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  • And That’s Why You Don’t Give Subsidies

    This past April, when Members of Congress introduced the New Alternative Transportation to Give Americans Solutions (NATGAS) Act that provides preferential tax treatment to subsidize the production, use, and purchase of natural-gas vehicles, the propane industry asked, “What about us?”

    Well, someone was listening, because a little over a month later Representatives John Carter (R–TX) and Dan Boren (D–OK) introduced the Propane Gas Act of 2011, which would provide a five-year extension for targeted tax credits for propane as a motor fuel, propane-powered vehicles, and propane autogas—propane converted to fuel for vehicles—refueling equipment. Ben Cardin (D–MD) introduced companion legislation in the Senate.

    The introduction of the NATGAS Act and the Propane Gas Act outlines everything that’s wrong with providing targeted tax credits.

    Companies seeking special tax treatment justify their handouts by convincing Congress that they need only a small subsidy for a limited time until their technology becomes profitable. Inevitably, successful requests for subsidies beget more requests, and soon the companies call for tax credit expansions or extensions.

    Subsidies centralize power in Washington and allow lobbyists and politicians to decide which companies will produce. The more concentrated the subsidy or preferential treatment, the worse the policy is, because the crowding-out effect is larger. Companies will devote more resources to hiring lobbyists to influence politicians in Washington than they will to finding ways to lower costs.

    Preferential treatment creates industry complacency and perpetuates economic inefficiency by disconnecting market success from production costs. By artificially lowering the cost of investment, subsidies take resources away from more competitive projects. The fact that other transportation fuels receive government support is not a good reason to continue or expand special treatment for propane, natural gas, or any other alternative fuel. Quite the contrary: It is a good reason to remove those subsidies. And Stuart Weidie, head of the industry group Autogas for America, agrees, saying, “Our position is that everybody ought to have the opportunity for subsidies or nobody should have them.” We prefer that no one have them.

    In fact, Solar3D CEO Jim Nelson said that government subsidies are obstructing innovation in the renewable energy sector. In a recent interview with Forbes, Nelson said:

    Operating subsidies, or installation subsidies, helps get clean energy sources installed but the problem is that current technology is not economically competitive. Everything we do needs to be done with a view toward global competitiveness. Unfortunately, because current technology is not economical relative to alternatives, it does not promote our competitiveness.

    The other common arguments for alternative vehicle fuel tax credits are that they create jobs and will reduce U.S. dependence on foreign oil. Targeted tax credits do not create jobs; they simply shift labor and capital away from one sector of the economy and toward the politically preferred sector. You subsidize something if you want more of it. You’ll see more production of propane-powered gas vehicles as a result of subsidizing them, but what you won’t see is where those resources could have been used elsewhere in the economy.

    The co-sponsors of the Propane Gas Act argue that “consumption of gasoline could be reduced by 480 to 683 million gallons per year by 2016.” According to the Energy Information Administration, we used 138.6 billion gallons in 2010—about 379.7 million gallons per day. So, at best we would save a little less than two days’ worth of gasoline consumption.

    Members of Congress are pushing to extend and expand a number of energy tax subsidies, but eliminating them would be better for American producers, consumers, and taxpayers. The Energy Freedom and Economic Prosperity Act of 2011(HR 3308) introduced by Representative Mike Pompeo (R–KS) would do just that, while lowering the corporate tax rate to encourage investment and spur economic growth in America. Doing so would allow the most efficient technologies that provide the most value to the consumer to reach the marketplace. It is time to stop using the tax code to pick winners and losers in the energy sector.

    Posted in Energy [slideshow_deploy]

    4 Responses to And That’s Why You Don’t Give Subsidies

    1. Eldy Driver says:

      If we built a million cars/year to run on natural gas (or propane), that would be a start but only 4/10th of 1% of the US fleet and would not have a significant impact in the near future.

      However, there are only about 8 million larger trucks (Class 5 – Class 8) in the US and use 35 billion gallons of fuel per year. The cost of Diesel is high, and we are increasingly competing on the world market for diesel fuel with emerging China and India among others and which will only serve to increase future costs.

      Due to the increased energy density, liquefied natural gas (LNG) is a superior fuel for heavy duty trucking applications over compressed natural gas (CNG). LNG is natural gas that has been cooled to approx. -260 degrees F and stored in its liquid form, and has an energy density 600x that of CNG.

      At today’s prices, a gallon of Diesel is approx $3.95 and a Diesel Gallon Equivalent of LNG in approx. $2.35, a significant savings. There are approx 1,000 LNG Heavy Duty trucks already on the road today, primarily in Texas and California. This is a proven technology.

      Private industry believes in the economics, as Clean Energy and Chesapeake Energy have plans for 150 LNG stations on the nations major truck routes that will enable coast-coast and border-border LNG trucking. (I am not associated with either).

      Converting America's heavy truck fleet of about 8 million vehicles to Liquefied Natural Gas would save 2.5 million barrels of oil per day, meaning we could reduce our reliance on OPEC oil by half. At $100 per barrel that means $250 million per day stays in the United States to circulate through our economy, rather than being shipped off the governments of Venezuela, Saudi Arabia, or Nigeria.

      LNG trucks cost more than Diesel trucks. At today’s prices, fuel savings will likely pay for the difference in 18 to 36 months. With increased volume production, the price of the LNG trucks will come down (yes, I know we do hear the volume argument all the time, but it is true sometimes)

      Give back the $500+mm Solyndra money and we can fund the difference of more than 10,000 heavy duty trucks and have a far more significant impact on our economy and start down the path of significance reduction of dependence on governments that don’t like us.

      I am also against subsidies for energy technologies (GREEN jobs? Wind subsidies? Solar Subsidies?) However, living in a real world where politics sometimes does dictate winners and losers, I will certainly fight for
      where I think the dollars will do the most good. If we are still living with an administration that is pretending niche emerging technologies will displace existing supplies (I'm looking at you Hydrogen, Solar Cells, Fuel Cells, Wind, et. al.) I'd at least like to give the real world economics of natural gas a shot.

      • DenHVACR479 says:

        Savings per gallon equivalent, yes, BUT……

        Energy content per gallon #2 diesel app. 129,000 Btu's, energy content per gallon equivalent LNG app. 75,000 Btu's. That is close to 60% more energy in 1 gallon #2 diesel versus 1 gallon equivalent LNG.

        Figure the difference in efficiency into the cost per gallon and you are within .20 per gallon. Add in other related costs mentioned in the original statement (and then some) and you have a cost ineffective product that will require subsidies to be competitive. Unfortunately, that is the way I see it.

        • Cryoruggie says:

          You didn't read the post carefully. The price of $2.35 is for a diesel gallon equivalent – i.e. for the same 129,000 BTU's of Energy.

      • Toes says:

        Add the Iran factor to calculations. If Iran develops a bomb and the means to deliver it, first strike becomes an option and even Obama has shown he may be willing to hit them so hard they could never strike back. Far better to explain to all that US cut crude consumption, using domestic natural gas, enough for the world to stop purchase of Iranian oil or be willing to live with an evaporated Iran.

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