Protectionism vs. the Free Market

Have you ever noticed that free market capitalists are only free market capitalists when it’s convenient? Subsidies are bad, unless they prop up legacy industry. Regulations are bad, unless they thwart new competition. Tax breaks are good, unless they promote new competition.


The fossil fuel industry has received billions of dollars in taxpayer subsidies (click to enlarge).

I constantly hear about how the solar industry and electric cars can’t survive in the free market, particularly without subsidies or special treatment. Outraged fist waggers cry about the hidden cost of solar passed onto the taxpayers. This has been a particularly pervasive narrative in the wake of the recent extension of the ITC (Investment Tax Credit). Missed in this position is how the fossil fuel industry has benefited from a beneficial tax system as well as subsidies and uses those advantages to keep its competition from succeeding.

Take Tesla Motors, they are a new concept and they want to function in the free market. Capitalist would want that, no? No. Their direct-to-customer sales model is being resisted by many states because it doesn’t comply with the old way of doing things. But free market capitalists should be in favor of new ways of providing business and innovating within the economy. Instead, they are restricting sales models to the point where Tesla had to sue New Jersey and is following suit in other states in order to have their innovative sales model allowed.

The legacy, dealership sales model profits disproportionately from servicing cars. But electric cars require virtually no maintenance, removing any incentive the dealership has for selling the car, no oil changes, no tune-ups, no serpentine belt adjustments. In fact, most service is done over the air as a software update. This is the primary rationale for not wanting Tesla cars sold next to gas cars on car lots. Car salesmen would persuade potential buyers away from electric cars.

Because of this and the fact that Tesla cars can run without fossil fuel, there is massive pressure applied to politicians to circumvent Tesla’s success. This makes sense (in a greedy way). What doesn’t is the inane propagation of the lie that Tesla and solar power can’t compete without subsidies. The fossil fuel industry is, ironically the most subsidized industry in the world. In the US fossil fuels receive nearly $100 billion a year and it’s over $500 billion worldwide. Additionally GM just went  bankrupt a few years ago and was bailed out by the US taxpayers. Irony much?

Subsidizing the fossil fuel industry made sense a hundred years ago. Back then, there were these new inventions: light bulbs, then cars, then airplanes, etc. All of them required energy, and fossil fuels were a welcome departure from the brutal and finite use of whale fat. So the societal good was in developing the infrastructure to accommodate these new energy needs and the risk involved made venture capitalists understandably reluctant without the safety net of government subsidies. Also, back then, there was no understanding of the implications of pollution. Thus it was easy for people to get behind this new industry.

Should fossil fuel companies continue to cause problems nearly cost-free?

Should fossil fuel companies continue to cause problems nearly cost-free?

Fast forward to today. The oil industry is the most profitable in the history of humankind (that’s everything folks). So their justification for being the most heavily subsidized simultaneously is dubious. Couple that with their unpriced externality (they don’t suffer a carbon tax) and they are getting away with creating a tragedy of the commons without being responsible for alleviating it.

This is equivalent to your neighbor all putting their trash out on the curb, but not paying for trash pickup. Your neighbor produces the most garbage in the area and then demands that everyone else pay for the trash collection. Additionally, this neighbor wants everyone in the neighborhood to pitch in for his business and buy his products at a profit to make sure no new products come along that threaten his business. This is a good business for your neighbor, but for the neighborhood, it’s expensive and trashy and incentivises your neighbor’s bad behavior.

When we account all of oil industry subsidies, implicit and explicit, the total is over $5 trillion (with a T) annually worldwide. Throw in that you and your neighbors are getting sicker because the trash buildup is toxic, then you are being taxed for the behavior again by your health and medical expenses. This is essentially what the fossil fuel industries are doing to us. Which is bad enough, but then they have the nerve to campaign against the subsidies received by the alternative energy companies and clean cars. Combine that with the fact that alternative energy companies are not eligible for Master Limited Partnerships, which the fossil fuel industry uses to shield themselves from almost all taxation and it’s mind blowing to hear people complain about the subsidies for solar and electric cars.

I get it. The industry that benefited the most, all time, from tax breaks and incentives is now the richest industry ever. And they want to further spike the ball in the face of the population and the environment by not allowing easy access to inexpensive, clean alternatives. Therefore they can continue to inflict the tragedy of the commons and profit disproportionately as a result.  All from people who constantly whine about regulations because they ostensibly believe in capitalism. Don’t mention,though, that they want to circumvent all competition via political shenanigans. Perfect.

Unfortunately, the fossil fuel industry had a huge head start and they are not going to commit economic suicide just because the whole planet is depending on their demise. Solar is getting cheaper, cost effective and more available, yet has a huge uphill battle. Fortunately for all of us, there are people willing to battle uphill, even though there is strong and loud opposition.