Energy policy

Thomas Friedman wrote a column on energy policy today that was listed at one point today as the most read article on The New York Times website and was linked to both by realclearpolitics and Glenn Reynolds. Clearly a lot of people agree with Friedman on the topic, or at least find him interesting -- and that is unfortunate.

Friedman begins by bashing -- correctly -- Senators McCain and Clinton for their endorsement of a federal gas tax holiday. He follows this up by stating:

This is not an energy policy. This is money laundering: we borrow money from China and ship it to Saudi Arabia and take a little cut for ourselves as it goes through our gas tanks. What a way to build our country.

Of course, he could have replaced China with Japan and Saudi Arabia with Canada and been just as accurate, but I guess it wouldn't have had the same ring to it. It's probably a lot harder to get people up in arms and throw around the term "crisis" when discussing our neighbors to the north.

He continues:

But here’s what’s scary: our problem is so much worse than you think. We have no energy strategy. If you are going to use tax policy to shape energy strategy then you want to raise taxes on the things you want to discourage — gasoline consumption and gas-guzzling cars — and you want to lower taxes on the things you want to encourage — new, renewable energy technologies. We are doing just the opposite.

Friedman is a big fan of the government coming up with some kind of energy strategy, but the truth is that we don't need one anymore than we need a national food strategy, a national housing strategy or any other industry strategy. In fact, I would submit that the last thing we need is more government intervention in this area. Government intervention in the energy sector thus far has resulted in diminished supply via restrictions on drilling in Alaska and offshore as well as promoting ridiculous alternatives such as ethanol that are a payoff to agribusiness and farming interests in key election states. This is not an unfortunate accident, it the way in which government works. Anytime money is spent -- your money -- you can bet that special interests will be there to influence who gets it.

The correct approach to energy is to have no policy. Rather, the market should decide what energy sources we use. Now, I will concede that some sources of energy bring certain costs along with them -- coal for example pollutes the air and its strip mining results in natural beauty that is turned into moonscape. This imposes a cost on all of us -- an externality -- whether we use coal or not. To compensate for this the government should impose a tax that accounts for the amount of the externality that is imposed, this is known in economic circles as a Pigouvian tax.

After such taxes are imposed the government should simply let the chips fall where they may. If oil is cheap there is no reason to develop alternative sources. If the price of oil increases then alternative fuels become much more attractive and money will be invested in them without government intervention. Indeed, we already see this happening -- so much so that The New York Times has expressed worry about a bubble occurring.

And who is more likely to uncover the next great energy source, the government and its attendant lobbyists or people who are out to make a buck by coming up with a product that works?

Returning to Friedman's column, he worries that this lack of government intervention will produce disaster:

It is also alarming, says Rhone Resch, the president of the Solar Energy Industries Association, that the U.S. has reached a point “where the priorities of Congress could become so distorted by politics” that it would turn its back on the next great global industry — clean power — “but that’s exactly what is happening.” If the wind and solar credits expire, said Resch, the impact in just 2009 would be more than 100,000 jobs either lost or not created in these industries, and $20 billion worth of investments that won’t be made.

You know, Washington DC is a town full of lobbyists, but you see very few people organizations that actually call themselves lobbying firms, instead they call themselves associations. This place is full of them. So you have Friedman quoting a solar power lobbyist about the need to spend more money on...wait for it...solar power and then declaring it "the next great global industry." Well, if it's the next great global industry then it should be able to get along fine without any assistance from Congress. Did Google, Microsoft or Apple need government handouts to help boost the tech industry? If this fortunes of alternative energy are really hanging by whether Congress gives it a tax break or not then count me as a skeptic regarding its long-term prospects.

More Friedman:

While all the presidential candidates were railing about lost manufacturing jobs in Ohio, no one noticed that America’s premier solar company, First Solar, from Toledo, Ohio, was opening its newest factory in the former East Germany — 540 high-paying engineering jobs — because Germany has created a booming solar market and America has not.

Well, here's what Friedman doesn't tell you -- that plant was only opened in Germany because it was given tens of millions of euros to do so. So the jobs weren't really created by the market, rather the EU just took a bunch of taxpayer money -- and jobs that otherwise would have been created elsewhere -- and decided to spend it on this chosen industry. Absent that funding there is no indication the plant otherwise would have been built, and if the free market can't support it on its own then I don't find the case terribly compelling.

Meanwhile, here's a story about a German solar company building an even bigger plant here in New Mexico. And really, when you think about it, doesn't solar power there make a whole lot more sense than in cloudy Germany?