HB’s comment about market signals is interesting. I always thought the ethanol subsidies were not about encouraging alternative fuel but were rather an agriculture measure to support corn growers. I don’t know precisely how much and where artificial mechanisms already skew pricing in the US but I expect quite a great deal, especially in agriculture/food products, fuel and petroleum based products, et al.

Oil companies already enjoy preferential treatment in the US market (although it doesn’t seem like it at the pump). Fun unsubstantiated rumor: I was talking to my Dad the other day (who at one time owned and operated a texaco station). He said at one point (long before the Aramco merger) its unpaid federal tax liability reached some catastrophic amount. Feds threatened, Tex refused to pay, and leveraged its position against the federal government since so many states depend on oil companies for tax revenues and employment. Then, as if by magic, the Saudis bought 500,000 shares of nonvoting stock in the exact same amount as Texaco’s outstanding federal taxes. Hmm, wonder how that happened.

So I don’t think it is necessarily bad to require that people pay “fuel taxes” even if they are using non-standard fuel. If the alternative fuel (not paying for its cost in externalities) is cheaper than petrol-based fuel (whose cost includes those costs) then people aren’t really getting the right signals about actual cost.

While I am all about encouraging growth in alternative fuels, I also have problems with the government trying to “Pick a Winner” by screwing around with market signals such as pricing. In general, this creates growth in ONE area, while stifling growth in other areas. Similar problems happened in Europe’s Cell Phone industry where EU insisted on adopting one standard (which got ubiquitous cell-phone coverage much quicker than the states, but made it more difficult to shift to 3G services when it turned out that the technology they started couldn’t compete).

As an aside, I think we are seeing this happen with Ethanol. I have not been able to navigate through the studies and counter-studies to decide one way or the other whether it is really an effective alternate fuel. But the massive subsidies and foreign tariffs that we are pumping into Ethanol production mean that the market is never going to make the optimal decision about it.