Energy Subsidies vs. Energy Progress

If we did a poll of free market economists about federal programs that are the most wasteful and ridiculous, energy subsidies would be near the top of the list. It’s not just that energy subsidies make no sense in economic theory, but also that there are so many news stories highlighting the folly that it’s hard to see why policymakers persist in wasting our money.

From the Washington Post on Friday:

The Department of Energy failed to disclose concerns about a green-technology company that won $135 million in federal funding but ended up filing for bankruptcy in September, according to a watchdog report released this week. DOE Inspector General Gregory Friedman noted that the firm, San Francisco-based Ecotality, is still due to receive $26 million from the agency for testing electric vehicles.

The Energy Department awarded the firm $100 million in 2009 Recovery Act funding for that initiative, in addition to a combined $35 million from a separate program to help pay for testing vehicles

Ecotality is among a number of failed firms that received stimulus funding through an Obama administration initiative to support green-technology companies during the recession. Solyndra, a Silicon Valley-based solar-panel maker, stands as perhaps the most high-profile example. The business collapsed after receiving more than a half-billion dollars in Recovery Act money. Other examples include Beacon Power , a Massachusetts-based company that received at least $39 million from the federal government, along with Michigan-based battery manufacturers LG Chem and A123, which landed grants worth $150 million and $249 million, respectively.

On Sunday, the Washington Post profiled the economic chaos, central planning, and wasteful lobbying generated by federal mandates for cellulosic ethanol:

Congress assumed that it could be phased in gradually, but not this gradually. This year refiners were supposed to mix about one billion gallons of it into motor fuel. So far, there has been hardly a drop. More than a dozen companies have tried and failed to find a profitable formula combining sophisticated enzymes and the mundane but costly and labor-intensive job of collecting biomass.

To reach the ethanol goals set by Congress, the government came up with a byzantine implementation plan. Each gallon of renewable fuel has its own 38-character number, called a “renewable identification number,” to track its use and monitor trading. There are different types of these RINs for different biofuels, including corn-based ethanol, cellulosic ethanol and biodiesel.

In February of each year, refiners who fail to provide enough renewable fuel to the blenders who mix ethanol and gasoline must buy extra RIN certificates. When companies have extra credits for renewable fuels, the RINs can be banked and sold in later years. If there are not enough renewable fuels overall, the price of RINs rises — and provides an incentive to produce more.

And in a related story on ethanol, the Post found:

Five years ago, about a dozen companies were racing to start up distilleries that would produce enough cellulosic ethanol to meet the congressionally mandated target of 16 billion gallons a year by 2022 … The Agriculture Department provided a $250 million loan guarantee for the Coskata plant. Today, most of the dozen contenders have gone out of business or shelved their plans.

Federal subsidies and mandates for ethanol and other energy activities are sadly causing the diversion of billions of dollars of capital to uneconomic uses. That’s the bad news.

But there is good news on the energy front, which comes from far outside of Washington. The Wall Street Journal last weekend profiled “the little guys,” the market entrepreneurs, who were behind the shale energy revolution:

The experts keep getting it wrong. And the oddballs keep getting it right. Over the past five years of business history, two events have shocked and transformed the nation. In 2007 and 2008, the housing market crumbled and the financial system collapsed, causing trillions of dollars of losses. Around the same time, a few little-known wildcatters began pumping meaningful amounts of oil and gas from U.S. shale formations. A country that once was running out of energy now is on track to become the world’s leading producer.

The resurgence in U.S. energy came from a group of brash wildcatters who discovered techniques to hydraulically fracture—or frack—and horizontally drill shale and other rock. Many of these men operated on the fringes of the oil industry, some without college degrees or much background in drilling, geology or engineering.

Thank goodness for the oddballs. And thank goodness for the market system that channels the brashness into creating growth for all of us, not just the favored few getting handouts from Washington.