Why Ethanol and Natural Gas Don’t Deserve Subsidies

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A grain transport truck is loaded up with corn

Two of the energy subsidy debates in Washington focus on tax credits for the ethanol and natural gas industries. The growing opposition to the $6 billion ethanol blender’s tax credit became quite clear when the Senate voted 73–27 to remove the subsidy—even though the credit is set to expire at the end of the year. When it comes to natural gas, bipartisan support has been cast to create, expand, or extend preferential tax treatment to subsidize the production, use, and purchase of natural gas vehicles (NGVs), although several Members of Congress have now withdrawn their names as co-sponsors of the bill.

To see why neither ethanol nor natural gas deserves subsidies, look no further than Representative John Sullivan’s (R–OK) answer when asked to differentiate between the ethanol tax credit and the natural gas vehicle tax credits. He said, “The ethanol industry won’t survive without that. The natural gas industry will survive.”

If that’s the case, then what’s the point of subsidizing ethanol or natural gas? If an energy source is not economically competitive, then the government should not artificially prop up these technologies and energy sources to create a market that wouldn’t exist without the subsidy. And if producers do have an economically viable idea, then they shouldn’t need the handouts from Washington in the first place. That is, if the natural gas industry will survive as Representative Sullivan says it will, then it shouldn’t need the tax credits.

The argument will then inevitably turn to helping producers push through the investment “valley of death.” Investment obstacles exist when introducing new technologies to the marketplace, so the natural gas industry could argue that it needs these tax credits to get off the ground and kick-start the transition from gas-powered vehicles to ones that run on natural gas. But if natural gas vehicles are truly a good economic idea, vehicle manufacturers will make them, and consumers will switch without market manipulation from Washington.

Will it happen as fast as politicians going to bat for their special interests would like? If it’s a good enough idea and the price is right for consumers, then natural gas vehicles and the supporting infrastructure will expand at rapid rates, just as cell phones and cell phone towers have. Price signals and an economic system that promotes risk taking and entrepreneurial activity will do much more for consumers than the government picking winners and losers.

Energy tax expenditures have been an increasingly attractive way for the government to award preferential treatment to certain industries. The number of energy tax programs expanded from 11 at the end of the 1990s to 38 listed in President George W. Bush’s 2007 budget. These special tax credits create the perception that technologies or energy sources are more competitive than they actually are by artificially reducing their price for producers. Instead of increasing competition, this market distortion gives one technology an unfair price advantage over another. We should be dialing back these industry-specific tax credits, not expanding them.

Source material can be found at this site.

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