December 17, 2010
The prospects for solar and wind companies have declined significantly in the last few years. Those who have been unfortunate enough to invest in solar and wind enterprises have, on the whole, experienced mediocre returns even as the overall market has risen 50% since its low of March 2009. Over the last twelve months, one popular global alternative energy index fund has declined in price from $25 to $20.50. Over the past two years, it has produced a return of zero.
There are several reasons for the declining prospects of alternative energy companies. Competition has become fierce, supply has increased, and prices for finished products have fallen. At the same time, governments at home and abroad have begun to withdraw the generous subsidies that once spurred expansion. Now companies are left with overcapacity that rivals the current supply of unsold homes -- another product of government interference in markets.
No one can predict the long-term future for alternative energy, or for any other enterprise. Technological improvements will create winners and losers, and they may boost entire industries. It is quite possible that solar and wind power will play an important role in meeting America's future energy needs. But if they do, it should be without government subsidies and mandates.
If alternative energy is inherently feasible, it stands to reason that it should be able prosper on its own. If not, no amount of government support will ensure its long-term survival. In that case, government funding thrown at wind, solar, and biofuels is simply one more case of taxpayer money squandered on unproductive enterprises.
So far, the return on government "investment," as it is called, has not been very good. Yet the prospects for ending government involvement are not very promising, either. On November 2, Californians voted to defeat Proposition 23, a bill that would have suspended the state's Global Warming Act of 2006. Apparently, West Coast voters have not yet caught on to the fact that global warming is a hoax. Perhaps this is because they have not experienced the severe cold that has gripped the eastern U.S. during the last few winters.
Unfortunately, government intrusion in the energy sector has continued to distort the energy market, and it has done so in ways similar to that of government involvement of the housing market in the early 2000s. Incentives for solar, wind, and biodiesel created a short-term boom that appears not to be sustainable in the absence of continued subsidies. Once subsidies are reduced or withdrawn, the harmful effects of government policies become apparent.
Not only has government intrusion distorted the energy market, but it has done so in ways that may well be unconstitutional. Justice Henry Hudson has ruled that government cannot force citizens to purchase health insurance against their will. And in his ruling, he implied that it would be unconstitutional for government to mandate the purchase of any product, not just health care insurance. Yet government at the federal and state levels currently mandates that consumers must purchase alternative energy as a percentage of electricity generation if they wish to have access to electricity, and it forces them in effect to purchase ethanol as a gasoline additive if they wish to drive. Electricity and transportation are essential goods in the modern world. They are not discretionary goods like pony rides or funnel cake. So how can alternative energy mandates be constitutional if they force the public to purchase products that they do not wish to buy?
Congress is attempting to address the current weakness in the alternative energy industry by attaching renewals of subsidies to the tax bill now under review. The Senate bill, expected to pass on Wednesday, contains nearly $5 billion for ethanol and additional funds for wind, solar, and biofuels. The ethanol subsidies, which seventeen senators have called "fiscally indefensible," are on top of stiff tariff (also extended in the legislation) limiting importation of more efficient ethanol produced from sugarcane. And these tariffs are in addition to existing mandates for ethanol use and EPA proposals to increase the amount of ethanol added to gasoline.
Beyond this, the tax bill includes further subsidies for hybrid vehicle development, mass transit, and the promotion of energy-efficient appliances. Since when did the Bush tax cuts have anything to do with government manipulation of the energy markets?
The solution to America's energy needs is not further stimulus or mandating. It is to get government out of the energy sector altogether. If stimulus funding remains in the bill, the result, inevitably, will be further distortion of the market. Consumers will pay more for fuel and electricity than they otherwise would, and they will pay once again in the form of future tax increases to fund subsidies.
Free markets do an excellent job of adjusting supply and demand for energy, as for all goods and services. In a free market, prices will fluctuate, sometimes significantly, but financial crises such as that produced by government intrusion in the housing market will turn out to be less severe.
The solution to meeting America's energy demands is so simple that anyone other than a politician could grasp it. Stop subsidizing industries altogether. Stop picking winners and losers based on ideological predilections. Stop mandating the use of alternative energy. Eliminate excessive regulation of fossil fuels. Then stand back and allow the free market to decide what works and what doesn't.
Jeffrey Folks is author of many books and articles on American culture and politics.