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Power Down the Subsidies to Energy Producers

By

America has an energy addiction - and it’s not an addiction to oil, as many politicians would have you think. It’s an addiction to government subsidies. The addicts, you see, are energy producers, not the consumers.

Their growing dependence on federal handouts is the real cause of America’s energy crisis. Energy subsidies have needlessly wasted taxpayer dollars, retarded commercialization of new technologies and failed to reduce our reliance on foreign energy sources. Washington would do well to end all energy subsidies.

Energy subsidies come in numerous forms ranging from direct expenditures to targeted tax breaks, from production mandates to loan guarantees. Basically, any public policy that favorsthe production or consumption of one type of energy over another can be considered a subsidy.

None of them come cheap. According to the Energy Information Agency, the federal government gave the energy industry $8.2 billion in subsidies and financial aid in 1999. This figure more than doubled to $17.9 billion in 2007 and more than doubled again to $37.2 billion last year.

But the damage subsidies inflict on our economy extends well beyond direct costs. A special endorsement from the government artificially props up that technology. This reduces the incentive for the producer to become cost-competitive, stifles innovation and encourages government dependence.

The federal government has no business picking commercial winners and losers. That’s the job of the marketplace. Indeed, it’s doubly damaging when government decides to manipulate the market through subsidies, because government - almost invariably - picks losers. That’s not surprising, because companies that seek handouts most strenuously are those that cannot compete without them.

If a project makes economic sense, however, the private sector can and will provide all the investment needed. Of course, sometimes government offers subsidies to viable technologies. In those cases, your taxpayer dollars simply offset the investments the company would have made anyway.

Subsidies also allow government to steer the flow of private-sector investments - another destructive feature. Supporters call this “investment for job creation.” But subsidies create jobs only in the politically-preferred industries. Economists are quick to point out that there’s no free lunch.

When government gives a tax credit to banana producers, more labor and capital shift toward banana production. But the money underwriting the tax credit is extracted from other economic activities, like strawberry or grape production. There’s no net job creation.

Similarly, the government can spend money to subsidize windmills, solar panels and natural gas vehicles, but those subsidies drain labor, capital and materials that could be used more efficiently elsewhere.

The caustic nature of subsidies does not end there. When government dictates how the private sector allocates resources, those industries that benefit from such policy decisions will spend more money lobbying Capitol Hill. The banana producers will push for tax-credit extensions. The apple producers will complain that they are at a disadvantage and lobby for their own handouts. This process results in the continuous picking of winners and losers, at ever higher stakes.

Reducing government control of the energy economy decreases the incentive to use the political process for gain. The best way to do that is to 1) stop creating new energy subsidies; 2) start removing those already in place; and 3) use the money saved by repealing the special-interest subsidies to implement a broad tax cut. Doing so would tremendously benefit Americans as taxpayers and energy consumers.

Americans have no addiction to any particular energy source. They’ll buy whatever delivers a good value: Reliable energy at an affordable price. The real problem is the energy sectors’ addiction to subsidies.

Central planning didn’t work for the Soviets, and it’s not working for the U.S. energy market. Eliminating subsidies for all energy sources would force all segments of the energy industry to develop the innovations and efficiencies needed to earn the business of American energy consumers.

Nicolas Loris is an analyst in the Heritage Foundation’s Roe Institute of Economic Policy Studies.

First appeared in The Washington Times

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