Commentary

The Energy Bill Follies

If you believe that government should by-and-large leave businessmen and consumers alone to govern their own affairs and that politicians should not be in the business of micromanaging the economy, then you’re probably a Republican. If so, you’re also probably ignorant because any resemblance between Republican rhetoric and Republican policy is purely coincidental. The passage of the Energy Policy Act of 2003 in the House of Representatives earlier this month demonstrates once again that the only real disagreement between the two parties, at least when it comes to economic policy, is which group of “Peters” ought to be robbed and which collection of “Pauls” ought to be awarded a place at the government trough.

Consider: The GOP saw fit to force companies to add renewable fuel (i.e., ethanol made from corn) to gasoline even though it takes more energy to produce ethanol than is gained by burning the stuff in engines. Moreover, ethanol is three times more expensive to produce than gasoline (which is why it has to be mandated upon an unwilling fuels industry) and it can’t be shipped in pipelines used for standard gasoline. This makes ethanol even more expensive and renders the nation more vulnerable to occasional regional supply shocks. But it is made from corn.

The Republicans also chose to cap the liability faced by owners of nuclear power plants for damages that may result from radiation accidents. But an important first principle of markets is that entrepreneurs should face all the costs of doing business, including the possibility of damages inflicted on third parties

The bill expands the government owned-and-operated Strategic Petroleum Reserve to 1 billion barrels even though the existence of a public inventory undermines the incentive for private inventories. Moreover, political control over inventories increases rather than decreases risk in petroleum market operations and encourages more, not less, price volatility. The GOP also saw fit to reduce the time over which electricity transmission assets are depreciated so that “needed” transmission is built. Yet economists agree that the proper mixture of generation and transmission should be determined by market forces rather than by provisions of the tax code.

Republicans also created a tax deduction for small refiners to comply with new diesel fuel sulphur rules. If the GOP thought the rules were too costly, they should have repealed them. Going this route, however, gives a leg-up to inefficient small corporations and blurs the true cost of environmental regulations.

Another tax credit was established for small crude oil and natural gas producers to increase domestic production. Beyond the silliness of preferring greater domestic production from small companies rather than from large ones, energy prices are set in world markets regardless of how much we import. Fewer imports accordingly make us no less vulnerable to petroleum market shocks.

Just to make sure that “no lobbyist is left behind, ” the Republicans even managed to extend the tax credit for electricity generated by so-called “renewable” fuels through 2007. Yet the pursuit of renewable energy as a major source of electricity is a pipe dream in that wind power and solar energy, because of their natural variability, require fossil fuel backup. They thus cannot replace coal, nuclear, or natural gas alternatives. If wind and solar were as economically competitive as their supporters allege, of course, it would scarcely need the subsidy to begin with.

We could go on and on (as the bill itself does, for 768 agonizing pages of this kind of stuff), but what’s the point? If this is smaller government and less intervention, then what would larger government and more intervention look like?

While it’s tempting to argue that the Energy policy Act of 2003 represents the sheerest hypocrisy in that it flies in the face of everything Republicans allege to stand for, that would presuppose that Republicans are consciously saying one thing but doing another. Conversations with Republican office-holders, however, suggest that they scarcely understand the implications of their rhetoric about limited government and are thus incapable of hypocrisy. They are, however, capable of intellectual incoherence, and that’s what we have here.

e/vandoren.html”>Peter VanDoren is editor of Regulation magazine, published by the Cato Institute, and Jerry Taylor is Cato’s director of natural resource studies.