Liquified Tax Dollars
The coal industry spent $6 million on federal lobbying in 2005 and 2006, and if a new bill passes, they would get billions in subsidies
June 1, 2007
Fred Foldvary, Ph.D.

If you are a U.S. person, your tax dollars may soon be working to liquify coal. A New York Times story by Edmund Andrews on May 29, 2007, reports on a proposal to subsidize coal-to-liquid production as Congressional representatives seek to grant privileges to coal companies in exchange for their lobbying and campaign contributions.

Coal-state Republicans as well as Democrats are seeking to liquify our tax dollars into coal subsidies. Former Democratic House majority leader Dick Gephardt has been hired by a coal company to help get the subsidy for liquefied coal. Also among those promoting coal-to-liquid fuels is Illinois Senator and Democratic-party presidential candidate Barack Obama, who introduced the Coal-to-Liquid Fuel Promotion Act of 2007.

The bill would guarantee minimum prices for liquified coal, provide tax credits for coal-based fuel, and guarantee Air Force purchases for many years. The coal industry spent $6 million on federal lobbying in 2005 and 2006, while if the bill passes, they would get billions in subsidies. In the web site operated by the Center for Responsive Politics, you can see the top contributors . This is an example of what economists winkingly call “rent seeking.” Lobbying Congress has the greatest return of any investment on earth.

Those pushing for a greater use of coal say this is needed for energy independence. But any economist will tell you that there is no country on earth which is energy independent. Even Saudi Arabia is not energy independent, as it imports gasoline. The U.S. economy will never be energy independent, and there is no need to be.

The push for energy independence is in conflict with the concern over global warming. The United States has vast coal resources, but whether the raw coal is burned or whether it is liquified to make diesel fuel, the use of coal creates harmful emissions. A greater use of coal will create more greenhouse-gas pollution. Liquified coal fuels produce about twice the amount of greenhouse gases as ordinary diesel. Promoters of liquid coal fuels claim that technology could be developed to clean up this fuel, but so far there is no cost-effective way to do this.

The amount of coal subsidies being proposed would be greater than the current subsidies for other energy sources, including the ethanol boondoggle. Several past efforts by government to subsidize particular types of fuel have been a colossal waste of resources. An example is the project in the 1980s to create synthetic fuels.

A sound energy policy should do the opposite of this proposed coal subsidy. There should be no subsidy to any energy source, including oil, uranium, solar, wind, gas, or coal. The avoidance of subsidies would require all polluters to compensate society for the damages. If burning coal creates more pollution, the coal companies would pay greater pollution charges. The revenues from pollution levies should be a green tax shift that would simultaneously reduce taxes on wages, profits, and goods. A complete green tax shift would eliminate the waste of resources caused by taxes by also shifting public revenues to land rent or land values. A land-value levy promotes environmental protection with a more efficient use of resources, as the waste of resources creates unnecessary damage to the planet’s ecology.

With no subsidies or penalties for energy use, the free market would sort out the use of energy. A pollution charge would let each company and energy source respond to their own costs and benefits, as some would install equipment to reduce pollution, others would cut back production, while others would pay the levy. There is no way that government officials can know in advance what the right energy mix is to minimize pollution. The promotion of coal subsidies also shows how government chiefs also have little incentive to promote wise use of resources, but instead, cave in to the lure of campaign contributions.

Children who have behaved badly have traditionally gotten a lump of coal in their Christmas stocking instead of toys and candy. If this coal subsidy passes, Americans will have to take their lumps as a punishment for letting the coal lobby succeed in its rent seeking.

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Fred Foldvary, Ph.D.

FRED E. FOLDVARY, Ph.D., is an economist and has been writing weekly editorials for since 1997. Foldvary's commentaries are well respected for their currency, sound logic, wit, and consistent devotion to human freedom. He received his B.A. in economics from the University of California at Berkeley, and his M.A. and Ph.D. in economics from George Mason University. He has taught economics at Virginia Tech, John F. Kennedy University, Santa Clara University, and currently teaches at San Jose State University.

Foldvary is the author of The Soul of LibertyPublic Goods and Private Communities, and Dictionary of Free Market Economics. He edited and contributed to Beyond Neoclassical Economics and, with Dan Klein, The Half-Life of Policy Rationales. Foldvary's areas of research include public finance, governance, ethical philosophy, and land economics.

Foldvary is notably known for going on record in the American Journal of Economics and Sociology in 1997 to predict the exact timing of the 2008 economic depression—eleven years before the event occurred. He was able to do so due to his extensive knowledge of the real-estate cycle.