Let the Private Sector Solve Energy Issues

This week’s Fortune Magazine revealed that a few of the Department of Energy’s pet projects that received funding from Obama’s 2009 stimulus have now been purchased by foreign investors.*The first such company is Ener1, a company that makes lithium ion batteries for electric automobiles. In 2009 it received $118.5 million grant from the Obama stimulus and two years later it promptly filed for Chapter 11 bankruptcy. That’s quite unfortunate but definitely not the most concerning part of this story.Shortly after it filed for bankruptcy it was effectively purchased by a Russian named Boris Zingarevich for $86 million. Disconcertingly, Fortune Magazine reports that “the Discovery Institute [a non-partisan] Washington think tank … believes that Putin and Medvedev have grown to trust Zingarevich so much that they could have asked him to purchase Ener1 for the benefit of Russian industry.”

Let’s think about the implications of that statement. Russia, a country that has recently failed to spur innovation on their own is now reaching out to buy a piece of American grown ingenuity. That really wouldn’t be newsworthy if it wasn’t for the fact that this company’s innovations, patents, and assets were funded by the U.S. government, and by extension, the U.S. taxpayer.

What’s more, this isn’t the only recent case of a foreign purchase of U.S. intellectual property. The Chinese company Wanxiang Group recently invested $465 million in the browbeaten battery maker A123 Systems. What do Ener1 and A123 Systems have in common besides the fact that they make batteries? The latter also received a substantial grant from the Department of Energy after the Obama stimulus. In fairness, I will point out that Republicans and Democrats alike supported giving grants to green energy firms, so this critique is not directed at one party in particular, rather it is an analysis of the unintended consequences of government policies.

But if I were to recommend a policy initiative that effectively uses taxpayer dollars, it would be to act more like Mr. Zingarevich. The government is not very good at picking winners and losers in the business world. No matter how much it subsidizes an industry, market demand for that product (in this case lithium batteries) remains a harsh reality. See Solyndra in case if you want another recent example of a spectacular government flop.

That being said, there will be times when the private sector does not produce a socially optimal amount of the good, and the government needs to step in and make it a public good. For example, public parks. If we left that up to the private market, there probably wouldn’t be a lot of parks in the country. So if Congress decides that it is socially optimal for us to support and sponsor green energy initiatives, that’s fantastic, but we need to be realistic and understand that there may not be a market for those goods at this time.

There’s an alternative approach, and that’s acting more like the bargain basement shopper Mr. Zingarevich. Let the private sector attempt to solve our energy issues, without the grants, and if they fail, buy the patents and use government scientists to advance our technology. We need government to encourage innovation, risk taking, and growth, not moral hazard and foreign, state-tied private equity vultures.

*Unfortunately the article is currently paywalled and not available online for another couple of weeks.