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Subsidy Addiction

Government incentives are smothering free enterprise.

Fortnightly Magazine - December 2009

investments, and is considering similar treatment for conservation-related investments ( see “ Negawatt Pricing ). And across the country, state regulators are considering utility requests for special rates for spending on conservation, efficiency and renewables, as well as cost-recovery of construction work in progress for major investments of almost all types.

On its face, each of these subsidies might be perfectly justifiable; their proponents can argue convincingly that they benefit society. But our reliance on subsidies has become an addiction, and we don’t seem to realize we’re hooked. Hardly any energy investment happens anymore without some type of federal or state subsidy. Taxpayers are expected to bear a growing share of business risks, and nobody can calculate the true all-in cost of any energy resource. And while politicians seem to treat “subsidy” as a four-letter word, policy debates seldom question the need for subsidies as a general matter. Instead, they focus on reviling one subsidy as wasteful pork-barrel spending, while upholding another as a vital investment in the future.

As any addict knows, the first step to recovery is acknowledging the problem. The problem is this: by taking business risks away from the private sector and putting them onto the shoulders of taxpayers, America’s subsidy addiction is destroying the very advantage that has made us the world’s most efficient and productive economy.

Shifting Sands

Subsidy addiction isn’t a uniquely Democratic or Republican problem, and it doesn’t discriminate among resource options or company types. A given corporate CEO might dislike subsidies as a matter of principle, but he or she can’t, in good fiduciary conscience, turn down a subsidy if doing so hurts the company’s profits compared to others in the sector. History has shown, however, that subsidies are a decidedly mixed blessing. Invariably they become detrimental to their recipients and the economy in general.

The renewable energy business understands this phenomenon all too well. On-again, off-again tax credits have trapped renewable developers in a vicious cycle of inefficiency. On the one hand, subsidies remove free-market incentives to squeeze out costs and push productivity to the limits. On the other hand, shifting policy priorities leave the industry perpetually uncertain about its subsidy-dependent future, and therefore unable to plan and invest appropriately to meet market demand.

Other types of energy are caught in similar deals with the subsidy devil. Nuclear energy’s fuel-cycle problem, for example, descends directly from America’s decision nearly 30 years ago, in the Nuclear Waste Policy Act of 1982, to federalize responsibility for managing nuclear spent fuel. When that happened, innovation and free enterprise became powerless to address the technical challenge of managing spent fuel. Meanwhile, the election cycle prevents lawmakers from mustering the sustained political will necessary to effect a sustainable solution. Consequently, nuclear spent fuel continues piling up at generating sites, leaving the industry foundering in the shifting sands of politics.

For instance, in May 2008, then-Senator Barack Obama told Tim Russert on Meet the Press , “We have to look at nuclear, and figure out … can we store the material properly? We’re going to have to