Does a public good argument justify subsidizing private energy production?

Michael Giberson

Yesterday I disputed the analysis by which the Breakthough Institute wanted to claim credit on behalf of the federal government for the shale gas boom; today I dispute their claimed broader implications for federal energy R&D policy.

Late in their op-ed, the Breakthrough folks shift emphasis from a narrow drilling technology story to a broader examination of energy R&D policy:

Giving the federal government credit where it is due takes nothing away from Mitchell, who was determined and tenacious. But the lesson of the shale gas revolution is that we should not be so quick to judge government investments in energy technology. Between 1978 and 2007, the Energy Department spent $24 billion on fossil energy research. Billions more were spent through the Gas Research Institute and non-conventional gas tax credits. Those investments were widely panned as a failure during the ’80s and early ’90s, when gas was plentiful and cheap.

Whatever one thinks about shale gas today — we worry about its environmental consequences — there’s no denying the extraordinary economic return on taxpayer investments.

This last point is interesting, but undeveloped in the article. If one were to calculate the “economic return on taxpayer investments,” would one have to conclude they were extraordinary?

The essay ultimately wants to argue against claims that the Solyndra episode proves governments can’t pick winners and the shale gas boom proves private enterprise can. Defenders of subsidies for solar power projects claim critics are too focused on a single failure, Solyndra, when reasonably critics should be assessing the overall portfolio of projects supported. It is a fair observation, but it may turn against their conclusion. If we are to consider the return on “taxpayer investments” in energy R&D, we’d reasonably need to survey the full portfolio of energy technology concepts funded by the federal government. We’d have to count the winners and losers both, based on the best current understanding, and again (as yesterday) we’d want to work out some idea of what would have happened in the energy technology space without federal government intervention. Further, we wouldn’t just worry about the environmental consequences, we’d have to compute some estimate of the costs and include it in the analysis.

The article goes nowhere close to presenting the relevant case. Near the end of the article they claim federal credit for “nuclear power, natural gas turbines, solar panels, and wind turbines — pretty much every significant energy technology since World War II.” Hmmm, notice they don’t mention the other big selectively-cited-by-critics failure: the Carter-era launch of an$88 billion effort to make oil from coal. Like the Solyndra and Synfuels Corp. complainers, the Breakthrough Institute wants to draw policy implications for an uncertain future based on a selective invocation of history.

It is further a kind of mistake to invoke Solyndra in an essay all about energy R&D policy. Much recent taxpayer-extracted support for energy shows up in the production tax credit, the investment tax credits, the Section 1603 Treasury grants and miscellaneous other subsidies that are directed to help promote the fortunes of companies building renewable power components or producing power via renewable sources. While some of these companies are pursuing technological developments, these subsidies are not tied to research in any substantial way and yield very little in the way of publicly available research results. Try gathering detailed data on production from a wind farm or solar power plant benefiting from millions of dollars in taxpayer-supported subsidies – their lawyers will likely tell you it is commercially-sensitive information and not publicly available. And by the way it isn’t just renewable energy, the lawyers for subsidized production from low-output oil and gas wells will likely say the same thing.

There is a respectable public good argument that can be made in support of subsidizing at least some research. The “extraordinary economic return” that the Breakthrough Institute wants to claim on behalf of government subsidized research into oil and gas drilling technology is this kind of an argument. If Breakthrough wants to drag Solyndra and the full range of energy production subsidies into this argument, an economist looking for a respectable public good argument has got to ask: where is the public good in subsidizing private energy production from projects that hide publicly useful information from public review?