Charles Wheelan, Ph.D. The Naked Economist

This is one of those times when I'd like to send the members of Congress on an all-expenses-paid "fact finding" mission to Hawaii, or Bali, or wherever they'd like to go.

Why? Because it would be a lot less expensive than letting them stay in Washington.

Subsidizing a Bad Idea

According to the New York Times, "a powerful roster of Democrats and Republicans" is pushing a package of subsidies to help the coal industry produce liquid fuels, such as coal-based diesel.

The package includes loan guarantees, a pre-commitment by the government to buy certain quantities of coal-based fuels, a tax credit of 51 cents for every gallon of coal-based fuel sold through 2020, and so on.

In short, the government is offering the coal industry lots of financial support to make fuel out of coal, which apparently wouldn't make any economic sense without the government subsidy. Why is this a terrible idea? Let me count the ways.

Publicly Funded Lunacy

First, let's start with the obvious. The purpose of a subsidy is to encourage rational firms to do something that wouldn't otherwise be rational. (If an activity makes economic sense without a subsidy, then obviously it wouldn't need one.) So if you strip away the fancy rhetoric, the coal companies are essentially saying to Washington, "Pay us to make fuel from coal. Because without a lot of government money, that would be complete lunacy."

I'm sure there are profit-hungry firms that would make jet fuel out of old tennis shoes if we paid them enough. That doesn't mean we ought to do it.

True, subsidies are a good idea if they induce behavior that has some significant social benefit, such as subsidizing pharmaceutical companies to produce drugs for rare diseases; without that subsidy, the firms couldn't recoup their research-and-development costs, and some life-improving drugs would never appear.

But coal is arguably as bad for the environment as oil, and possibly worse, so I don't see any social benefit in using public money to induce a switch. (Yes, making energy from coal reduces our demand for foreign oil, but I'll get to that in a minute.)

A Rebate for Recklessness

Second, subsidies for alternative energy make less sense as the price of oil goes up, not more. The high price of energy is exactly what causes the market to find alternatives on its own. By using government money to hold fuel prices artificially low, we kill the incentive for entrepreneurs to develop alternative energy sources that don't need subsidies.

Third, global warming is for real. The evidence continues to mount, and is slowly but steadily convincing anyone who doesn't sell fossil fuels for a living. To reduce our CO2 emissions, we're going to have to change some of our behavior. And the best way to change behavior is to raise the price of the activities that we want to discourage. Curiously, this policy does just the opposite.

Most of us would agree that it's bad for the planet when someone commutes alone 62 miles to work in a Chevy Tahoe. Instead of discouraging that activity, the coal subsidy actually makes it cheaper -- almost like a government rebate. And the more you drive, the bigger the government check. Does that make any sense?

Furthering Foreign Dependence

Fourth, using government money to hold down fuel prices isn't going to save you any money. Sure, you might get lower-priced fuel. But come on, people -- where do you think those subsidies come from? From your taxes. (Or, more realistically at the moment, from the Chinese government, in which case your children will have to pay higher taxes whenever we repay our mounting foreign debt.)

Finally, subsidizing coal is an inefficient way to reduce our dependence on foreign oil. It's kind of like reducing coffee consumption by offering Starbucks wads of cash to lower the price of tea.

Would it work? Yes, probably a little. But if you really want to reduce coffee consumption, wouldn't it make more sense to raise the price of coffee?

Bipartisan Solidarity at Last

On the positive side, this proposal is truly bipartisan: It requires both parties to abandon their core principles. Democrats are supposed to be serious about the environment. Subsidizing activities that contribute to global warming will not make Al Gore happy at all.

And Republicans are supposed to believe that the market, rather than the government, should determine what kind of fuel we put in our cars. If firms can make money by turning coal into diesel, then they'll turn coal into diesel. And if they can't earn a profit, they won't do it.

And yet Democrats and Republicans (from coal-producing states) have found a way to work together on this one. It's inspiring in a sad, pathetic kind of way.

A Taxing Solution

I'll repeat what I've written before: If we ever get serious about global warming and our dependence on oil, then we'll implement some version of a carbon tax. Fuels with the most adverse impact on the environment would be the most heavily taxed; cleaner energy would be relatively less expensive. We would all change our behavior accordingly, which is the point.

The carbon tax ought to be phased in over a long period so that households and firms have a chance to adapt before getting socked by higher energy prices. We should then use that new revenue to cut some taxes that discourages productive activity, such as the payroll tax or the income tax.

That won't happen anytime soon. So in the meantime, I'll reiterate my offer to send our elected representatives on the boondoggle of their choice -- as long as they leave their business in Washington unfinished. Believe me, it would be a lot cheaper than writing huge checks to the coal industry year after year.