Saturday, December 26, 2009

The Alternative Energy Conundrum

The U.S. Department of Energy is in the process of transferring $32 billion of your tax dollars to various new and promising technologies in Alternative Energy. It is estimated that 40% of the nation's energy comes from petroleum, 23% from coal, and 23% from natural gas. Nuclear power supplies roughly 8.4% and renewable energy supplies less than 7%, mostly from hydroelectric dams. This means that your tax dollars are being directed into a tiny sector of Alternative Energy research and development; predominately solar and wind power.

What are the issues in this arbitrary focus?

First and foremost this puts the federal government in the position of picking winners and losers in the research, development and commercialization of Alternative Energy; a role that it is uniquely not qualified to perform.

Secondly force-feeding this much capital into such a tiny energy sector distorts the market, which attracts fraud, abuse, political decision-making and unqualified recipients.

Finally it is an inefficient way to promote energy efficiencies, as many of the companies receiving this money will ultimately fail, leaving just a few winners. Taxpayer funds expended on the losers will not be recovered, as much of it is in the form of grants and guaranteed federal loans.

What are rational methods of encouraging the transition to Alternative Energies?

Our congress has arbitrarily raised the ethanol content requirement for gasoline. Unfortunately the ethanol industry cannot meet the arbitrary targets set. Far more efficient would be to simply tax gasoline at a higher level, sufficient to trigger the profitability hurdle rates of more developed Alternative Energy technologies, including ethanol, other biofuels, electric cars and gas-driven systems.

Our congress is vested in responding to political power centers that contribute back to them a sliver of the very funds it bestows. At the same time they seek to keep the energy transition pain away from the voters who elect them. This is the recipe that distorts our energy decisions.

Today the U.S. uses roughly 21 million barrels of oil a day, of which roughly 15 million barrels is imported. Depending upon the cost per barrel this represents over $600 billion in import expenditures each year. As an example, a simple VAT tax of $10.00 per barrel would raise over $70 billion each and every year for transition costs to Alternative Energy. Such a tax would be market neutral and could be directed to reward the winners in new technologies with legislation that eases the way to new energy distribution systems for industry and the consumer.

Richard Wottrich, Blog Editor

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