Energy & Environment

The Candidates’ Bad Energy Ideas

In the realm of energy policy, there are a great many bad ideas and a very few good ones. The usual practice of presidential candidates is to 1) sift through all these proposals, 2) separate the wheat from the chaff, and 3) keep the chaff.

This year, the two parties are competing to show who is most eager to discard sound economics and long-term prudence in favor of appeasing aggrieved motorists. Barack Obama and Hillary Clinton are pandering with a proposal to punish oil companies with a windfall profits tax. John McCain has targeted the same group by urging a federal gas tax holiday from Memorial Day to Labor Day.

What motivates them is high pump prices, which are at odds with the popular view of cheap gasoline as a national birthright. One common defect of the candidates’ measures, though, is that they would not actually reduce prices.

The Democratic option rests on the unshakable belief that Big Oil is guilty of chronic profiteering at public expense. In fact, from 1987 through 2006, oil and gas companies did worse than other industrial companies on return on investment in all but four years.

When the price of gasoline is high, drivers notice. But when it’s low, as it has been for most of the period since 1982, everyone takes it for granted.

No idea can be definitively judged until it has been tried, which makes the Obama-Clinton approach particularly hard to defend. Congress, you see, enacted a windfall profits tax on oil back during the Carter administration. You would think Democrats would not want to remind voters of that president or embrace his errors, but you would be wrong.

By almost any standard, the last windfall profits tax was self-defeating. According to a 2006 study by the Congressional Research Service (http://assets.opencrs.com/rpts/RL33305_20060309.pdf), it generated less than one-fourth of the revenues that were expected. Worse yet, it reduced domestic oil production by as much as 8 percent.

Obama has yet to provide details of his plan. Under Clinton’s version, if a company’s profits rose above a specified level, the government would take 50 percent of the "windfall" — in addition to what it reaps from the existing corporate income tax, which tops out at 35 percent.

The expropriation would deter investment in exploration and drilling by reducing the potential payoff. It would depress the supply of oil over the long run, which would push prices up, not down. Punishing Big Oil would mean hurting ourselves.

McCain avoids this error in favor of a different one. He wants to stop collecting federal gas taxes for three months, which he says "will be an immediate economic stimulus — taking a few dollars off the price of a tank of gas." It sounds like a simple, sure remedy, and it is simple and sure. It’s just not a remedy.

As energy analyst Jerry Taylor of the Cato Institute points out, prices are now at the level required to balance supply and demand. Cut prices by the amount of the gas tax, and consumption will rise, pushing prices back up. So drivers would get no holiday, and the economy would get no stimulus.

About the only effect would be to "transfer money from the federal government to the oil companies," says Taylor. If the oil companies don’t deserve a windfall profits tax, neither do they deserve an additional windfall. The gas tax hiatus would also enlarge the federal deficit, since McCain would take general revenues to make up the loss to the highway trust fund — and at the moment, there aren’t any extra revenues waiting to be spent.

Besides proposing useless or damaging ideas, the candidates have also passed up the single best idea for energy policy: a carbon tax that would curb use of fuels that release greenhouse gases, while encouraging development of clean alternatives. Better yet would be a carbon tax whose revenues go to cut payroll taxes for Social Security and Medicare, rewarding work without raising the deficit.

It’s a win-win concept with wide support among economists, but almost none among politicians. That’s the nature of energy policy in an election year: Any bad idea may be adopted, while the good ones remain orphans.

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