It's hard to imagine a sillier approach to energy policy than the one
Congress is concocting. The recent experience with ethanol illustrates the
problem with such silliness.
To jumpstart a market for domestic corn ethanol, Congress passed very
generous tax credits for its production, erected tariffs against the
importation of foreign ethanol and mandated that gasoline be blended with
billions of gallons of the stuff.
The result, of course, has been a sharp rise in the price of corn. This has
food producers and other farmers and ranchers angry, and even the Mexican
government, which blames the ethanol mandate in part for the high cost of
corn tortillas in its country.
And now environmentalists are beginning to question whether ethanol is such
a good idea after all. It uses lots of land and water. And fertilizer,
which increases the emissions of nitrous oxide, considered an even more
destructive greenhouse gas than carbon dioxide. Burning gasoline mixed with
ethanol increases ozone levels.
So, has Congress learned the lesson about the limitations on its ability to
micromanage energy markets? Of course not. The bills under consideration
offer a blizzard of subsidies (credits, loan guarantees, research grants,
usage mandates) for a cornucopia of energy sources (wind, solar, hydrogen,
biomass, nuclear).
There is even under consideration an increase in the ethanol mandate,
although with some of it coming from President Bush's magical switchgrass
rather than corn. Farm wastes seem to be the fuel source du jour. There are
even subsidies for looking into generating energy from ocean waves.
Maybe we will surf to our energy future on ocean waves. I don't know. And
the more relevant point is, neither do the members of Congress.
The silliness of all this is best seen by stepping back and contemplating
what all these subsidies and mandates are supposed to accomplish.
There are two problems that are cited as creating the exigent need for an
energy bill. The country is excessively dependent on foreign oil. We emit
too much of environmentally destructive greenhouse gases.
Both of these problems can be dealt with very directly, in ways that would
be effective and efficient.
The extent to which the United States relies on foreign oil, particularly
from the Middle East, is usually exaggerated. Persian Gulf oil supplies
less than five percent of the overall energy consumption of the United
States. The principal vulnerability is in the price of gasoline, not
industrial production.
Nevertheless, if Congress believes that foreign oil imports represent an
unacceptable strategic vulnerability, it can directly limit them. Declining
import quotas could be adopted, reducing oil imports to whatever point
Congress decides adequately diminishes the strategic risk.
Likewise, greenhouse gas emissions could be directly limited, either
through a cap-and-trade program or, preferably, through a tax on carbon and
other such gases.
That's all Congress would need to do. The American people spend nearly $900
billion a year making things run and go. The energy market is plenty big
enough to attract private investment to meet the fuel needs of the country
within whatever constraints the federal government imposes for security or
environmental reasons.
Congress doesn't need to figure out the alternatives. The market will do
that, more effectively and efficiently.
However, it will do that through the price mechanism, and therein lies the
political problem. If Congress, for example, were to directly limit oil
imports, the price of gasoline would go up. And people don't like that.
So, instead of directly and simply limiting supply, Congress is attempting
to manage demand, through fuel efficiency standards and subsidies for
alternative ways of making things run and go.
The problem is that while it may be within Congress's competence to decide
that foreign oil imports are an unacceptable strategic risk or that the
environmental damage of greenhouse gases needs to be limited, micromanaging
the energy market response lies beyond its competence — as the ethanol
story so amply demonstrates.
The American people will pay for the decisions one way or another — if not
through rising fuel prices, then through higher food prices, less choice
among automobiles or washing machines that don't really get clothes clean.
While Democrats are currently in charge of Congress, the silliness isn't
limited to them. The energy proposals of President Bush and Republicans in
Congress tend to be milder, but are similarly afflicted.
It would be far better for national leaders to just do directly what they
think is important for the country, limit foreign oil imports and
greenhouse emissions, and let markets and the American people figure out
the rest.
