Maybe Washington Should Pick Energy Winners

The federal government has to stop picking winners and let the market decide which energy resources Americans use.

That's what we keep hearing lately from Washington, D.C. That's not what Washington, D.C., does, however. The federal government has been picking winners since the days of hooped skirts and beaver top hats. Notwithstanding this-time-it's-different rhetoric, there is not a lot of evidence that politicians will change their habits, level the playing field, and let coal, oil, gas, nuclear, renewables, and technologies we have not yet dreamed up fight it out in a perfectly competitive market that has perfect information and no unpriced externalities.

A venture capitalist who works with renewable energy companies and a former staffer for the Massaachusetts legislature have published an interesting report exploring the history of energy subsidies. It's entitled "What Would Jefferson Do?"

(As an aside, I suspect Jefferson would not like subsidies for any form of energy, nor would he approve of the federal government's current size or of sprawling corporate capitalism as a way of organizing our economy. Too much concentrated power, public and private, for the man from Monticello's liberty-loving taste.)

Delve into the report and you'll get a sense of the little-known history of subsidies that politicians have showered on favored technologies. You probably have heard of the intangible drilling costs deduction, enacted 95 years ago, that allows oil and gas producers to deduct certain costs in one year rather than capitalizing and depreciating them over time. You might not have heard of a Korean War-era tax preference that gives capital gains tax treatment to coal royalties, which in effect lowers the tax on this type of income.

The federal government and states have been picking coal as a winner since the republic's early days. In 1789, the nascent federal government slapped a 10 percent tariff on imported coal, giving domestic producers a leg up over imported competition. The commonwealth of Pennsylvania exempted anthracite coal from taxation shortly after hard coal fields were discovered. State geological surveys sprung up in the 19th century to map coal fields and mineral deposits, saving business the costs of exploration. The big daddy of coal subsidies, although not intended as such, was the vast land grants awarded to railroads. A fair accounting would not charge the entire value of these grants to coal, but the railroad construction that the grants spurred certainly enlarged both coal supply and demand enormously.

Defenders of fossil fuel subsidies argue that intermittent renewables get far larger subsidies per unit of energy produced than oil, gas, and coal do. True, but why defend fossil fuel subsidies at all if the government shouldn't be picking winners?

Back-and-forth arguments that boil down to "Your favorite energy technology gets more subsidies than mine does" miss deeper points. If the government shouldn't pick winners, how realistic is it that the federal government would do away with tax, insurance, research, and myriad other subsidies that benefit specific forms of energy? Should the federal government stop giving tax credits to renewables? Should Congress kill the extended amortization period that coal receives for pollution control costs? Should the federal government repeal the indemnity protection the Price-Anderson Act gives nuclear power plants? Should the oil industry be charged some or all of the costs of maintaining the U.S. Navy in the Persian Gulf? Tough questions, and there is very little likelihood that such questions would be settled quickly or amicably, if at all.

Let's reframe the question. Instead of fruitless rants about "picking winners" that don't square with history or current practice, better questions would be what energy policies should America adopt and what should the federal government do to put those policies into effect?