Alternative Fuels: Let Markets, Not Government, Decide.

Cite this Article
Thomas A. Lambert, Alternative Fuels: Let Markets, Not Government, Decide., Truth on the Market (June 12, 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.