opportunities in clean technology.

I don’t know what tomorrow’s low-carbon economy will look like — and neither do you. Nor, more importantly, do the central planners in the Obama administration. Our cars may be powered by electricity, natural gas or fuels made from algae or other plants. Offshore wind farms will compete with rooftop solar panels and nuclear plants to deliver low-carbon power. Homes, offices and factories might — or might not — become hyperefficient. It’s impossible to forecast technology, and folly to steer government money to particular technologies or companies. That’s one lesson of Fisker, A123 and another high-profile example, Solyndra.

The other, more important lesson is that, contrary to popular wisdom, we don’t need a comprehensive national energy policy any more than we need a comprehensive food strategy to stock supermarket shelves or a comprehensive laptop strategy to keep Apple or Dell in business. What markets do very well is separate winners from losers. As the economist Michael Giberson put it: “When values are diverse and knowledge is dispersed, letting a thousand energy strategies bloom really is the best approach.” To do that, we have to get the government out of the way.

ensiaEditor’s Note: EarthTechling is proud to repost this article courtesy of Ensia. Author credit goes to Marc Gunther.

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