Subsidy Addiction

Deck: 

Government incentives are smothering free enterprise.

Fortnightly Magazine - December 2009

When Sen. Lamar Alexander (R-Tenn.) announced legislation in November 2009 aimed at doubling America’s nuclear power capacity within 20 years, he compared the clean-energy challenge to fighting a war.

“If we were going to war, we wouldn’t mothball our nuclear navy and start subsidizing sailboats,” he told attendees at the American Nuclear Society’s winter meeting. “If addressing climate change and creating low-cost, reliable energy are national imperatives, we shouldn’t stop building nuclear plants and start subsidizing windmills.”

Alexander’s bill, co-sponsored with Sen. Jim Webb (D-Va.), would provide $100 billion in federal loan guarantee capacity for nuclear plants and other similarly capital-intensive projects that produce energy without emitting carbon. It would direct the Department of Energy to conduct what Alexander called “mini-Manhattan Projects” to advance clean-energy technologies.

Of course, Alexander isn’t the first person to equate the energy challenge with a war—and given what’s at stake, the metaphor seems apt. Just a couple of weeks earlier, Navy Vice Admiral Dennis McGinn (retired) told the Senate Environment and Public Works (EPW) committee—of which Alexander is a member—“Climate change has the potential to create more frequent and intense natural and humanitarian disasters due to flooding, droughts, disease, and crop failure. It will magnify existing tensions in critical regions, overwhelm fragile political, economic and social structures, causing them to fracture and fail. The predictable result: much greater frequency and intensity of regional conflict and direct threats to our United States’ interests and national security.”

Indeed, energy policy as a general matter is closely intertwined with foreign policy and defense policy, vis-à-vis our reliance on a global energy trade to fuel the economy and the military itself. However, putting America’s energy industry in the same category as national defense raises a fundamental question. If, as Sen. Alexander and others are suggesting, the clean-energy challenge represents a “national imperative” on the same order as a war, then should the federal government shoulder the burden for America’s clean-energy campaign in the same way it would a military campaign—bearing substantially all the risks and costs, employing private-sector companies and institutions as little more than contractors?

By degrees, that seems to be precisely what’s happening. Alexander’s proposal—similar to several others working their way through Congress—would federalize a host of risks for developing clean-energy technologies and projects. Other legislation proposes creating a federal green bank, termed the “Clean Energy Development Administration,” with $100 billion in loan authority, on top of the $111 billion in clean-energy loan authority Congress already provided DOE in the Energy Policy Act of 2005. And the subsidies don’t stop with appropriations and loans. Introduced in August 2009, the Carbon Storage Stewardship Trust Fund Act (S.1502), would make the federal government responsible for all long-term risks associated with carbon sequestration, similar to its unmet responsibility for managing spent nuclear fuel (see “Nuclear Breach).

Nor do subsidies stop at the Capitol steps. The Federal Energy Regulatory Commission (FERC) already provides special incentive rates for transmission 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 figure out storage and safety issues.”

By raising spent fuel as a sine-qua-non issue, Obama seemed to be staking out an anti-nuclear position. As a result, when American voters put Obama into the White House—and put Democrats solidly in control of Congress—nuclear project sponsors scaled back their hopes for a nuclear renaissance. Duke Energy said it would postpone its Lee Energy project for three years, and Exelon pushed back its plans for two new reactors at Victoria, Texas, by some 20 years. In both cases the companies cited economic factors for their decisions, but undoubtedly the elections damped the industry’s excitement about a nuclear renaissance.

But then, along came climate-change legislation, and the sands shifted again. Today, lawmakers across the political spectrum, including the president, agree that any consensus on climate policy must include incentives for building new reactors—rekindling hopes for a nuclear renaissance to begin sooner rather than later (see “Hope for Change).

Unfortunately, however, policy changes being considered as part of climate legislation won’t improve America’s fundamentally unsustainable nuclear energy policy. They’ll continue preventing free enterprise from optimizing the nuclear fuel cycle, and they’ll dump more taxpayer dollars into the trough of corporate welfare.

So the subsidy addiction continues, unacknowledged and unabated.