Sunday, June 04, 2006


Sometimes, Governments Fail

An excerpt from Friday's News and Observer:

Progress Energy is pulling the plug on a controversial line of business that has allowed the company to legally avoid paying nearly $2 billion in federal income taxes.

The Raleigh-based utility has benefited from a lucrative but little-known tax credit awarded for producing a type of processed coal called synthetic fuel. Synthetic fuel is a money-losing venture without the tax credit.
According to the N&O, These credits (subsidies) were installed during the 1970s oil crisis with the hope that companies could sell synthfuel cheaper than coal and(somehow) reduce U.S. dependence on foreign oil.

Apparently, that wasn't a good idea.

A few questions, wouldn't rising oil prices provided oil consumers enough incentive to find oil-alternatives? And if there were some externality or other barrier that "justified" government intervention, wouldn't raising taxes on oil have been a better way to curb oil use? It would have amplified the incentive to seek out alternatvies and it would eliminate the no need for the government to pick "winning" products or technologies.

I guess market intervention is never as easy as it looks on paper. The efficiency-minded economist has his own interests and so does the self-interested politician. Maybe subsidizing energy companies would sound better in the press than raising taxes? Either way, we should keep history in mind when we are formulating todays energy policies. It might save us from repeating it down the road.

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