Money Talks

There are many devices used by policy makers to reduce the chance that subsidies will continue to be provided long after they have served their public purpose -- an all-too-common occurrence. Setting time bounds on subsidies is a commonly used approach. But for sunset clauses to work as intended, the duration or other limit criterion must be credible, and enforced. Otherwise the subsidy will create expectations that the limits are not serious and can simply be extended or expanded indefinitely.

A case in point is the Clean Coal Technology Program; originally authorized for only five years, its funding was reauthorized again and again. Many farm programs were introduced following the 1930s Dust Bowl and were intended to be temporary. Today not only many farmers, but also many well-intentioned environmental groups, regard farm subsidies as an entitlement. Once a subsidy program gets to that point, it becomes very, very hard to dislodge.

I agree that the capture and defense of policies by special interests is what makes reform so difficult. The principles of political economy suggest that the narrower the recipient base, and the more broadly sourced the funding, the more likely a subsidy will become entrenched. But I would not go so far as to say that subsidies themselves are not often a problem in and of themselves. There are plenty of one-off subsidies that are poorly designed and implemented. A frequently cited example (at least in Europe) was a Dutch policy in the 1970s that provided an incentive to purchasers of double-glazed windows. The problem was that there was no spare domestic capacity to increase the supply of such windows. The result was that prices rose on increased demand, and most of the increased business went to Belgian producers.

Aggregate figures are useful, but they mask the different ways in which subsidies to various energy sources are provided. Some support R&D, some help reduce production or pollution-control costs, and some are simply pure wealth transfers. Many of the tax breaks granted to oil and gas producers fall into the latter category.

We are also starting to organize regional workshops to help train journalists to investigate and report on subsidies more effectively. Our first workshop will be in Mumbai, India, in March 2007.

Whether subsidies to wind turbines are cost-effective is an easier question to answer than whether they are fair. I can't give a general answer to that question, but I would point out that how subsidies are provided matters a great deal. Subsidies from general taxpayers that simply bring down the cost of generating electricity by wind turbines into line with the cost of generating electricity from fossil fuels simply expand the amount of electricity available at a given cost, and provide no incentive to conserve. Moreover, to the extent they raise taxes on service industries that are not energy-intensive, they create market distortions. Renewable-energy certificates, or other policies that create cross-subsidies within the electricity market, raise the price of electricity to consumers, and in a sense "internalize" the costs of the policy.

Finally, don't forget the trade angle. Back in the 1980s, while California was subsidizing wind-generated electricity, European governments were subsidizing production of wind turbines. Many of those European subsidy programs were poorly designed and, as a result, a lot of fly-by-night companies formed just to take advantage of the generous incentives on offer. Denmark was cleverer, and pursued an aggressive infant-industry policy that was so successful that its producers now dominate the world market. However, it is fair to ask whether Danish subsidies, by creating such dominance, thereby kept companies elsewhere -- including in developing countries (whose pockets are not very deep) -- from being able to compete as effectively in this rapidly growing market.

You are right that most water projects ultimately distribute water to several categories of users. To the degree to which we can isolate agricultural uses, we shall be focusing on those, however. Crop farming is the largest consumptive use of water in most countries.

Regarding lawns, some anthropologists suggest that our fondness for them is hardwired into our brains, from the days when our ancestors emerged from the African savannahs. If people were charged the opportunity cost of water, there would be fewer watered lawns maintained in hot, dry climates.

But if you want to do some investigating on your own, my recommendation depends on what level of government you want to check out. At the local level, property taxes are usually a matter of public record. But finding information on what your local elected officials are offering corporations -- before the deal is done -- is not always easy. The level of transparency across states is pretty uneven. The same goes for state-level subsidies. For more information, including a number of useful online resources, I would highly recommend the Corporate Subsidy Watch section of the Good Jobs First website.

Ideally, informed, vigilant voters would hold their elected officials to account, and vote the profligate and corrupt among them out of public office. Given the high rate of reelection of sitting senators and representatives, however, and the natural tendency of voters to expect that their congressional representatives "bring home the bacon," the likelihood that there will soon emerge a majority of candidates pledged to subsidy reform seems remote. The alternative is to convince officials to place constraints on their collective spending behavior, or at least to make their spending decisions more transparent. In that regard, there has been some important progress of late.

Thanks to the pioneering efforts of Sens. Barack Obama (D-Ill.) and Tom Coburn (R-Okla.), the country will soon have a searchable database that will track federal spending by the U.S. government. The web-based search engine, which is expected to come online by 2008, will provide access to all federal funding to public and private organizations. For each entity receiving federal funding, the database will show the amount of money received in the last 10 years and an itemized breakdown of each transaction. Users should be able to search a particular company and be shown all the grants, contracts, subcontracts, loans, awards, and other forms of financial assistance paid out to it by the federal government. Initially, the database will cover data for the 2006 and 2007 fiscal years. By 2009, the data are supposed to stretch back to 1999.

I assume by "generate buyers' demand" you mean overcome whatever market failures make it difficult for people's preferences to be reflected fully in market transactions. Already certification systems help people identify products of organic agriculture, for one. America could also develop a stronger "agri-tourism" network, as exists already in countries like France, Ireland, and Italy.

I think as energy prices rise, architects and homeowners will pay more attention to the design of buildings and window fittings to take better advantage of the sun in the winter, and to shade themselves from it in the summer. The market for solar-thermal water heaters should also continue to grow. As for photovoltaic systems, I am not a physicist, but I would not be surprised (from talking with my brother, who is an inventor) if we see some important breakthroughs in materials science within the next few years that could reduce the costs of PV electricity considerably.