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How to solve the energy crisis.

Friday, June 18, 2010
By Dan

My wife had a very interesting observation last night.  I was trying to explain why government mandates don’t work, and she said, “So Democrats are all about sticks, and Republicans are all about carrots.”  It’s a remarkable insight from a foreigner, and probably more true than she knows.

The conversation started over why, as Jon Stewart so eloquently pointed out (start at the 7:00 mark), that every President since before I was born has tried to solve our foreign oil problem, and yet, it keeps getting worse.  The problem, I explained, was that the government cannot mandate ingenuity.

Obama’s plan, as all “green” projects in the past have, is to shove money at the problem and naively Hope™ that bureaucrats and politicians can pick a winner from primitive, undeveloped versions of future technologies.  Of course, these people have their own biases, and often find that the only projects that will work are ones in their own district or ones from which they or their union friends will personally benefit.  Even assuming you can level the playing field, you are asking people with little or no background in physics, engineering or astrology to decide which technology will, after billions of dollars and decades of false starts, be the one that pays off.  This is a lot like asking a 2 month old infant to pick your mutual fund–it may work out, but chances are you’re just pissing money away.

This is a lot like asking an infant to pick your mutual fund–it may work out, but chances are you’re just pissing money away.

The stick in all of this, of course, is that the government will fund this bad idea on the backs of taxpayers and energy consumers.  Just as they did in Spain, Germany and Denmark, “green” initiatives will increase the cost of energy, including low cost existing sources like oil, coal and natural gas.  A cap and trade program is a way to mandate an increase in the cost of existing fuel.  Even Obama admits that his policies would “bankrupt” the coal industry.

So I began to think what a carrot would look like.  By far, the most palatable incentive for free market types is a tax break–but “green” policies already provide tax incentives to “go green.”  In the context of our current energy issues, this is very much like giving a $5 off coupon for brass polish to the captain of the Titanic.  What is needed is an incentive to innovate that cannot be turned down.

Here is my two part proposal:

First, drill, baby, drill.  Access all of our natural resources domestically until that Texas tea cannot be found anywhere under American feet or swimsuits.  Start an immediate program to bring to market every ounce of oil under American control, shale, natural gas, ANWR–everything.  As Krauthammer pointed out last month, we are only drilling in deep water because environmentalists won’t let us drill where it is safe.  This is absurd and self defeating and needs to stop.  Cut the red tape, bar the law suits and start drilling.

Second, for the carrot–call it the federal X-prize: the first company (or individual) who patents and brings to market either of the “new energy technologies” listed below will not have to pay federal taxes for the next 25 years.  The President will, in his infinite wisdom, set out the basic objective criteria for a “new energy technologies” in direct power and power generation.  The criteria must be vague enough to allow for unforeseen solutions, and specific enough to be used to determine success objectively.  My suggestion for the direct power criteria are;

  1. A source of energy (e.g. a battery or a motor) that can power a standard size SUV for 300 miles at highway speed without stopping to refuel.
  2. Weighs less than 25 gallons of gasoline or provides sufficient additional power to compensate.
  3. Is renewable or reusable (a battery or a primary source).
  4. Is non toxic to the environment and its users.
  5. Is marketable (price point without subsidies) to ordinary consumers.

The argument, of course, will be on the definitions for the above.  For power generation, I suggest the following criteria:

  1. A source of energy that can provide energy on a large scale (at least 500 MW) at or below the national average cost per kWh (currently, about $.15 per kWh) with the builder recouping construction costs.
  2. Is renewable or reusable.
  3. Is non toxic to the environment and its users.
  4. Is capable of mass production and use in large and small markets.

So these are the product criteria.  If you bring a product to market, you won’t owe Uncle Sam a dime for the next quarter century.

This would spark a search like none other since the Holy Grail.  Every company in the world, technology companies, aerospace companies, oil companies, credit card companies, would make massive investments to win the brass ring: a 60-70% increase of after tax profits for 25 years.  [For the math inclined, a corporation pays roughly 35% in federal taxes out of a total tax burden of 40-50% for most companies.  If you take off the 35% federal tax, after tax profits (the percentage the company keeps) will go from 50-60% to 85-95%.  85%/50% = 170%; 95%/60% = 158%.]

To give this some real world numbers, Exxon, the largest U.S. company by revenue, pays about $5-7 billion in federal taxes each year.  So at the maximum, this would be about a $175 billion “investment” over 25 years.  Of course, unlike Obama’s $50 billion plan, not a penny of this would be wasted–we would only make the “investment” after the goods were delivered.

For perspective, all of the world governments combined spend $500 billion per year on “green” subsidies that are largely a waste of money.  So for a maximum of 1% of that price, the United States could revolutionize the energy industry and solve our foreign oil problem.

Looking at it a different way, the U.S. imports 9.73 million barrels of oil per day.  That’s about $980 million per day going to stalwart allies like Saudi Arabia, Yemen and Venezuela.  That’s $357 billion of American money exported per year.  I know liberals hate the idea of even one corporation not paying taxes, but we get very little tax revenue from the $357 billion we send over seas.

This idea may seem extreme, but (1) no government subsidy has ever worked to move the needle for oil consumption and (2) it is completely cost free if it works.  Moreover, it is not unprecedented.  Many countries provide low or zero tax agreements to companies in order to spur local economic growth.  Singapore and Dubai, for example, have economic development councils that encourage multinational corporations to build their regional business there.  The company gets a massive tax break and the host country gets higher employment, ancillary economic growth (workers need food, lodging and entertainment) and bragging rights.

Under my plan, companies would be given the incentive to expand their R&D departments, hire more employees and develop technologies that, even if they do not win the prize, will at least be taking us in the right direction.  (We might not have digital thermometers or cordless tools if not for the space program.)  If the research resulting in a dead-end, the cost is borne by the private company, not the taxpayer.  And no technology would have a defacto advantage through bureaucratic endorsement.  The government would be encouraging risk and innovation, rather than underwriting it, or worse, stifling it.

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