Good Politics? Maybe. Good Policy? Definitely Not!

By David Strom
Friday, December 14, 2007

Congress has taken another substantial step toward passing an Energy bill that could spell disaster for American consumers and manufacturers, ensuring a future of rising energy costs and less economic competitiveness.

Until recently, Republicans had stood firm on opposing the Democratically-controlled Congress’ bill, which would have imposed huge tax increases on oil companies in order to pay for subsidies to promote more “green” alternative energy sources. The original bill passed by the House also includes mandates for utilities to generate 15% of their electricity from renewable sources such as wind, solar, and biomass.

Unfortunately, the opposition in Congress is crumbling to passage of a comprehensive Energy bill. Republicans have forced substantial changes to the bill, stripping the 15% renewable mandate and forcing the Democrats to drop their tax increases.

The politics of this bill are pretty clear: who could possibly oppose more efficient automobiles, buildings, and appliances? And who wouldn’t want the United States to produce more energy through the application of “green” technology?

But still, the bill is a disaster waiting to happen.

The most striking parts of the bill include a mandate to force automobile manufacturers to increase the average fuel economy of their cars by 40%, and a mandate to increase the nation’s consumption of ethanol by sevenfold in the next 15 years. Other changes include an expansion of federal powers to regulate energy efficiency of appliances and commercial buildings.

Unfortunately, the world outside the beltway doesn’t always work by the whim of political leaders. Simply intending to achieve a certain set of goals is no guarantee that the policies set in motion are a good or efficient way to get you there.

Policymakers are ignoring the market—and that means you and me and the rest of us collectively—we are already responding to changes in global energy prices. As prices for fossil fuels, especially oil and natural gas, have skyrocketed due to soaring demand, people and firms are beginning to adjust their behavior to soften the blow of rising prices.

They are already shopping for more fuel efficient cars, and as the demand for them rises, so will the supply. Past experience has shown that forcing automakers to produce fuel efficient cars didn’t make consumers want them any more, but higher fuel prices are likely to change that equation pretty quickly.

The same dynamic applies across the economy: as energy prices increase, people’s behavior will change over time to reduce energy consumption. And because the impetus for change is consumer demand, entrepreneurs will begin to flood the marketplace with goods and services to meet that demand in the cheapest and most efficient way possible.

Of course, the opposite happens when mandates are involved. Consider the Ethanol mandate Congress wants to impose. It not only mandates the increase in Ethanol content in motor fuels, it actually specifies the number of gallons and proportion of what kind of biomass can be used to produce the stuff!

The idea that a bunch of politicians should negotiate in a backroom deal how many gallons of ethanol American should consume in 2022 is absurd on its face. The ethanol industry in its current form only exists because of huge government subsidies and mandates, and without them the entire industry would likely collapse.

But imagine for a moment it didn’t: what if it turned out that ethanol really did have the promise its boosters promise? Wouldn’t we more likely see the technology take off in a free market with competition and private incentives than in the current environment, where government mandates and subsidies distort the market?

What if ethanol or some other alternative fuel really could supplant our current thirst for fossil fuels? In the current economic environment, does anyone doubt that investors would be scrambling to cash in on it? In effect, the need for government mandates and subsidies are proof enough that ethanol is a poor choice for an alternative fuel.

If Congress had really wanted to come up with a coherent energy strategy that relieved the short-term pain of rapidly escalating energy costs and put the United States on the path of a rational energy policy, it could have done two simple things to grease the wheels of the marketplace: 1) change regulations in a manner to promote clean, efficient, and inexpensive nuclear energy production, and 2) reduce or eliminate the barriers to extracting the known huge reserves in fossil fuels in the United States and its coastal waters.

Increased use of nuclear energy would reduce the demand for fossil fuels in the generation of electricity (and could provide a non-polluting source of energy for electric cars, whenever they come). Increased domestic production of fossil fuels would relieve some of the upward pressure in the oil markets as excess demand is accommodated.

Fossil fuels have powered our economic growth over the last century, and they will remain key for at least part of the 21st Century. But the writing is on the wall: our dependence on fossil fuels will need to decrease substantially in the near future. The best way to usher in the next generation of power sources is to let market forces work, unleashing entrepreneurs to seek new ways to meet consumer demands.

That’ll work a darn sight better than have congress mandate the precise number of gallons of ethanol Americans should consume in any given year.