To save the planet and the budget, cut energy off the dole

By Jeffrey Leonard
Friday, January 14, 2011

President Obama promised in the fall that a top priority of his legislative program for 2011 would be an energy policy "that helps us grow at the same time as it deals with climate change in a serious way." With global warming deniers now in charge of the House of Representatives, there would seem to be little hope for major legislation on clean energy or climate in this Congress. Even a member of his own party, West Virginia's new senator, Joe Manchin, has boasted of extracting "a deep commitment and personal commitment" from Senate Majority Leader Harry Reid "that cap-and-trade is dead."

But all is not lost. If Obama wants to set us on a path to a sustainable-energy future - and a green one, too - he should propose a very simple solution to the current mess: eliminate all energy subsidies. Yes, all of them - oil, coal, gas, nuclear, ethanol, and wind and solar. Energy subsidies are the sordid legacy of more than 60 years of politics as usual in Washington. It would be better for national security, the balance of payments, the budget deficit and even, yes, the environment if we simply wiped the slate clean and let all energy sources compete for the future.

And with anti-pork Tea Partyers loose in Washington and deficit-cutting in the air, it's not as politically inconceivable as one might think.

As an investor in clean and green energy, I don't make this suggestion lightly. But as environmentalists are realizing, the energy providers of the last century (oil and coal), and a few politically wired new energy interests (such as corn-based ethanol and nuclear), always seem to come out the big winners in the $20 billion annual energy subsidy game. As long as current energy subsidies stay in place, and K Street lobbyists have sway over what interests deserve congressional favoritism, American tax dollars will continue to retard the market forces that are pushing the United States toward energy independence and a greener future.

Major changes in the picture of domestic energy supply make it possible to sweep away decades of accumulated subsidies without seriously threatening the affordability of energy. In the mid-1900s, the dominant fuels and sources of energy in America - for all sectors of the economy - were petroleum and coal. The rationale for subsidizing these fuels was simple: They were the backbone of the economy, and adequate supplies needed to be assured. But this rationale no longer applies.

The real game-changer among several major trends is the discovery in recent years that America is sitting on many decades' worth of exploitable natural gas. Natural gas emits half the carbon dioxide of coal. Other long-term market trends complement the availability of cheaper, abundant natural gas: the growing likelihood in 2011 of more expensive oil; the extended life of existing nuclear facilities, adding thousands of megawatts of unexpected power to American generating capacity; the increasing competitiveness of solar and wind power coupled with state mandates for utilities to adhere to renewable portfolio standards; and the slow but steady electrification of transportation. The U.S. energy market, if left to its own devices, without distortions or subsidies, will provide plentiful and affordable energy while gradually evolving away from oil and coal as the primary fuel sources.

The federal government has a legitimate and vital role to play in dramatically accelerating this evolution. It should invest heavily in long-term research and development to hasten the progress of new commercially viable energy technologies. It should stiffen regulations on coal use so that the fuel's environmental and health costs are borne by industry and reflected in its price. It should make sure that natural gas produced from hydraulic fracturing techniques is environmentally responsible. Eventually, when the political climate is right, it should impose some form of tariff on carbon and other greenhouse-gas emissions to ensure that the market internalizes the global "costs" of threats to the planet's life-giving atmosphere.

What government shouldn't be doing is subsidizing and protecting incumbent energy producers. That will only slow the transformation to a cleaner-energy future.

Is eliminating all energy subsidies politically possible? There have always been libertarian elements in the Republican Party that have railed against "corporate welfare," including the massive tax expenditures that favor oil production. Now they are joined by many Tea Party sympathizers who, appalled by the bailouts of the big banks and automakers, instinctively share the same hostility toward subsidies of big business. Though progressives are inclined to forget, Sarah Palin imposed a steep tax on oil companies' windfall profits while serving as Alaska's governor. Meanwhile, after years of going along with big ethanol subsidies in return for minuscule investments in wind, solar and other alternative energy sources, many liberals and environmentalists, including Al Gore, have decided that the compromise isn't worth it.

So we find ourselves in a political moment when for the first time it is possible to imagine an alliance of GOP libertarians, disaffected environmentalists and budget hawks coming together for a grand deal that would sweep away 60 years of bad energy policy. In the spirit of bipartisanship, Obama should seize the opportunity.

Jeffrey Leonard is a founder and chief executive of Global Environment Fund, a private equity investment firm. A longer version of this article appears in the January/February issue of Washington Monthly.

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