In 1848, the discovery of gold in California lead to one of the most dramatic population shifts in US history. People hoping to strike it rich migrated from all over the country, South America, and even as far as China. The non-native American population of California went from under 1,000 to over 100,000 in a little over one year. Today, there is another gold rush taking place in Washington D.C. as political entrepreneurs seek to strike it rich by mining the climate change mother lode.
According to the 2013 Federal Climate Change Expenditures Report to Congress, the Federal Government is spending $21 billion annually for research, subsidies, and tax breaks to address the perceived threat of climate change. That makes climate change a big business. While the California gold rush attracted people who were willing to work hard for gold, the climate change miners want to get rich through government action instead of the market place.
A recent article in the Los Angeles Times reported that Tesla founder Elon Musk has built Tesla, SolarCity Corporation, and Space Exploration Technologies with an estimated $4.9 billion in government support. Unlike most private corporations who invest and risk shareholder money, Musk is building his companies with taxpayer money. A hedge fund manager quoted in the article was quite blunt, “without it [taxpayer money] none of them would be around.”
Musk is hardly unique, although he may be the most flamboyant rent seeker around. A few years ago, the CEO of Cypress Semi-conductors explained how Wall Street was getting rich from solar energy investments. Wall Street firms, including Musk’s SolarCity Corp, set up limited liability corporations to buy solar systems and sell the power to homeowners on a contract basis. The firm gets the subsidy, accelerated depreciation, and large profits after the payback period and the homeowner gets cheaper electricity. Looks like a win-win, except for one thing. Before the 20 year life of the LLCs, are up, their creating firms off load them as solar backed securities. Sounds similar to the high-risk mortgage backed securities that were at the heart of our last financial crisis.
As the government became more obsessed with climate change and alternative energy schemes to reduce CO2 emissions, there have been a large number of government subsidy programs that spawned the creation of companies like Solyndra, A-123 Batteries, Fisker Motors, and high priced electric vehicles that help auto makers achieve stringent CAFE standards. Once in place, these subsidies take on a life of their own. Although the production tax credit for wind powered energy expired at the end of 2013, the IRS has allowed it to continue for 10 years for developers who had incurred at five percent of the construction costs. That action is worth about $13 billion, according to the Institute for Energy Research.
The net result of all these programs is that shrewd people who know how to game the system get rich, the taxpayer gets fleeced, and the climate keeps changing as it always has. Last year in a US News and World Report article, Warren Buffet readily admitted, “We get a tax credit if we build a lot of wind farms. That's the only reason to build them. They don't make sense without the tax credit.” The article made a point that can be generalized to all subsidies, “While subsidies may allow wind turbine makers to pump up their payrolls, the rest of the economy suffers as a result. The subsidy diverts labor and capital away from productive areas of the economy, which slows overall economic growth.”
The increasing collaboration of big government and big companies has been a clear and validating example of the economic public choice theory known as the Bootlegger and Baptist theory. Baptists are groups that assert a moral purpose and public benefits from government regulation while Bootleggers use those regulatory restrictions as a means to gain profit. As Professor Bruce Yandle, who developed the theory, observed, Bootleggers and Baptists make “strange bedfellows who rally behind a shared political aim. They (Bootleggers) are simply in it for the money.”
The road from Kyoto to the Obama climate action plan has been a wide and deep vein of gold for Bootleggers. Various proposals from cap and trade, to a carbon tax, to the Obama administration’s actions to restrain the use of carbon based energy have provided opportunities for political entrepreneurs to enrich themselves by appearing to do good. They have done nothing to control the climate system, which is too complex to control, certainly not by restraining CO2 emissions.
All of climate change schemes have common elements. They involve more regulation, they involve more government subsidies to promote favored fuels and actions, they promote crony capitalism, they involve more government interference with market forces, and they harm the economy. What has been a mother lode of gold for political entrepreneurs is fools’ gold for taxpayers and the economy.
William O’Keefe is CEO of the George C. Marshall Institute.