RIO DE JANEIRO, Brazil — In his State of the Union address Tuesday, President Bush broached the important subject of the nation’s dependence on imported energy. Unfortunately, his prescription for change embraced trivial or harmful approaches and overtly rejected the best tool available to U.S. energy policy: a hefty tax on petroleum-based fuels.
A Republican president should have done better. But in fairness, any of the aspiring 2008 Democratic presidential candidates probably would have come up with even worse proposals than the president’s.
Even so, the Republican Party is the one that overtly identifies itself with the importance of market forces in an economy and minimal government interference in the working of our market economy.
When faced with an apparent economic problem, a representative of such a party should ask: “Is the market failing and, if so, how?” If one does not ask that basic question, any response is likely to be ineffective or unnecessarily costly.
The president chose instead to use a medical metaphor — addiction. That may make for snappy rhetoric but obscures fundamental issues. How does our economy suffer from a high level of petroleum imports? How can we best reduce such imports, and what might it cost us to do so?
A long visit to Brazil gives me a good perspective on the last point, perhaps the most important one. If we want energy self-sufficiency, we better be prepared to pay more for energy over the long haul than if we continue to import at least some.
Brazil has sought energy self-sufficiency since the mid-1960s. After heroic efforts, it has finally achieved reduced net petroleum imports to zero. With vast hydropower potential, electricity was never a problem. Brazil does import some metallurgical coal for its steel industry and substantial quantities of natural gas, largely from Bolivia.
The cost is high, however. My friend in Rio de Janeiro, whose computer I am using to write this, pays 23 cents per kilowatt-hour of electricity. I pay just under nine cents in St. Paul. At yesterday’s exchange rate, he pays $4.10 per gallon of regular gas.
His car is not a flex-fuel vehicle, so he cannot opt for ethanol made from sugar. But many owners of new cars can. Brazil is a world leader in fuel-alcohol production. It currently costs $2.65 at the pump. This is a bit under the 70 percent of the price of gasoline that experienced Brazilians regard as the point at which it is better to switch to alcohol.
Natural gas, not available in all homes, is priced a bit above U.S. levels.
Liquid petroleum gas, delivered in 28-pound cylinders, is cheaper than in Minnesota, but only because of government price controls.
Most Brazilians I talk to consider Brazil’s energy policy a success. They are proud of their world dominance of ethanol technology and deep-water oil production. Only those who travel abroad realize how much they pay for petroleum self-sufficiency.
With Evo Morales’ inauguration as Bolivia’s president, they are acutely aware of Brazil’s dependence on Bolivian natural gas. They are happy to not have any coal-burning power plants polluting Brazilian air, but increasingly realize that hydropower is not environmentally benign either.
Bush should have addressed the higher costs of self-sufficiency directly.
The external costs of importing — economic instability and involvement in Mideast politics — may well justify a much higher price for petroleum-based fuels. But self-sufficiency will not be cheap. We need to discuss these tradeoffs directly, rather than implying they don’t exist.
Bush also oversold the importance of government-subsidized research.
Technology for ethanol and biodiesel production is well established. Just look at Archer Daniels Midland or any of Minnesota’s ethanol or soybean-oil plants. Wind-generating technology is advancing rapidly.
Yes, government funding of research might advance hydrogen fuel cells. Tax subsidies may help establish a hydrogen fuel distribution network.
But measures like federal subsidies to research arbitrarily-chosen technologies are ineffective and wasteful in comparison to a simple alternative — a hefty tax on petroleum-based fuels.
Ever since British economist Arthur Pigou came up with the idea a century ago, economists across the political spectrum are nearly unanimous in agreeing that when some product involves external costs, the cheapest solution is to tax it at a level approximating the costs to society not included in the price of the product.
Thoughtful Republicans readily acknowledge this. But their party has painted itself into a costly corner with its frenzied anti-tax rhetoric. We will continue to pay a high economic price for ineffective policies until some courageous Republican president, in a “Nixon-goes-to-China” move, embraces economic sanity.
I hope that someday a Republican in the mold of senators John McCain or Chuck Hagel delivers a historic State of the Union address calling for effective, market-based responses to problems of resource scarcity and environmental harm. Until then, our society and economy will suffer.
© 2006 Edward Lotterman
Chanarambie Consulting, Inc.