Wasted Energy

Does anyone remember the Synthetic Fuels Corporation? Established in 1980, the last year of the Carter Administration, it was charged with dramatically increasing the amount of energy that Americans got from sources other than traditional imported fossil fuel. Billions of wasted dollars later, President Reagan killed it in 1984. The National Academy of Sciences told us why in 1992 (hat tip: Heritage Foundation):

Energy programs of that time were hindered by excessive political interference. Political influence on funding allocation decisions, selection of R&D projects, or the direction and conduct of scientific research is counterproductive and damaging to the success of federal technology efforts. Fuel-cell projects under the SFC, for example, were allotted to each of the 50 states, regardless of economic viability. Implementation of energy performance standards for buildings was held back by complex regulations. The clean coal technology project was hampered by congressional involvement in technical design and operational management. Although programs such as the tertiary oil recovery initiative and the R&D program in photovoltaic cells attained some success, these technologies were not widely adopted."

Alas, President Bush (and, in all likelihood, the new Congress) have forgotten these lessons, if they ever learned them. In a State of the Union address last night all too laden with the imperative voice, here were some of the urgencies he saw:

It is in our vital interest to diversify America's energy supply, and the way forward is through technology. We must continue changing the way America generates electric power by even greater use of clean coal technology, solar and wind energy, and clean, safe nuclear power. We need to press on with battery research for plug-in and hybrid vehicles, and expand the use of clean diesel vehicles and biodiesel fuel. We must continue investing in new methods of producing ethanol, using everything from wood chips, to grasses, to agricultural wastes.
…
Tonight, I ask Congress to join me in pursuing a great goal. Let us build on the work we've done and reduce gasoline usage in the United States by 20 percent in the next 10 years. When we do that, we will have cut our total imports by the equivalent of three-quarters of all the oil we now import from the Middle East.
To reach this goal, we must increase the supply of alternative fuels, by setting a mandatory fuels standard to require 35 billion gallons of renewable and alternative fuels in 2017. And that is nearly five times the current target. At the same time, we need to reform and modernize fuel economy standards for cars the way we did for light trucks, and conserve up to eight and a half billion more gallons of gasoline by 2017. Achieving these ambitious goals will dramatically reduce our dependence on foreign oil, but it’s not going to eliminate it. And so as we continue to diversify our fuel supply, we must step up domestic oil production in environmentally sensitive ways.

Let us stipulate that our heavy use of imported oil is a problem. (Whether we should is another question, but let's play along.) What our government is (predictably) proposing is that we embark on a particular path toward addressing this market failure, one negotiated by politicians. One might suppose that the system will be designed to reward the decision-makers. Ethanol, for example, might loom unusually large in the handing out of government funds because it is an important issue to Iowa, the first caucus state in 2008, at a time when both parties have wide-open contests for Presidential nominees. And lo and behold, ethanol was apparently one of the biggest applause lines of the night.

Is 35 billion gallons the right number to get from alternative fuel by 2017? Is the optimal average fuel efficiency for cars 25 miles a gallon , or 35, or 37.623? (Recall, among other things, that smaller, more fuel-efficient cars are more dangerous and can carry fewer materials per trip.) I have no idea, and neither does anyone reading this or certainly anyone in the government. People could of course sort out these tradeoffs in the market. From the point of view of efficiency (assuming the externality problems were accurately diagnosed, which is debatable), the simplest thing to do would be to tax imported oil and let individuals sort out which uses of oil remain valuable after this adjustment and which do not. If ethanol produces more value than the opportunity cost required to bring it to consumers, it will be. So too with fuel efficiency and everything else on the President's wish list.

But of course doing that would eliminate politicians' ability to dole out favors to pressure groups that power their re-elections. This classic sort of rent-seeking is too tempting to pass up, and this is how we get the Synthetic Fuels Corporation and then get the ethanol empire a quarter-century later. Hayek warned (in the far more serious context of evaluating central planning and totalitarianism) that "We must shed the illusion that we can deliberately 'create the future of mankind.' This is the final conclusion of the forty years which I have now devoted to the study of these problems." But the illusion is too lucrative for the leaders when the led are insufficiently aware.