Hydrogen Fuel Cell Subsidies

In Tuesday’s State of the Union Address, President Bush proposed increasing federal subsidies to hydrogen fuel cell research. His administration had made similar recommendations in its national energy policy proposal in May 2001, to supplement the existing energy technology research subsidies.

Such technology subsidies, particularly to get renewable energy technologies to the point where they are commercially viable, overlook an important point: the fact that these technologies are not commercially viable may mean that they are not economically efficient. If entrepreneurs and investors do not think that these forward-looking investments make economic sense, then for the government to override this decision with subsidies is almost certain to be wasteful and more costly than need be.

My colleague Adrian Moore and I analyzed the administration’s national energy policy proposals in a Congressional Advisory titled National Energy Policy: In Need of a More Dynamic Approach for the Institute for Research on the Economics of Taxation.

Many of the Bush proposals and methods, including their flaws, were reflected in the energy bills passed by the House and the Senate in the last Congress. These energy bills are likely to be resurrected in some form in the new Congress. Both versions of the bill included pervasive subsidies, government management of economic activity, and inadequate attention to market processes. If energy bill proposals in this Congress retain these flaws, the best possible energy bill may be no bill at all.

While the Bush approach appears innovative and less prescriptive than traditional “command and control” energy and environment regulation, it retains too much government manipulation of markets, and does not recognize the range of institutional approaches available to address energy challenges. A more dynamic approach to energy policy would focus on the removal of regulatory and institutional disincentives to competition and entrepreneurial discovery of opportunities and focus government policy on the margins, possibly to aid the transition to competitive markets.