Saturday, August 30, 2008

Energy Policy

This week, I am devoting some time writing about some of the areas where I expect the Democratic Party, if it should be in control of the executive and legislative branches of the federal government, will likely fail.

One of the areas in which I expect Democratic failure is in the area of energy policy.

Clearly, the Democratic failures in this area will not be as bad as we can expect from the Republicans. However, it would hardly even be possible for the Democrats to invent an energy policy that is as bad as that what we get from the Republicans, but I will get to that next week. The issue is not whether the Democrats can beat the Republicans in terms of energy policy. The question is whether the Democrats can advance a good energy policy.

I do not expect them to.

The main source of failure that we can expect from the Democrats will be their tendency to try to pick winners and losers – to come up with specific objectives and to legislate those objectives. The reason that this policy will fail is because (1) legislators do not have and can never have enough information to do this well, (2) the information changes over time and legislation cannot respond quickly enough to new information, and (3) legislators need to feed their supporters.

We can see this failure in the government programs involving ethanol production. Legislators decided that we need an alternative to fossil fuels and decided that this alternative must be ethanol. Therefore, they passed legislation mandating that a certain amount of our energy production be in the form of ethanol. Furthermore, this could not be foreign ethanol (e.g., that produced with sugar cane from Brazil), but domestic ethanol produced from corn.

Let us be clear as to why the government picked ethanol as one of the ‘winners’ of an alternative energy program. It is because corn farmers have a lobby, and that lobby coordinates political support for legislators who will pick corn ethanol as a “winner” and mandate its production as a part of our alternative energy program.

But what are the consequences?

Let us assume that there is a drought or a flood that damages a significant portion of the corn crop. We have legislation in place that still demands that a certain amount of corn be used in ethanol production. But we do not have as much corn as we used to. So, something has to be cut.

So, we have no option to cut anything but food. Food prices because there is simply not as much food corn to go around. In social terms, the legislature, spurred on by the farming lobby, created a program where the rich people almost literally take food off of the table of the poor and starving people of the world in order to produce energy that is ultimately used for the sake of entertaining those who are not so poor.

Please consider the consequences of this failure – consequences being felt around the world today. People are starving. People who live off of hundreds of dollars per year are finding it more difficult to find food because that food is going to producing alternatives to gasoline for people in a country where there is a significant problem with obesity.

This policy has, as a matter of fact, turned out to be an instance where people with money have used the power of government to make themselves better off by forcefully redistributing wealth from others who can barely afford to eat.

The energy policy that the Democrats should pursue is simple. We now know that the burning of fossil fuels produces some significant threats – the spread of tropical diseases into areas that did not used to be tropical, sea-level rise threatening coastal property, more severe storms, heat stress (causing death among the sick and elderly). The simplest plan for dealing with these problems is to simply tax the use of fossil fuels to raise the price, and then to use the money raised to help those who are being harmed by fossil fuel use.

The point is that the government is not picking winners and losers. It simply makes the price of using fossil fuels more closely match the cost of using fossil energy. And it puts the cost of using fossil fuels on the shoulders of those who use them, rather than allowing a person to use fossil fuels and to impose the costs on somebody else.

The people themselves decide how they are going to respond to these price differences. If they want to respond by switching to a car that burns ethanol, or an electric car, or by driving less, or by driving the same car and driving just as much but not spending money on other things, all of these options are open to them. They can pick the option that best suits their interests (that best fulfills their desires given their beliefs).

More importantly, businesses can decide how they want to respond to the higher prices of fossil fuels. They can decide which options to invest in, and any option that they might conceive of is on the table. Any new method of conservation, any new way of producing energy that reduces the cost of wind, electric, solar, or some other form of energy, immediately begins to influence market choices.

Unfortunately, this simplicity would come with political costs. There is the cost of increasing the price of energy, which many voters would not like. We would need to add some complications to deal efficiently with these effects.

More importantly, there is the cost of a group of politicians not using their political positions to channel money directly to their friends and campaign supporters. Such a tax still leaves those poor friends and campaign supporters at the whim of market forces. They still have to find some ways to provide customers with better options to higher priced fossil fuels than the other competitors.

This last point explains why I expect that the Democrats’ are going to fail us when it comes to devising an energy plan. Again, it would be difficult for the Democrats to come up with an energy plan as bad as the Republican plan. However, this does not imply that we should expect anything good to come from the Democrats over the next four years.


anton said...


Any debate devoted to creating an energy policy should include the statistic that US America consumes 25% of our world's energy. Without reducing that percentage being an integral part of any solution, debates are doing nothing but adding to global warming as hot air trumps common sense!

Anonymous said...

In the face of my opposition on other points, I felt it was only fair to cheer you on and say you're doing a great job, as always. :) Even when I disagree on practical applications, it's always illuminating and educational to read what you have to say. Plus I couldn't agree more about the energy policy. ;)