Tax Rascal

New Energy Bill is More of the Same

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New Energy Bill is More of the Same

Congress is debating a whole slew of new energy proposals, including adjusting or abandoning ANWR and coastal drilling restrictions, raising emissions standards, and adopting a new tax-and-credit scheme to encourage a shift from fossil fuels to alternative energy.

It’s all decent, well-meaning stuff, but the problem with these tax incentives is that they’re just not as dramatic as the ‘tax’ Americans pay when oil prices rise. This tax creates a huge incentive to find alternative energy sources, with or without a subsidy — and as long as no viable alternative is in sight, the prospect of using up oil reserves pushes prices that much higher.

It’s tricky to analyze a balanced situation like this, particularly when turmoil in the financial markets has had an effect on prices. But to anyone who dreams of building an electric car, an ultra-efficient solar panel, or a cost-effective geothermal system, every 1% increase in oil prices is a 1% larger market to sell to (and a market that’s that much more angry at oil companies, and that much more willing to consider alternatives). The very goods Congress is taxing function as a ‘tax’ on consumers and a ‘subsidy’ for anyone with a better plan.

With oil down to $92 per barrel (from $140 just a few weeks ago), one might argue that we need incentives to push prices back up. After all, we didn’t solve the energy crisis at $140 per barrel, so how will we do it with prices one third lower?

The answer is lead time: as oil’s rise in price began to feel less like an aberration and more like a dreadful certainty, the idea of investing in alternative energy startups seemed like a better and better idea. Unlike an oil investment, for which reserves are at least sometimes measurable, an alternative energy company with an unproven technique might spend years on research before investors know whether they backed a winner or a dud. For them, a change in the tax code now can’t affect their business unless it makes new investments as attractive as they were when oil reached $140 per barrel. Even if that’s a reasonable policy, it’s not politically viable.

So even if there aren’t new alternative energy companies being formed now, the last few years give us a healthy backlog of unknown firms striving to balance America’s energy consumption with a new and better source. For them, the best thing we can offer isn’t tax breaks or subsidies — it’s consistency. If they know that the biggest energy companies will be hit with special taxes whenever profits go up, they won’t pursue massive, paradigm-changing solutions. Instead, they’ll go for safe, incremental changes; moving towards self sufficiency half a cent per kilowatt-hour at a time.

It’s possible to argue that an energy tax bill is necessary for alternatives to flourish, or essential to save the American consumer. But tax incentives simply don’t wield the same power as a high price at the pump.

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