Thursday, August 4, 2005

Our Socialized Energy System

Our Socialized Energy System

Patrick Doherty

July 29, 2005

Ok, so let me get this straight. Our energy system is 96 percent dependent on coal, oil, natural gas and nuclear; coal and oil are the main drivers of climate change; nuclear energy is the main contributor to WMD proliferation; natural gas terminals are prime terrorist targets and we're building more near cities; the oil industry has not built a new refinery for 30 years but energy companies, like Exxon, are reporting record profits—and Congress just gave all four industries close to $15 billion in subsidies.

Now, I'm the first one to acknowledge that it is the government that allows markets to function properly. Government enforces contracts. Government establishes measures, harmonizes standards, and provides essential market infrastructure, like roads, communications spectrum and ports. Government also ensures that the processes of commerce do not impose costs on people who are not primary parties to commercial transactions.

That last point is essential and yet has been twisted and distorted over the last 50 years. America's zoning laws emerged out of progressive activism at the turn of the century, when early industrial factories were massive sources of pollution and it was essential to separate residential areas from industrial areas. The same applied to power plants and fuel refineries. Given the technology of the day, keeping these massive pollution sources away from residential areas was important.

But today, advanced technology, the failures of suburbia, rising global energy demand and climate change have systematically undermined the logic that supports our energy system. Nevertheless, Congress just spent $15 billion on reinforcing that system and the results will be bad for our economy, our ecosystem, and our security.

Look at power generation. If our national interest is to reduce energy consumption, increase quality of life and provide sustainable, well-paying jobs, we should be decentralizing our power grid, not building massive new coal and nuclear plants. Decentralized power generation would reduce transmission load on our fragile grid, allow incremental, on-demand capacity increases with the latest and most efficient technology, would create an enormous market in high-tech generation and power management equipment, and reduce our vulnerability to disruption by distributing our generation assets.

Instead, we just opened the door to massive subsidies for nuclear energy. Nuclear power plants are so expensive that a normal market will not invest in them, so they need government subsidies. They are so dangerous normal insurance companies will not take on the risk, so they need government-guaranteed insurance. And they are so much of a risk to local communities that they need the federal government to force through permits on local governments. All that, and because these new plants will be far from their customers, more than 30 percent of the power they generate will be lost in transmission. Subsidized, inefficient and hazardous.

And then there is the provision in the energy bill that stipulates that only the first 60,000 hybrids from any one company will receive a tax break from the government. Now remember, government is supposed to ensure that the commercial or personal activity of one person does not impose costs on others. Hybrid engines, by reducing emissions and energy imports, do this marvelously. This new provision, however, reverses that. The government should be encouraging as many people as possible to drive hybrid cars, but instead Congress just capped the number of tax breaks, and therefore capped the market, at 60,000 units. It is absurd.

Taken together, these two examples resemble most the folly of centralized economic planning that sank the Soviet Union 15 years ago. Government involvement in the energy marketplace is now more about preserving the energy status quo for as long as possible. Unfortunately for taxpayers, consumers and citizens, that means that instead of gradual, market-led adaptation of our energy markets, we will have to wait until a major economic shock hits.

Think of it as yet another economic bubble. But this one is filled with gasoline.

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