In the most recent issue of the Washington Monthly, Jeffrey Leonard argues that the best energy policy would be to repeal all subsidies to the energy industry. He writes that the best way to set us on track for a sustainable energy future would be to simply eliminate all energy subsidies — for fossil fuels and renewables alike.
When the government subsidizes a particular industry, the industry tends to remain dependent on that protection or subsidy. Instead of encouraging innovation, these subsidies cement America's dependence on its current energy mix (i.e. one skewed heavily toward fossil fuels). Leonard points out that 70 percent of federal energy subsidies are directed toward oil, natural gas, and coal.
One of the biggest problems with subsidies is that industries that receive them do not have an incentive to innovate because they are not subject to the same competitive pressures as those that are unsubsidized, such as the profit incentive. This is particularly important in finding alternative fuels and technologies that use energy more efficiently.
Energy subsidies come at the expense of other activities. This is because time, money, and resources are scarce and finite. As a result of its decision to subsidize an activity, the government incentivizes individuals and businesses to divert resources from other productive uses and invest them in activities for which they have a higher opportunity cost than others. Overall levels of productivity and consumption will increase once energy companies in America are allowed to focus on profitable, non-subsidized economic activities.
If the federal government eliminated energy subsidies, many groups would benefit. One such group is businesses and industries that do not currently receive subsidies. The government places this group at an artificial competitive disadvantage by dispensing political favors to its competitors.
Consumers represent another group that would be better off. Energy subsidies hurt consumers because they: (1) Restrict new energy suppliers from entering the market (which restricts supply and increases the price to the consumer); (2) Remove the incentive for existing suppliers to innovate and seek out alternative energies; and, (3) Restrict their access to consume non-protected competitive products (i.e., alternative energies). If the federal government eliminated energy subsidies, then consumers would be able to access a greater variety of energy sources and energy-efficient technologies.
Taxpayers would also benefit in the absence of energy subsidies. The subsidies distort relative prices, which consequently distorts the mix of goods and services available for consumption. An energy firm that receives a subsidy from the government can charge a lower price for the good to consumers, who consequently have an incentive to consume a greater quantity of it. In the context of energy policy, a higher level of consumption is opposite than intended.
These subsidies likely continue because the fossil fuels industry represents a strong lobby. This industry has an incentive to convince elected officials that energy subsidies should continue. It would be better for everyone outside of this industry, however — yes, even the renewable energy sector — if energy subsidies were completely eliminated.
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