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What We Can Learn From the Pickens Plan

Posted on July 31, 2008 by Martin A. Sullivan
Document originally published in Tax Notes
on July 28, 2008.


T. Boone Pickens is a nice, rich old man with good intentions. His energy plan is getting a lot of attention because of our national fascination with billionaires and because he's an oilman who has gone green. You can hear the glee of the tree-huggers: "See, even T. Boone, an oilman's oilman, is pushing clean alternative energy. We are right. Exxon Mobil and Dick Cheney are wrong."

"I've been an oilman all my life," he proudly proclaims. This gives his plan good-old-boy credibility that an East Coast environmentalist could never have. If the Pickens plan were floated by the Sierra Club — even with the same $59 million budget — it would barely earn a mention in the back pages of the local newspaper.

Notice we haven't talked about what the plan is yet. That's because there is so little substance that the "details" are really not important.

Ok, if you must know, here it is: The U.S. government should support wind energy — with production tax credits and by modernizing the national electricity grid — so that we can use wind instead of natural gas and then we can use the freed-up natural gas to power natural gas vehicles (once we build several million natural gas vehicles and the infrastructure to distribute natural gas to every nook and cranny of the United States). This will — as the dedicated Web page (http://www.pickensplan.com) says in large type — "stop America's addiction to foreign oil."

Pickens's substitute-wind-for-natural-gas-for-gasoline plan is Ok for a private entrepreneur. That's his vision, and he and his partners will profit handsomely if they are correct. But in his leap from the private to the public, Pickens has made a critical mistake. Government should not be picking and choosing technologies. Government should set policy in terms of ultimate goals (reduce dependence on foreign oil, reduce CO2 emissions, etc.). Then the private sector should choose the means of getting there.

We would level this criticism at Pickens even if his plan included a cheap way of turning water into emission-free gasoline. But his plan has as many technological problems as policy problems. There are limitations on how much power can be generated by wind and delivered to customers. Even if those limits could be overcome, only about one- fifth of U.S. electricity is generated from natural gas. (If Pickens's extra wind power substitutes for coal or nuclear power, the possibility of reducing oil imports in his plan does not materialize.) It also depends on transforming natural gas transportation from a market niche to a mass market. The plan does not consider other transportation technologies. Strangest of all, it does not consider plug-in hybrids or fully electric vehicles as recipients of Pickens's new wind energy.

The best thing you can say about the Pickens plan is that it sounds the alarm about how ridiculous it is for Americans to be shoveling hundreds of billions of dollars into the coffers of unfriendly nations. And it helps spread the gospel about the potential for wind energy. This is not news to anybody except tuned- out teenagers, who won't listen to Pickens anyway.

So why are we writing about it here? It isn't that the plan is unique, but that it's so typical. Once again, some reasonably well- connected person gets excited about a particular energy technology and sees it as a solution to our energy problems — which these days are closely tied to our economic problems, our national security problems, and our environmental problems. The advocate becomes almost messianic with fervor. The problem isn't lack of enthusiasm, but lack of thoughtful follow-through.

Sooner or later a coalition of interest parties is organized, bills are introduced, hearings are held, estimates made, and, because nobody cares enough to challenge the coalition, which is obviously doing good things for America, the government subsidizes the technology. And mostly for ideological reasons, the subsidy takes the form of a tax credit instead of increased government spending. As a result, we have about three dozen tax incentives in the Internal Revenue Code that have evolved from the same pattern. (And to make matters worse, for no good policy reason, these subsidies are made temporary. But that's another story.)

Do you think this approach will bring about the quantum leap of change that everybody — including Pickens — is clamoring for? You probably answered the last question "no." Then you must ask why our subsidy approach is failing us. Should we repeal the subsidies? Should we double them?

There is a lot we could do to improve these subsidies. Instead of lawmakers just picking numbers out of a hat, the subsidy amounts should be directly tied to the public benefits they yield. For example, if a certain fuel or technology saves so many millions of barrels of oil, and the social cost of importing that oil is so many dollars per barrel, a numerical value for that credit can be calculated. If those calculations are made consistently across technologies, the proper amount of subsidy will be applied equally across all technologies.

While consistently relating the subsidy amounts to the public benefits they provide would be a vast improvement over current haphazard legislative practice, it is still a far cry from what this nation needs. That's because even though there is some economic justification for subsidies, they are a second-rate approach.

So what's the answer?

Ok, we are now going to touch the third rail. We are going to spit into the wind. We are going to insult Mom and apple pie. To significantly reduce our dependence on foreign oil in a manner that is least costly to individuals and our economy, we need to raise the price of petroleum with a revenue-neutral change in our tax system: a harsh gasoline tax increase — like 50 cents or a dollar a gallon — combined with a compassionate tax cut or rebate — like $500 or $1,000 per year — for those who feel the most pain.

On average, consumers would see no change in their overall tax burden. But they would have a strong incentive to reduce gasoline consumption — in any way they like. Unlike under current law, all technologies are equally favored, and unlike under current law, conservation is put on an equal footing with new technologies.

The economic benefits of this approach over current law are beyond dispute. The proposal, of course, is not without difficulties — primarily in how the tax cuts and rebates should be distributed. We hope people will begin to see that the politics — once we get over our irrational taxaphobia — should not be impossible. Considering the stakes, it may be time to start dealing with the political problems of an economically sound approach and stop trying to patch up the approach that is easy for politicians and is failing the public.

Or we can hope more guys in white hats will ride in and save us.

Endnote: The proposal in this article has a lot in common with a plan suggested by Prof. Gilbert E. Metcalf of Tufts University, "A Proposal for a U.S. Carbon Tax Swap: An Equitable Tax Reform to Address Global Climate Change," Hamilton Project Discussion Paper 2007-12, Oct. 2007, available at /taxbasehttp://www.brookings.edu/~/media/Files/rc/papers/2007/10carbontax_metcalf/10_carbontax_metcalf.pdf. Metcalf proposes a $15-per-ton carbon tax offset with payroll tax cuts that would be neutral across income levels. The big difference between the proposal here and Metcalf's is that the new tax on our proposal would only be on petroleum and would only be for the purpose of promoting energy security. (Of course, there would likely be environmental benefits from a tax on petroleum.) Therefore, compared to Metcalf's proposal, the new tax proposed here would place a significantly larger burden on gasoline and heating fuel. On the other hand, electricity — heavily burdened under a carbon tax — would not be taxed at all.