Natural Gas Industry Cozies Up to Washington

Investor dollars, not government subsidies, should guide the energy industry.

Public outrage at cronyism and corporate welfare is growing—and that's all to the good. But don't expect well-connected special interests and politicians to go gentle into that good night. Especially if they think the darkness can be dispelled via energy subsidies that are supposed to lead to green jobs, lower gas prices, and energy independence.

The latest energy boondoggle on the table involves the natural gas industry and is called the New Alternative Transportation to Give Americans Solutions Act (NATGAS Act). The bill would provide subsidies for the manufacture and purchase of cars that run on natural gas, the conversion of commercial trucks from diesel to natural gas, the creation of natural-gas filling stations, and tax preferences to favor the use of natural gas over other energy sources. All told, NATGAS could end up costing taxpayers somewhere from $3.8 billion annually (according to the Joint Committee on Taxation) to as much as $14 billion a year by other estimates.

Like many bad ideas, it has bipartisan support, with politicians such as Tom Cole, Charlie Rangel, Ron Paul, and Harry Reid all pushing for its passage. The bill has stalled in Congress, coming up nine votes short of the filibuster-proof 60 votes in the Senate. But with nearly 180 co-sponsors in the House, it's likely to be reintroduced after the election. Having big players in the natural gas industry such as T. Boone Pickens and Chesapeake Energy pushing the bill will only make its resurrection all but certain.

The rationale behind NATGAS is familiar. Backers say that they've got a whiz-bang technology whose benefits are guaranteed. The only problem, they say, is that transition costs to the new and better technology are really high. In this case, investors are reluctant to spend the billions of dollars in capital expenditures necessary to earn natural gas the much larger share of the transportation market it supposedly deserves. Such a view is as self-serving as it is ahistorical. The automobile itself provides a counter-example. The shift from horse-powered vehicles to gasoline ones came about without tax subsidies for filling stations. And in fact, some companies are already converting trucks, cars, and buses to run on natural gas without the NATGAS Act's large subsidies. Honda, the only company that sells factory-ready natural-gas-powered cars in the country, is offering buyers $3,000 of free fuel as an incentive.

Natural gas does in fact provide a proven, less-polluting alternative to conventional fuels for cars and trucks. But the reluctance of investors to pour the $130 billion to $210 billion that may be needed over the next 20 years to build for the natural gas infrastructure alone stems from precisely the sort of market forces that government should respect. Natural gas prices are well below historic levels while oil prices are well above historic levels. There's no guarantee that these prices will stay at those mismatched levels over the life of the capital expenditure needed to ramp up the market for natural-gas vehicles.

If the recent string of government-subsidized energy failures such as Solyndra teaches any lesson, it's that government should be extremely slow to overrule investors' reluctance to wager their own money. Just as it does with more chic "green energies," the acknowledged need for subsidies shows that natural gas technology is not ready for prime time. Tilting the scales in its favor will introduce even more economic inefficiency into the market while putting taxpayers on the hook for yet another "sure thing" that will help America move forward into a future of cleaner and greener energy.

As it stands, natural gas companies are already set to benefit from regulations that hamstring competing energy sources. After granting itself the authority to regulate greenhouse gases, the EPA proposed a series of regulations apparently aimed toward eventually requiring every coal plant in America to either close shop or convert to natural gas. As one EPA administrator recently admitted, "gas plants are the performance standard, which means if you want to build a coal plant, you got a big problem." The cost of retro-fitting existing plants to meet numerous EPA requirements—including mandated installation of selective catalytic reduction for nitrogen oxides, scrubbers for sulfur dioxide, and electrostatic filters for fine particulate matter—is big enough that the smart choice will be to retire plants sooner than would otherwise be the case. Brattle Group energy analysts estimate that approximately 20 percent of existing coal capacity will be retired rather than face the alternative of installing these and other EPA-mandated retrofits.

One EPA rule already has some coal-fired generating capacities off-line: the Utility MACT. That rule, which was finalized in December of last year, places limits on the emissions generated by coal fired electric generating units starting in 2016. However, the impact of the rule is already being felt today as plants are proactively going off-line. The EPA estimated that the rule would cost $10.9 billion in the year 2015, $10.1 billion in 2020, and $10 billion in 2030. However, according to the National Economic Research Associates annualized compliance costs could be as high as $17.8 billion.

It is important to understand that the issue here isn't that coal-fired plants may eventually have to be closed to convert to natural gas. Rather, it's that the natural gas industry will benefit from these rules, which have been pushed before it's fully clear that the energy sector is ready for the change. It's possible that a Romney win might see some of these rules rolled back, but a flurry of midnight regulations from the outgoing administration could also cause more havoc than they are able to solve.

These new EPA rules didn't just materialize out of thin air and their origins show how special interests are always working to rig outcomes in the name of an ever-changing public interest. The rules were spurred by lawsuits from the Sierra Club's "Beyond Coal" campaign a few years ago. The Sierra Club received $25 million from Chesapeake Energy CEO Aubrey McClendon between 2007 and 2010. Chesapeake Energy is the second-largest natural gas company in the United States and stands to gain considerably from any legislative or regulatory restrictions on coal. It's unlikely that McClendon, who has also been embroiled in a corporate governance scandal, would otherwise be interested in the work of the Sierra Club, which has already zeroed in on natural gas as its next target. Fracking, after all, which promises an abundant supply of natural gas for the foreseeable future, has gone from being the darling of the environmental movement to one of its betes noire.

Rather than pushing new legislation like the New Alternative Transportation to Give Americans Solutions Act—which would simply introduce new and fickle incentives—policy makers should actually level the playing field in energy. Both Barack Obama and Mitt Romney—and Democrats and Republicans more generally—say they believe in an "all of the above" energy policy. That is, they think that all forms of energy production and innovation should be encouraged. But the best way to find the fuels of the future is to use markets—and investor dollars—to lead the way.