An industry that relies on government finds its market falters when subsidies do, too.
An old Soviet joke serves as a reminder of the potential distorting hand of government in solving problems like energy: One Russian says to another, "Did you hear the whole world is now communist except New Zealand?" The other asks, "Why not New Zealand?" The answer: "We need place to determine prices."
Just this week, Barack Obama promised $150 billion for renewable energy. John McCain suggested a $330 million prize for a breakthrough in battery technology. These are examples of good government intentions to "create demand" for new energy sources by throwing money and regulations at research and markets. But at some point such carrots and sticks also risk creating price distortions that cloud judgments about the real value of intended solutions.
For decades, it was assumed nuclear energy would be an inexpensive energy source. But in the 1970s, a physicist named Amory Lovins ran the numbers on how much taxpayers subsidize the industry – and would pay for the life-cycle burden of nuclear – setting the industry back on its heels.
For oil and coal, too, the real cost of federal support for these industries is still being tallied – not only in tax breaks but in adjustments to global warming and the expensive process of weaning people off these polluting and now-expensive fuels.
An essential part of the energy-policy debate must include the danger of nurturing new sources but then warping the invisible hand of the market's corrective forces as an industry grows. A good example is solar power, which is still a niche and heavily subsidized piece of the energy pie. In recent weeks, news of fickle government support for this clean energy source has rocked the industry.