“Be kind, for everyone you meet is fighting a hard battle” - Often attributed to Plato but likely from Ian McLaren (pseudonym of Reverend John Watson)

Sunday, July 04, 2010

Subsidies, no, no subsidies...

One of the criticisms I read consistently of governmental encouragement of renewable energy (feed in tariffs, renewable portfolio standards, tax incentives, etc.) is that this artificially distorts markets, thereby leading to inefficiencies. "Let the free market decide" is the cry from the Competitive Enterprise Institute, the American Petroleum Institute, etc.

So it strikes me as ludicrous and ironic to read the extent to which the oil industry relies on subsidies, and to read the rationalizations provided for it. I've mentioned many times that I'm philosophically inclined toward market-based policies but that I believe they'll be insufficient to get us through times of diminishing primary energy supplies at increasing prices and sporadic availability, together with climatic effects of burning fossil fuels with very large inertia with respect to delays between emissions changes and effects.

So what we seem to have here is proposing that technologies that could help with our energy and climate dilemmas fend for themselves while those that contribute most to the variety of problems receive massive subsidies. Can anyone call this sane? There is absolutely no question that we need, and will continue to need, fossil fuels in massive quantities far into the future. They are intrinsic to much more than the generation of electrical energy and liquid fuels for transportation. But converging events make weaning ourselves from those areas where it's possible on a generational time scale critical. Because corporations' only responsibility is to maximize shareholder value, and shareholders value reliable short term returns above all else whereas the needed developments are quite long term, market intervention will, I'm sorry to say, be necessary.


GRLCowan said...

I would like all the cars on all public roads to be indirectly nuclear-powered; I think this can happen by motorists' choice in roughly two car lifetimes.

So I want zero dollars of road construction and maintenance costs to be paid by taxes on fossil fuels burned on those roads. Roads let workers get to and from work, and tangible goods to buyers; they catalyse income, and as public goods, can be funded from taxes on this income.

The NYT article you link details subsidies of billions of dollars per decade in the USA. Motor fuel tax revenues are tens of billions per year in the USA.

So you see, or should see, a difficulty in claiming the industry depends on government help. Government likes to help; the amount of help it gives is similar to the portion the kine get when, biblically, they are given grain to tread with their mouths unbound.

King of the Road said...

Your comment confuses me greatly. Your boron site will take a minute (or two) to absorb.

WRT taxes, I gather you want taxes on fossil fuels to elsewhere than road building but that you like roads and think they should be funded by taxes on some other economic activity.

I think you're comparing the subsidies to various components of the fossil fuel industry to taxes on the refined fuels that constitute much of their end product.

Such taxes certainly make gasoline and other liquid fuels more expensive and standard economic theory says that if you want to tax a business and not consumers, you tax things for which demand is elastic. I would say that the last few years show that the price elasticity of demand for gasoline and other liquid fuels is quite low, thus the billions in taxes to which you refer have been borne primarily by consumers. Have I missed something?

Your Biblical metaphor is lost on me though.

GRLCowan said...

the price elasticity of demand for gasoline and other liquid fuels is quite low, thus the billions in taxes to which you refer have been borne primarily by consumers. Have I missed something?

We agree that the consumers are the ones paying.

My point is that the people being paid are, to the tune of a few tens of billions a year, oil rentiers.

They act accordingly. Suppose, for instance, that an oil company would prefer to have no-one but disposable contractors on its offshore oil rigs, and would find the permanent stationing of government inspectors on those rigs very burdensome. (The inspectors could, with impunity, be picky about the safety of those contractors, and they would, because that safety would also be their own. They would cause delays without thinking about the expense.)

Regulators who are, through taxation, oil rentiers will share the interest of the oil company's onshore management in production, production, production. They will be quite content to do all their regulating from ashore.