Government Should Stay Out of Business, Unless They Don't Want To

October 02, 2009

In an Oil & Gas Journal article written last month:

US President Barack Obama's administration is studying whether to propose repeals of tax breaks for other industries besides oil and gas, a US Department of the Treasury official told a US Senate subcommittee on Sept. 10.

The examination reflects an administration policy that taxes should be neutral across all businesses unless exceptions are in the national interest, Krueger said.

In someone's interest for sure.  While the government dumps oil and gas tax breaks, they should refrain from replacing them with specific breaks for the renewable energy sector.  The government has no idea what the best (cleanest, cheapest, etc.) way to get energy is.  That's for the greedy, creative, and consumer to figure out.  The government has scientists and economists and certainly their share of the greedy, but they aren't the best at innovating or judging what consumers want.  If controlling carbon is in the national interest—a complicated issue—then the best thing to do is raise the price of carbon.  Credits encourage rent seeking and can have high administrative costs.  Even if tax credits blanket the entire renewable energy industry, rather than targeting just one form of power like solar, it dissuades the use of oil in a cleaner way.  It's the amount of carbon emissions that is the goal, not the amount of fossil fuel used.    

Tax provisions that encourage investment in a specific industry may be justified in cases where they address a positive externality associated with either production or consumption of certain goods. Private market decisions can be inefficient when market prices do not reflect the full social costs," the Treasury official continued.

How the government quantifies the positive externality of investment in an industry is at best complicated and at worst a guess.  Of course this problem doesn't go away when determining how much to tax carbon.  But at least there isn't room for this sort of welfare noted in the Wall Street Journal today:

Under the House's climate-change bill, a few utilities-primarily those that have made big bets in renewable and nuclear energy-are poised to clean up once Congress hands them carbon emission credits. The bill sets aside 35% of the free credits for utilities. Exelon and other "renewable" utilities will get a huge piece of that pie.

An internal memo produced by Bernstein Research in June described how Mr. Rowe met with investors to rejoice that the House legislation will allow Exelon to rake in additional revenue-by some estimates, up to $1.5 billion a year.

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