The Best Policy On Subsidies Is Simply To Ditch Them

Commentary, Energy, Environment, Frontier Centre, Regulation, Taxation

Only in the government does it make sense to fix one bad idea — the subsidising of fossil-fuel energy — by giving even larger subsidies to less efficient forms of energy such as ethanol and wind power. Only in government can you find the kind of hypocrisy shown by Nancy Pelosi, speaker of the U.S. House of Representatives, and the new Democratic Congress, which gave a whopping $14-billion subsidy to the “alternative energy” industry in their “first 100 hours” but would have screamed had Republicans given the same to oil companies. And only in government do you see a Republican oilman from Texas declare that he would rather run cars on corn from Iowa, doubling the huge subsidy that ethanol producers suck out of taxpayer wallets.

Let us review why the best policy regarding energy subsidies is to eliminate them entirely.

First, subsidies subvert the efficient functioning of the market, which is our only effective mechanism for matching supply with demand. Free trade in a given good is, as economics tells us, the only way to determine efficiently how much of that good is desirable at a given price.

Just as Soviet planners could not simply determine how many shoes of what sort people would want in five years’ time, politicians cannot determine how many kilowatt-hours Americans will want in five years, nor the price they will be able to pay without sacrificing wealth to inefficiency. The idea that it could make such predictions is, as Friedrich Hayek, the Nobel Prize-winning economist, observed, the fatal conceit of government.

Second, subsidies create a fertile garden for rent-seekers, who connive to get a share of the pie by hook and often by crook. Rent-seeking happens when people who cannot sell a good in a free market 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 lowest cost, rent-seekers undermine social welfare by foisting inferior or overpriced goods on to the market while taking money that could be used for important purposes.

Third, subsidies create a vehicle for government manipulation by special interests and campaign donors at the general public’s expense. Does anyone really think that environmental groups and the wind and ethanol industries were unaware of the potential windfall a Democratic Congress would bring? Does anyone really think they did not donate to political campaigns accordingly?

Fourth, subsidies are often inequitable. High petrol taxes create an incentive for new fuel-efficient cars — in a sense creating a subsidy for vehicles that do a lot of miles to the gallon. But only people in higher economic brackets can afford new cars; poorer people are left to drive less efficient vehicles and spend more on petrol taxes.

When the California government wanted to subsidise electric vehicles, it offered more than $8,000 to people who leased General Motor’s EV1. But the only people who could do so were households that earned more than $100,000 annually and had a regular petrol-powered car as their primary mode of transportation.

Finally, subsidies pave the way for adverse consequences that inevitably result when legislators 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 magazine noted, government efforts to protect the environment are rife with unintended consequences. Mandating fuel-efficient vehicles led people to drive more, not less. Recycling plastic often consumes more resources than it saves. Manufacturers receive subsidies for selling flexible-fuel vehicles that most people never run on anything but gasoline. That allows the companies to sell SUVs with their ruinous miles to the gallon and still maintain proper “average” fuel economy. The list is endless.

Both the Democrats and Republicans are pushing energy subsidy plans that, by further distorting markets and degrading the price signal with hidden subsidies for fuels such as ethanol, are likely to weaken our energy-intensive economy further. By adding more mandates to fuel production and use, these plans also make our energy production and distribution system more fragile and subject to disruption.

The right thing to do is to strike all energy subsidies, tax the environmental harms that energy demonstrably creates and let the market sort it out.

Kenneth P. Green is a resident scholar at the American Enterprise Institute.