The moral stature and effectiveness of free-market capitalism depends on its structure of rules that apply to large firms as well as small, to the politically connected as well as those lacking political pull. In contrast, the treatment of “green” and “renewable” energy constitutes the essence of crony capitalism, with its unelected czars and its unequal treatment of those industries or firms that are politically favored and those that are not.
A case in point is the issue of “subsidies” for energy producers. President Obama recently denounced oil companies for receiving such subsidies when those same companies are “making record profits and [U.S. consumers are] paying near-record prices at the pump.” Senate Democrats subsequently held hearings and introduced legislation to repeal subsidies for the largest U.S. oil companies. The legislation failed, but the hearings exhibited all the trappings of an inquisition.
The three most prevalent forms of energy subsidies are direct payments to energy producers, favorable tax treatment of depreciation and credits, and research-and-development assistance. Oil companies primarily benefit from the second category: tax regulations that allow them to deduct development costs immediately rather than amortizing them over a longer period. This has always been understood to be necessary in order to provide the capital and cash flow in an industry where the risks are huge and returns are realized, if at all, over many years or even decades.
Of course, if the president and Senate Democrats were truly concerned about wasting taxpayer money on uneconomical subsidies, they would be targeting government support for renewable and green programs, e.g., ethanol and wind and solar power.
For instance, a 2008 report by the Department of Energy’s Energy Information Administration (EIA) looked at the subsidy per megawatt hour for electricity generation and the subsidy per million British thermal units (BTUs) for nonelectrical use. Total subsidies for electricity generation amounted to $6.7 billion in 2007. While the average subsidy per megawatt hour for all sources was $1.65, the subsidy for wind and solar was about $24 per megawatt hour. On the non-electricity generating side, ethanol received a subsidy of $5.72 per million BTUs.
The fact is that renewables cannot compete in the marketplace with more efficient sources of energy like petroleum unless the producers of renewables get money from the government to artificially lower the price of their product. Despite these subsidies, renewables still account for just a small fraction of total energy use. In other words, a dollar spent on fossil fuel provides much more energy than a dollar spent on “clean” energy sources.
As bad as subsidies are, they are not as damaging as mandates - both federal and state - that require the use of renewables. For instance, the Democrat-controlled California State Legislature passed a bill earlier this year mandating that the state’s utilities purchase 33 percent of their electricity from renewables by 2020, up significantly from the already high current requirement of 20 percent. The effect of the measure, subsequently signed into law by Gov. Jerry Brown, is to impose a severe energy tax on California businesses, private consumers and the state government itself, already awash in red ink.
A California Air Resources Board study finds that as a result of this law, average retail electricity rates will increase substantially for customers of all California utilities - by as much as 74 percent for some - by 2020, when the legislated mandate goes into effect. With record-level unemployment and increasing numbers of businesses fleeing the state’s high costs and regulatory burdens, this foolish mandate merely makes things worse. Unfortunately for other states, California is usually is a harbinger of things to come.
Crony capitalism enriches the powerful, politically connected few at the expense of U.S. consumers who have to subsidize them while seeing their own economic preferences regulated or driven out of the market. Green energy is crony capitalism in action.
Mackubin Thomas Owens is professor of national security affairs at the Naval War College and editor of Orbis, journal of the Foreign Policy Research Institute.