Subsidies are bad; That's ECON 101. The reason being they distort the market: the subsidised product sells for less than it costs to produce, and so we buy more of it than we would without the subsidy. Making things worse, unsubsidized alternatives are placed at a disadvantage, and may struggle to exist.
We may even base a large part of our economy on subsidised goods, and that causes an ‘adjustment' when the subsidies are eventually removed. Because sooner-or-later the subsidies will have to be removed, often with much kicking and screaming.
Reality always wins. Perhaps the government runs low on money and the subsidies become a drain on the treasury. Or perhaps the subsidised item begins running out, resulting in large price increases that strain the treasury when the government tries to maintain the artificially low price.
Either way, the government in question has a problem. In the case of oil, we all have a big problem. Some governments subsidise oil directly in order to grow their economies quickly, such as China and India, while others take more circuitous routes, such as the United States' invasion of Iraq to secure a supply of oil.
The biggest part of this big problem, though, is that we have based our economies on oil, nowhere is this more true than in the United States. We transport our products in diesel-spewing trucks on subsidised roads, even though rail is much more efficient (pdf). Big box stores are entirely committed to endless and expensive supply chains. The average Caesar salad travels 3,000 km.
Many people are dependent upon a car to get to work, to shopping, to just about everything. We tore up the streetcar tracks and widened the roads. We are accustomed to jetting here and there for everything from business meetings to weekend getaways in Vegas.
Most of our food comes from industrial-scale ‘farms' that rely upon irrigation and petroleum-based pesticides. It seems like everything we use contains huge amounts of plastic, from cell phones to televisions to...everything. Look around and take a quick inventory of all that contains plastic. And most of these products come from far, far away.
Well, guess what: Oil is running out at the same time the demand is increasing rapidly from countries like China and India. This would be great news for the climate except that if the world economy crashes due to oil price increases and/or shortages, we'll be hard pressed to build clean and green energy solutions from scratch, and there will be great pressure to turn to coal. We would have to burn a lot of coal to smelt enough steel to rebuild the railways, including wind turbines to power them.
The solutions all exist, but it will take time to ramp up. For example, wine is once again being delivered to England by sailing ship, and ultimately this will be less expensive - and non-polluting - than shipping by gargantuan heavy-oil-fuelled container ships. However, we don't have many sailing ships left, our railways are in a sad state, our houses are poorly insulated, most of our energy comes from coal, and so on.
Recently, Al Gore called for the United States to get all its energy needs from renewable sources within 10 years. T. Boone Pickens, former Texas oilman, has also called for a massive shift away from oil and is putting his money where his mouth is, investing hundreds of millions in wind farms. There are examples of houses that use almost no external energy, and China's solar hot water capacity will be equal to forty nuclear plants by 2010. Many countries have high-speed electric trains for people and freight, and so on and on.
It is time to cut the subsidies and let the inefficient industries that have been leeching off taxpayers for decades change or go bust; enough corporate welfare for oil and car companies. And after that, under normal circumstances, no more subsidies for anybody.
However, the circumstances are far from normal: we are facing a climate crisis. Some highly informed opinion is saying we need to actually reduce the amount of CO2 currently in the air; simply stabilising at some point in the future is not enough. We've already overshot the ‘safe zone.'
This makes sense. Look at the changes we're already seeing: the Arctic is now expected to be ice-free in the summer very soon, possibly this summer. Coral reefs are dying, rapidly. Species (pdf) from penguins to polar bears are endangered. In my own country of Canada, warmer winters have allowed the Pine Beetle to get the upper hand on the pine trees, and my province of British Columbia is expected to lose 80% of its pine trees - in the next five years. This is an economic loss of 192 billion dollars, and will mean the closure of many mills and many towns turning into ghost towns. And the beetles have crossed the Rocky Mountains and may now take out Canada's entire boreal forest, a potential loss that is incalculable.
Making things worse, developing countries are simply trying to raise their standard of living the same way we did: by burning fossil fuels.
We need to move quickly, and fortunately the solution to both problems is the same. We must admit responsibility for what we've done, and we must take responsibility for making things right. The developed world must immediately transfer all subsidies for fossil fuels to alternatives temporarily, even at the risk of causing market imbalances again, as we did with oil and then recently with ethanol. Then, we must reduce consumption by doing things like changing building codes. Next, we have to subsidise rail and sail for awhile. Finally, we have to mandate and subsidise renewable energy generation like wind and solar. And as we go, we must give these solutions to the developing world so they can leapfrog to energy self-sufficiency and efficiency.
And as we reindustrialise, this time, we must end the subsidies.
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