Perils of energy subsidies

I recently met with a Bozeman, Mont., writer about my opposition to subsidies for alternative fuels. Was I opposed to all subsidies, including those for fossil fuels, the writer asked, or just for wind, solar, and synfuels? Of course, I responded, I’m opposed to all commodity subsidies on ethical and environmental grounds. But I support federal investments in basic research and projects like the construction of the Hyalite handicapped trail (in the Gallatin National Forest between the Gallatin Canyon and Paradise Valley south of Bozeman).

Here’s how I think about the difference. When we subsidize things that trade in the market, we benefit the well-off and well-organized at the expense of the most vulnerable members of society. This holds true whether in Bozeman, Boston, or Birmingham. Princeton PhD George Will said it well: “The world is divided between those who do and do not understand that activist, interventionist, regulating, subsidizing government is generally a servant of the strong and entrenched against the weak and aspiring.”

For a primer on the process, I recommend the late Mancur Olson’s book, The Logic of Collective Action. Olson examines how political forces derail the greater good. His explanation is straightforward: small, wealthy, well-connected groups easily organize into cohesive, effective units. They then use the political process to reap huge benefits while dispersing the costs over 290 million citizens. Rarely is this graft challenged — especially in the Bush administration.

But isn’t it reasonable to support subsidies for the “right” kind of energy — for wind and solar, for instance? No, for the same pathological logic applies. Here’s an example.

Wind farms are enjoying a boom. Alas, their popularity has more to do with harvesting advantages in the tax code than with their environmental or energy merits. Following the logic of collective action, we’re not surprised to learn these “good” subsidies annually transfer hundreds of millions of dollars from customers and taxpayers to a few large companies. Wind “farmers” reap more revenue from tax breaks and subsidies than from the sale of their product. They benefit at the expense of other taxpayers and energy consumers.

Subsidies cause tremendous environmental harm. Here’s the unintended but predictable consequence of European Union mandates for biofuels.

New Scientist magazine reported in its Nov. 22, 2005 issue that “the drive for ‘green energy’ in the developed world is having the perverse effect of encouraging the destruction of tropical rainforests. From . . . Borneo to the Brazilian Amazon, virgin forest is being razed to grow palm oil and soybeans to fuel cars and power stations in Europe and North America.”

“The expansion of palm oil production is one of the leading causes of rainforest destruction in south-east Asia,” says Simon Counsell, director of the U.K.-based Rainforest Foundation. “It is one of the most environmentally damaging commodities on the planet.”

Here’s a key point. If consumers really derive superior value (in terms of price and performance, for example) from alternative energy sources, won’t entrepreneurs rush to deliver these products?

We all care about our energy future; some of us care for the environmental consequences. They include human health, natural beauty, and ameliorating the negative effects of climate change. Most folks primarily value warm homes in the winter, fast and convenient transportation, and inexpensive energy. The questions we face involve balancing competing values. In what combination and in what amounts should we seek the things we want?

My writer friend is frustrated by our slow transition to a green energy future. She believes we can hasten this process if the government subsidizes the “right” fuels. Perhaps. But if a technology is not economically competitive, no amount of public subsidy or special political favours will make it so.

Isn’t it ironic that Western environmentalists who spend their careers fighting the perverse environmental impacts of government subsidies (e.g., dams on Western rivers) believe that government, rather than the market process, must guide our energy future?

How can they forget that the West best exemplifies the environmental harms resulting from the subsidized exploitation of the environment? This is a result of the alliance between big government and big business. Are they sure the government will get it right this time?

When considering our energy future, understand there are no solutions, only tradeoffs. All energy production has environmental impacts. Our choices involve trading off among imperfect alternatives. It’s ethically and environmentally irresponsible to pretend this reality away.

— This is an edited version of a commentary written for the Bozeman, Mont.-based Foundation for Research on Economics and the Environment. The author is the executive vice-president of the foundation.