Alternative Fuels: Let Markets, Not Government, Decide.

Thom Lambert —  12 June 2006

It’s a strange day when the New York Times advocates corporate tax breaks. It’s an even stranger day when I dissent from that recommendation. Well, today must be a strange day indeed, for they did, and I must.

The upshot of today’s editorial, Let Them Go Green, is that the federal government should “throw its weight behind� (i.e., subsidize) private efforts to develop alternative energy technologies. Specifically, Washington should use “loans, grants, or targeted tax breaks� to encourage companies to develop alternative fuels.

Why? As the Times observes, this sort of investment is already occurring at an unprecedented rate. Goldman Sachs, the Times notes, has recently invested over $1 billion in alternative fuels, and it is not alone: “Goldman is only one of a growing number of investment and manufacturing enterprises chasing emerging technologies that could help provide the alternative energy sources that politicians from President Bush on down say they want and that the country will certainly need in years to come.� Indeed, the Wall Street Journal recently reported that venture capital is pouring into alternative energy technologies.

This is happening, of course, because of high and rising oil prices. That’s the way markets work. When the price of a commodity rises enough, enterprising entrepreneurs scramble to develop a cheaper substitute for that technology, and investors provide them the capital to do so. Thus, high energy prices will lead to increased investment in alternative technologies without government intervention. The Times complains that “a tax credit to encourage wind power is set to expire next year, at a time when high energy prices are raising interest in that clean technology,� but isn’t that as it should be? If high energy prices are pushing entrepreneurs into new technologies, why should the government try to do so?

Look, I’m all for tax breaks. But I’m not for industrial policy – i.e., policies where the government picks which industries to encourage/subsidize. When the government tries to pick winners, it tends to screw things up. If government money is on the table, businesses are likely to make investment decisions aimed at appropriating that money, not at responding to market forces.

The best thing the government could do to encourage appropriate development of alternative fuel technologies would be to let energy markets work. Let oil prices do their thing, and entrepreneurs will develop the technologies necessary to avert any future crisis.

As the Times notes, “Investing is about the next big thing.� Entrepreneurs and investors know that. They don’t need government “encouragement� to tell them what that “next big thing� is.

Thom Lambert


I am a law professor at the University of Missouri Law School. I teach antitrust law, business organizations, and contracts. My scholarship focuses on regulatory theory, with a particular emphasis on antitrust.

4 responses to Alternative Fuels: Let Markets, Not Government, Decide.


    I also agree that the government will not be as effective as the market in determining the best alternative fuel R&D choices. I have a question, though. Would you support the government increasing taxes on conventional fuels to spur development of alternatives? I am envisioning a revenue neutral rather than net tax increase approach.

    A tax would spur industry interest in alternative fuels as consumers, producers, or both internalized the spill-over costs of conventional fuels. It is also appears better than subsidies because it doesn’t tip the scales in any particular direction, instead it just provides increased incentive to move in some direction. Our government won’t take any step in this direction, particularly in a revenue-neutral fashion, but beside the obstacle of political reality do you have any objections?


    I agree on the whole that tax advantages for alternative fuel are a bad idea. Moreover, it is a waste of government resources when the market is driving business to invest in alternative fuels anyway. I see only one exception to this general rule. That exception is biodiesel, ethanol, and other plant-based alternative fuels. The government has paid farmers to not grow crops under CRP and similar programs for decades. If alternative fuel subsidies replace CRP and at least pay farmers to grow crops instead of idly watching weeds germinate, I think the subsidies are a step in the right direction. While both subsidies are extremely sociolistic, alternative fuel subsidies appear to be the lesser of the two evils.

    William Goodwin 13 June 2006 at 7:50 am

    Thom, I’m agnostic on these particular incentives. But from an economic perspective, it makes no sense to allow the price of oil to determine whether or not investments in alternative energy get made, because the price of oil doesn’t internalize many of the costs that the use of oil inflicts. The cost of pollution, of the effects of global warming, and the tens of billions we spend on military operations to keep oil flowing from the Middle East all need to be factored into the price of oil to make the comparison fair. Insofar as the greater use of alternative energy will reduce those costs, it will produce meaningful social benefits that investors in alternative energy won’t be able to capture, which means they will underinvest in these alternatives. The tax breaks seem like one reasonable attempt to, in a sense, internalize the benefits of eliminating some of oil’s costs.

    You can call this industrial policy, but building (and continuing to repair) the interstate highway system, opening up public land to oil drilling, and using the military to protect oil tankers are all part of an industrial policy as well. And in this case, two wrongs will in fact get us closer to right than otherwise.


    Excellent. Let’s let the market decide. First, please start by repealing the last two pieces of energy legislation that heaped tax cuts on big oil. Then let’s see what looks competitive.