Topic: Energy and Environment

Stifling Innovation by Subsidizing It

In 2007, the Advanced Technology Vehicles Manufacturing Loan Program was created in the Department of Energy to support the development of advanced (i.e., “green”) technology vehicles. Last year Congress appropriated $7.5 billion to support a maximum of $25 billion in loans. So far, the subsidies have been dished out to Ford ($5.9 billion), Nissan ($1.6 billion), Tesla Motors ($465 million), and Fisker Automotive ($528 million).

Darryl Siry, a former official at Tesla, has written a piece for Wired that illuminates a fundamental problem with the government trying to pick winners and losers in the marketplace:

To the recipients the support is a vital and welcome boost. But this massive government intervention in private capital markets may have the unintended consequence of stifling innovation by reducing the flow of private capital into ventures that are not anointed by the DOE.

Private investors, such as venture capitalists, make investments based on perceived risk and expected financial returns. Companies with government backing are more attractive to investors because government support “amounts to free leverage for the venture capitalist’s bet” given that “the upside is multiplied and the downside remains the same since the most the equity investor can lose is the original investment.”

According to Siry:

The proposition is so irresistible that any reasonable person would prefer to back a company that has received a DOE loan or grant than a company that has not. It is this distortion of the market for private capital that will have a stifling effect on innovation, as private capital chases fewer deals and companies that do not have government backing have a harder time attracting private capital. This doesn’t mean deals won’t get done outside of the energy department’s umbrella, but it means fewer deals will be done and at worse terms.

Siry concludes that a solution to avoiding these market distortions would be to “cast the net more broadly” by giving subsidies to more companies. That’s where I part ways with his analysis. The real solution is to get the Department of Energy out of the subsidy business – and energy markets – altogether.

This Won’t Put Al Gore in the Christmas Spirit

This has not been a good week for the global warming alarmists. They’ve been caught with their pants down on the Climate-gate email scandal, and they are terrorized by my colleague Pat Michaels. So this is the time to add some insult to injury with a very amusing video.

On the topic of amusing videos, here’s one on health care put together by Ladies4Liberty, featuring Cato’s Nena Bartlett.

“Climategate” and Government

It was “Open Mic” this past weekend at Politico Arena:

My post:
Brad Smith is to be commended for encouraging Politico Arena contributors to comment on the emerging “Climategate” scandal.  And it is noteworthy that both he and Walter Russell Mead, the first to respond to Brad’s invitation, have taken a “let’s-see-the-evidence” posture toward the matter, discounting neither the global warming thesis nor the evidence that there may be less to the thesis than its promoters have been saying.

Yet to listen to how the promoters have discounted their critics over the years, one would imagine that the science on the matter were settled.  In fact, one hears often enough that the science is settled to believe that many of them believe it – until a story like this breaks.  Then we see the scramble to shore up their belief system.  It’s an old story, documented years ago by Thomas Kuhn in his provocative volume, The Structure of Scientific Revolutions.

Fortunately, we haven’t yet reached the stage of the Lysenko scandal, which set Soviet genetics back several decades.  But we delude ourselves if we believe that the politicization of science is not inherent in government entanglement as such.  Since that entanglement of government and science is not likely to end soon, the antidote is transparency.  Climategate may be just the spur we need to open the books on global warming, especially given the draconian remedies its promoters are prescribing.

On What Planet Is Lindsey Graham a Free-Trader?

I’ve just started reading a new article by economists at the World Bank and the Peterson Insititute. The gist of the paper is that greenhouse gas emission targets will have little effect on “carbon leakage”, the apparently-largely-theoretical phenomenon whereby carbon-intensive industries move to less regulated jurisdictions in response to stringent emissions regulations in their original home.  So we can strike that off our list of worries.

The authors do reach the conclusion, though, that output of energy-intensive products will decline in response to emissions caps and the political temptation for “carbon tariffs” will be strong (see here why that is a bad idea). Basing the carbon tariffs on the carbon content of imports–as opposed to, say, the carbon content of domestic production displaced– will lead to significant falls in developing country exports. Music to protectionists’ ears, perhaps, but not exactly a recipe for international cooperation or global prosperity.

I’m still digesting the substance of the paper, but I was struck by what I think is a pretty large oversight/mischaracterization in the second paragraph.  The authors refer to the “internationally-minded” Sen. John Kerry (true in the serves-on-the-foreign-relations-committee-and-speaks-French sense, I guess) and the “free-trade oriented” Senator Lindsey Graham (R, SC).

Huh? A cursory glance at Senator Graham’s record indicates that in no serious sense could he be deemed “free-trade oriented.” Senator Graham has voted to lower trade barriers less than half (43 percent) of the time and has taken only 20 percent of opportunities to cut subsidies. That puts him in the “interventionist/internationalist” camp. Maybe the authors didn’t know about the Center for Trade Policy Studies’ “Free Trade, Free Markets: Rating Congress” tool, but surely Senator Graham’s co-sponsorship of the notorious Schumer-Graham legislation, among other transgressions, should have tipped them off.

The Long Road to Copenhagen

There are two different stories coming from the same political party on global warming, leading to only one conclusion: President Obama is about to (or has) ordered the Environmental Protection Agency (EPA) to mandate some type of cap on U.S. carbon dioxide emissions.

Harry Reid and other democratic leaders in the Senate have clearly indicated that cap-and-trade legislation will be put off at least, until what they call “spring”, which is long after the upcoming UN climate conference in Copenhagen next month. At the same time, President Obama has said that the U.S., along with China, will announce some type of emissions cap in Copenhagen. Obviously this cannot refer to legislation that has yet to be voted on in the Senate.

President Obama keeps using the language “operationally significant” when referring to what the U.S. will agree to in Copenhagen. The only way that he can get around the Senate and still have a credible position in Copenhagen is for the EPA to announce specific regulations for carbon dioxide emissions between now and the conclusion of the Copenhagen meeting in mid-December.

Short of Funds? Give the Feds More Power

In 2006, the National Transportation Safety Board found that 298 subway cars in the Washington Metrorail system are “vulnerable to catastrophic telescoping damage” and should be replaced or reinforced immediately. They weren’t, which was a major reason why nine people died in a rail collision last June.

In 2007, supposedly fail-safe circuits in Metrorail’s train detection and control system began to “intermittently malfunction.” This contributed to at least one near miss before the fatal crash, and was the other major reason why nine people died in June.

Clearly, the Washington Metropolitan Area Transportation Authority is short of funds. It still has not begun to replace the 298 cars; instead, it is merely inserting them into the middle of trains so that, in the event of a crash, the will be buffered by newer (and hopefully stronger) cars.

According to the Federal Transit Administration, it will cost nearly $50 billion to bring rail lines in Washington and five other urban areas – New York, Chicago, Philadelphia, Boston, and San Francisco – up to a “state of good repair.” Current rates of spending are not even adequate to keep these systems in the miserable condition they are in today. As an official with New York’s Metropolitan Transportation Authority says with resignation, “there will never be enough money” to restore New York’s rail system to a state of good repair (see p. 15).

The problem, of course, is that rail transit does not come close to paying for itself out of transit fares. Fares cover about 60 percent of the cost of operating Washington’s Metrorail system, but none of the costs of building or maintaining it – and has one of the highest cost recovery ratios in the industry. Transit agencies have convinced most legislators that transit shouldn’t have to pay for itself – but that leaves them perennially short of funds and their patrons in danger of deadly accidents.

Legislators love to fund “ribbons, not brooms” – that is, new, highly visible projects such as the $5.2 billion silver line to Dulles Airport rather than the cost of maintaining the existing system.

So what’s the solution? How about federal regulation of transit agencies? That won’t solve any of the problems, but at least we’ll have a whole new layer of bureaucracy to blame the next time people are killed in a train crash.

The real solution is to stop building expensive rail transit lines that cities can’t afford to maintain. Transit should be privatized, which will lead transit companies to run vehicles – mostly buses – where people want to go, not where bureaucrats and politicians decide they ought to go.

The Odd Couple

Well, here’s an interesting pair. Today’s Washington Post contains an op-ed on climate change and trade, written jointly by Fred Bergsten, director of the Peterson Institute of International Economics, and Lori Wallach, director of Global Trade Watch at Public Citizen. 

The authors readily admit, quite early in the piece, that they are usually on opposing sides of the trade debate.  The Peterson Institute scholars are well-known and well-respected advocates of freer international trade. Global Trade Watch, and Wallach in particular? Not so much. She has called NAFTA a “disastrous experiment” and has a special section on her website calling on people to Take Action! on trade (example: by hosting a house party to celebrate the tenth anniversary of ” the historic 1999 Seattle protest victory of people power over corporate rule.”)

Yet here they are, claiming to agree on “a suprising number of aspects of the climate change debate and on the related need to overhaul global trade negotiations.” I am still trying to make sense of the op-ed, because it lurches around a bit, and to work out exactly how deep the agreement of these strange bedfellows really is. But for now, let me comment briefly on what I think is the main thrust of their op-ed: a proposal for launching a new round of trade talks.

The authors point out that a new treaty on global warming would “require new trade rules in intellectual property, services, government procurement and product standards.” So, hey, why not combine that into trade talks?The Obama Round (as if Obama-worship has not gone far enough) “would include, as a centerpiece, addressing these potential commercial and climate trade-offs and updating the negotiating agenda.”

That, quite frankly, would be fatal for the World Trade Organization. Developing countries, now in the majority in the WTO, are in general very resistant to the idea of bringing extraneous issues into its agenda (witness constant struggles over linking trade to labor and environment issues, to name just two). More to the point, we already have a round in progress. The Doha round has been struggling over old-fashioned trade concerns like tariffs and subsidies (remember them?)  since launching in 2001. The risks of overburdening the WTO agenda are, in my opinion, far greater than the possible benefits. It’s fairly clear to me why Wallach would advocate a new round full of poison pills, but not so clear why Bergsten would put his name to such a suggestion.

It’s not even clear to me that such an approach would “help the environment.” Why the optimism about the possibility of agreement under the auspices of the WTO when negotiations in forums designed explicitly and solely for the purpose of halting climate change have been unsuccessful?

( Speaking of which, expectations for a breakthrough at the upcoming Copenhagen conference on climate change are being rapidly scaled back, with talk of an “interim” agreement — likely some anodyne political statement — rather than the final deal that environmental groups had hoped for. The international diplomacy circus rolls on, though: conferences are planned for Mexico and South Africa — talk about a carbon footprint! — next year.)

For my take on the climate change and trade debate, the solution to which does not involve launching an Obama Round, see here.