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Let’s Tax Carbon

It’s the worst form of energy policy, except for all those others that have been tried

May 26, 2014, Vol. 19, No. 35 • By IRWIN M. STELZER
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Meanwhile, self-styled progressives, some of them very smart indeed, think they can successfully intervene in energy markets without imposing huge costs on consumers and on industries, and that such intervention is the only route to a cleaner, more efficient energy economy. They’re delusional. In Germany, the decision to shut down nuclear plants and rely on wind and solar has produced a massive increase in energy costs, so politically indefensible that Germany now has 10 coal plants under construction in an effort to prevent its poorer citizens from suffering in the winter and its energy-intensive industries from fleeing to more hospitable climes, including natural-gas-rich America. Worse: The coal these plants will burn is the dirtiest version of the stuff that can be found. In Britain, the government’s decision to make a gesture—one that can have no possible effect on global greenhouse gas emissions—by ordering a massive cut in that nation’s emissions has made it 63 percent more expensive to heat a home and driven 25 percent of households into what is called “energy poverty”—spending more than 10 percent of their disposable income on energy. Not to mention scarring the beautiful countryside with unwanted wind machines that are slaughtering birds and interfering with the military’s radar installations. In this country, hard-working Joe-the-plumbers, driving unsubsidized pickups, are paying taxes that help finance the purchase of $80,000 Tesla all-electric automobiles by Hollywood moguls and other high-earning greens and energy bills swollen by all sorts of regulations the cost/benefit justification for which the EPA refuses to reveal. With more bills to come: A few weeks ago the Department of Energy’s experts, hot off their Solyndra success, pledged up to $47 million to each of three offshore wind projects.

Even the green-friendly New York Times noted that “an Energy Department grant to develop a new technology can be helpful but is certainly no guarantee of success.” No surprise there.

In short, costs are rising, the poor are suffering the most in our country and elsewhere, all because government bureaucrats refuse to return the allocation of energy resources to the markets. The bureaucrats believe that they can accomplish what some of the hardest-headed (in the better sense of those words) investors the nation has ever seen cannot: predict how energy markets will react to new developments, including regulations. Legendary hedge fund operators, deal-makers, and Masters of the Universe were so certain that natural gas prices would rise and stay elevated, generating huge profits for lower-cost coal-based power, that they bet billions on the acquisition of a Texas utility, TXU, that is now bust. Along came fracking, moving the natural-gas supply curve in an unanticipated direction, and making electricity generated by the utility’s coal plants uncompetitive with natural gas in electricity markets. At least the taxpayer will not pick up the tab for this misadventure, although it is never wise to underestimate the inventiveness of these deal-makers, who have already announced that they will need some complicated favors from the IRS and from regulators to pull off their bankruptcy plan. If the smartest guys in the room, with an enormous personal incentive to get their forecasts of energy markets right, can’t succeed, how can we expect bureaucrats, with only taxpayers’ skin in the game, to shape efficient, fair energy markets?

Consider the road not taken by our political dabblers in energy policy: Let the market decide who uses energy, and how much, and how it is supplied. But not the market as it is now structured, for it is rife with what economists call market failure—the sending of price signals to consumers and producers that do not reflect the true cost of producing and using energy. One set of distortions makes some forms of energy seem more costly than they are by imposing inefficient regulations on them, driving up costs and prices. Just load regulations on coal producers and generators who burn it, then more regulations, and sooner or later they will give up the one-sided game and put what is left of their capital to more profitable uses. Another set makes some energy sources seem less costly than they are by using taxpayer money to subsidize their production, as is the case with nuclear power, wind, and solar. Set standards for automobile fuel efficiency that make safe, comfortable cars unaffordable for lower-income buyers, who end up with less car than they would have had thanks to policies imposed by politicians, many representing big-city constituents who can walk to the nearest Whole Foods and who use taxpayer-subsidized public transit to get to work. 

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