Sunday, August 3, 2008

Obama's Energy Plan (Part 1): Venture Socialism?

I want to like Obama. I really do. He's young, dynamic, eloquent. Many of my best friends and nicest relatives support him. He sounds like he might be a "New Democrat," looking for innovative, market-oriented, small government solutions.

But he is just not.

Take a look at his energy plan. The most striking aspect of the Obama plan is what it does NOT include: not a single kind word for all the various existing tax incentives that have spurred along the development of hybrid cars, solar power and other clean technologies. These incentives have been hugely successful in convincing millions of Americans to buy cleaner, more efficient hybrids, or put solar panels up on their roofs. Expanding these successful programs is key to moving America over to green energy. But not a single mention of these in the Obama plan. No commitment to either expanding or even maintaining these policies.

That omission should be profoundly disturbing to any serious environmentalist.

Anyone interested in keeping government lean and efficient should also be disturbed, because these tax incentives are the one extremely effective solution that does not require new taxes, spending or regulation, that does not grow the government.

By contrast, McCain's energy plan is way ahead of Obama's in his support for a wide array of existing and new tax incentives for green energy. We will take a look at that later -- McCain does not go as far as he should in supporting complete tax freedom for green energy -- but for now, back to Obama.

Obama should be applauded for the few incentives he does propose: incentives to encourage cellulosic ethanol, E85 pumps at gas stations, and retooling of auto plants to produce more fuel efficient cars. But those three narrow incentives are nowhere near enough... and smack of government bureaucrats trying to pick winners and losers in the green energy universe for political reasons. For instance, ethanol may not be the best solution out there for a transportation fuel, compared to say, plug-in natural gas hybrids. Ethanol does not reduce carbon emissions or dependence on foreign oil, while natural gas vehicles do both, dramatically. But ethanol has a very powerful farm lobby behind it. Green energy development should not be driven by such politics. Green energy tax cuts should be broad based, across the board, letting the market pick the winners among the most cost effective, carbon neutral/negative technologies available.

So if Obama does not support existing and successful green energy tax incentives, what does he support? Unfortunately, most of his solutions are typical Big Government initiatives, based on increasing taxes, spending and regulation. I will come back to the new taxes and regulations in my next post. But the worst aspect of Obama's plan is the new spending, which Mr. Obama calls "investment."

Obama proposes $150 billion investment over ten years for a variety of green energy technologies, plus an additional $50 billion over five years for a "Clean Technologies Venture Capital Fund." In addition, he plans to double federal energy R&D budgets, and proposes unspecific amounts for investment in "clean coal," clean tech worker re-training, and clean tech manufacturing conversion.

So you may ask, what is wrong with all that? After all, this blog proposes that we need massively more green energy investment. Well the research part of it is good, very good. We need good solid research on these technologies, both private and public. No problem there. The problem is with the various investment schemes.

Obama is proposing to launch the very first federally-funded venture capital firm ever. Sounds exciting, sure. The problem is, when you do that, it is no longer venture capitalism. It is venture socialism. And that -- state investment in and ownership of key industries (i.e. socialism) -- carries a host of pitfalls that true (i.e. private) venture capitalism avoids.

1) It fosters corruption, and can easily turn into a protection/payola racket. We absolutely do not want to train our green CEO to come clamoring to politicians for their personal access to the public teat. Politicians should never be able to wield that kind of power -- it is incredibly corrupting. Companies end up being given investments for political payback reasons -- because they gave the right campaign contributions and other perks -- not because they are the most efficient green energy company. Bureaucrats and politicians start picking winners and losers based on the size of their lobby, not the competitiveness of their technology. All such investment decisions should be strictly private, and NEVER EVER put into the hands of politicos.

While Obama and the people around him may have the best of intentions, one has to wonder how many of his contributors are wealthy green entrepreneurs who have done the math and figured that, for their $25,000 contribution, they get a favored spot in the line for the $25 billion a year that B.O. plans to "invest." If so, it stinks. We need to close the doors on all payola schemes, not create new ones.

2) State funding becomes a crutch for inefficient businesses that never bother to learn how to be independent because they have political connections. Many state owned businesses, like Amtrak, lose money continuously, and become dependent on state financing to survive. The best way to avoid that fiasco with green energy is to never let such companies become dependent on state financing in the first place. Making green energy tax free avoids that pitfall, because, even with such tax advantage, such companies still must be profitable to survive and keep their (private) investors happy. State funding allows favored companies to operate indefinitely at a loss; tax exemption does not.

Lastly, Obama's state-funded investment schemes are simply not enough to do the job that needs to be done. We need way, WAY more new investment than $25 billion a year, and the only way we can get the investment numbers we need is to massively motivate private investors and consumers.

Look at the numbers: Last year, world investment in renewable energy technologies was $148 billion. If we want to reach the point where clean, renewable energy accounts for 50% to 100% of the US and global market in 10 - 20 years, we need to raise global green energy investment by about 500%, from the present $150 billion annually, to $750 billion. $25 billion is really peanuts . You are only going to get the kind of numbers we need through the free market, by radically changing the economic picture, by making the entire green energy sector tax exempt on account of the good it does our nation and the planet.

If the US does that, we will certainly hit our annual $750 billion globally in the next president's first term, and most of it will be invested through the tax-advantaged US markets, making the US the world leader in in green energy, supplying both US and international needs. Obama's plan won't get us there, can't deliver those numbers, and will cause our green energy sector to fall behind Europe, China, South Asia and Latin America.

The crying shame of all this is that Obama really should be backing green energy tax cuts, and NOT these quasi-socialist state investment schemes. Not only because the former policy will actually jump start a green energy revolution and the later will not. But also, because, doing so would certainly burnish his image as a "New Democrat" favoring innovative small government, free market solutions. Instead, it seems he is being ill-served by his advisors, who would rather have a scheme that allows the future Obama administration to write multi-million dollar checks to outstandingly rich green entrepreneurs (and potential donors) who may give a few thousand to the campaign right now.

Sadly, these advisors are leaving Obama open to some very serious criticism, and give McCain the opportunity to put himself forward as the truly green candidate. However, it is not too late for either Obama or McCain to step forward and seize the initiative on this issue.

To be continued soon re Obama's energy taxes and regulations, and then the McCain plan. T. Boone Pickens plan next week. Stay tuned.


Anonymous said...

Beans comments:
There is a lot to be said for a results-oriented approach to supporting alternative and environmentally friendly energy. This would depend on objective definitions of what's "green," with precautions to prevent spurious claims. While congress debates the definitions, intense pressure will be brought to bear by energy producers and other groups. It would be best to leave such decisions to an organization like the National Academy of Sciences.

Anonymous said...

Beans writes:
While I have reservations about the specifics of this blogger's proposal, I wholeheartedly agree with the notion of using tax incentives to support the use of alternative and environmentally friendly energy. And our energy policy should rely as much as is wise or practicable on the creativity and resourcefulness of private enterprise to meet what Barack Obama has termed "the great moral challenge of our times."
I've also heard it pointed out that this is not just something we have to do to deal with climate change and avoid military interventions, it's also something that will improve our lives and America's position in the world.

Anonymous said...

This plan isn't "results oriented". It's "do whatever you want and get a tax break" oriented. It's this kind of public policy that leads to these "results":

Rod Randolph Richardson said...

Anonymous: Here, let me help you to make my point. Your URL was a bit long, so here is a tinyurl link to the same article:

The article is about how the Ports of Los Angeles and Los Angeles have failed to sign up a single trucker for their program which requires truck fleets to replace most of their fleets with cleaner trucks, some running on alternative fuels like natural gas.

But, my dear Anon, that is NOT a tax break program, it is a MANDATE. The ports are trying to force truckers to do something green, but nobody likes to be forced to do anything. Nobody likes to lose their freedom. So they fight it on principle. That is why it is not working. Mandates nearly ALWAYS spark fierce political opposition.

Tax cuts work because nearly everybody likes a tax cut. And Beans is right: the tax cuts are results oriented. You don't get a tax cut unless you are genuinely producing clean energy or qualified green technology, like, say, a plug-in natural gas hybrid vehicles. You can't just do anything to get the tax breaks I am proposing. That is ridiculous, and you have no serious basis for making that claim.

Anonymous said...

Obviously by definition there is resistance from market forces against mandates, otherwise it wouldn't be necessary to mandate them! In this case, the Teamsters are opposed to the program because they want the program to be open to only fleets where they have membership. Owners are upset about having to open their books to some extent. All this needs to be carefully thought through and reasonable decisions made by smart people. To take the intended "results" of this example, how long do you think it will take for tax incentives to get 100% of the trucks going into the Port of LA to be clean trucks? Never, that's how long! If there are benefits to tax incentives, by all means, they need to be reaped, but how are you (or other smart people) going to evaluate that relative to the cost? If the system is designed not to be evaluated it is doomed to have unintended consequences.

Anonymous said...

btw, here's the link I meant to send:

Rod Randolph Richardson said...

Well, Mr. Anonymous, did you ever buy anything (like a hybrid or solar panels) partly because you were offered a tax incentive or other rebate? If it worked for you, as it has worked for millions of others, then why wouldn't it work for the California truckers?

Tax incentives for green energy tech is an established, wildly successful and very popular policy. Sure it should be evaluated. But clearly, the bigger the incentive, the faster the clean tech will be adopted. If clean energy trucks are sales and income tax free, if the income clean energy trucks produce is tax free until the cost of the truck is recouped, that would be a substantial incentive, and you would see a massive shift in the national truck fleet in a few years.