A reader has emailed me regarding my post last Tuesday on a recent Time magazine article on natural gas policy. He advocates a policy shift from regulation to taxation:

Well, Dr. Kiesling, if you accept the view of Time’s writers that energy policy needs to consist primarily of regulation and subsidy, wouldn’t you expect the process of making it to be incredibly politicized?

Like most commentators on this subject, Time’s writers look right past the underlying reason we use so much energy: because it is cheap. Government policy is designed before anything else to make sure it stays cheap. When for reasons beyond the immediate control of government, business or consumers any form of energy becomes less cheap the adjustment is painful. Trying to avoid the pain by precisely aligning regulatory policy and subsidies for promising technologies is like trying to run on your hands — it can be done, but not very well or for very long.

To set energy policy on its feet, we need to deal with the underlying issue. This means less use of regulation and subsidy, and more use of taxation. Raising taxes on energy use when energy is cheap will reduce economic growth in the short term. It will also make violent disruptions in the economy less likely; businesses and consumers not accustomed to using, and wasting, vast amounts of cheap energy will adjust more easily to changes in market prices.

This approach is obviously out of step with the “money for nothing, your chicks for free” fiscal policy of the current occupant of the White House, though it is no more politically unrealistic than what Time’s writers propose. The one advantage of relying on taxation to reduce energy usage is that we know it will work.

I wholeheartedly agree that our current energy policy fails to deal with the underlying fundamental issues arising from a history of cheap energy. Some of that cheapness has arisen from plentiful supply relative to demand, and some has arisen from outright subsidies and manipulation of prices to make energy appear cheap to politically powerful constituencies.

I’m not sure that I am willing to go the next step and advocate taxation as an alternative to regulation, because I don’t think we need to make energy artificially expensive (and I do think that removing market barriers to transparent pricing will incorporate lots of information that usually gets used as the argument for taxation to reduce negative externalities). I would first recommend that we make the subsidies and the manipulations transparent, eliminate them, and see how consumers respond to seeing the real value of the energy they consume. The lack of price and cost transparency is the most blatantly problematic in electricity, but it also exists in other energy markets.