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WebMemo #396 on Energy and Environment

January 21, 2004

A Responsible Energy Policy

By and

In his State of the Union Address, President Bush rightly called for a reliable energy policy, one that decreases our dependence on foreign energy. Demand for energy is fast outpacing supply, and this imbalance is growing.

The path away from dependence does not involve the government selecting winners and losers through mandates, subsidies, and giveaways. Instead the country needs a policy that will ensure reliable and affordable energy by enhancing our supplies of domestic energy sources. This policy must let the market and the private sector do the rest. The President should call for policies that would:

  • Open access to energy-rich areas currently "off-limits" for exploration of oil and gas resources off-shore and in the Outer Continental Shelf;
  • Provide access to gas and oil exploration in the Rocky Mountains and other federal lands; and
  • Authorize use of a tiny portion of land in the Artic National Wildlife Refuge (ANWR) for exploration - an area which contains more then twice the proven reserves in all of Texas.

Such commonsense goals are all but missing in the energy bill that now languishes in the Senate. Riddled with special interest spending and subsidies in the forms of grants, spending authorizations, and tax giveaways, this bill is devoid of any substantial policies that would enhance our supplies of domestic energy. The President should hold firm and demand broad policies that will provide diverse sources of energy while avoiding the pitfalls of special interest treatments disguised as incentives, such as those in the current energy bill:

  • Over $9 billion in giveaways for the oil and gas industry;
  • About $3 billion in tax credits for the use of renewable fuels to produce electricity;
  • $2.5 billion for investment and production credits for clean coal technology;
  • Over $2 billion for alternative motor vehicles incentives; and
  • Almost $2 billion in tax breaks for the electric power industry and other businesses.

These measures will not improve domestic energy production. We know from experience that mandates and subsidies for the production of ethanol create an artificial market that raises gasoline prices for consumers and benefits a few big agribusinesses. Additional mandates and more subsidies will cause even more distortion in the market. Markets don't work when policymakers choose winners and losers, and the energy market is no exception. If the President is serious about increasing domestic energy production, consumers -- not the government -- must make these determinations.

The President also called for improvements to the electricity grid so that we can avoid suffering from the same devastating electrical blackouts that paralyzed the Northeast last summer. Sound policy should attract investment to the grid without needless mandates and regulations. A very modest start to this is contained in the energy bill that now:

  • Grants FERC limited "backstop" authority to issue permits for interstate electricity lines in bottleneck areas, and
  • Repeals the Public Utility Holding Company Act, an antiquated law that prohibited power companies from investing in unrelated businesses

In short, the President was right to call for an energy policy that will provide affordable, reliable energy and protect the nation's economy by decreasing our dependence on foreign sources. He should resist temptations to get legislation quickly to his desk and call on Congress to dump the empty promises and lucrative giveaways and goodies of this bill and start over. The key will be to open access to our own resources, eliminate special interest meddling, and let the markets do the rest.

Alison Acosta Fraser is director of the Roe Institute for Economic Policy Studies at The Heritage Foundation. Charli E. Coon is Senior Policy Analyst for Energy and the Environment in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

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