Michigan ranks second-to-last among peer states in business cost competitiveness.
Citing a threat to national security from U.S. dependence on foreign oil,
Gov. John Engler recently instituted state management of alternative energy
research and development. A newly created agency and a variety of subsidies
supposedly will enhance development of non-fossil fuel technologies.
But even the best of intentions don't necessarily produce sound policy, and
the governor's "NextEnergy" initiative is, unfortunately, flawed.
In unveiling his proposal in April, Engler vowed to position Michigan as the
"world leader" in alternative energy sources such as hydrogen fuel cells to
power vehicles. Absent state intervention in automotive re-engineering, he said,
Michigan risks the loss of 200,000 manufacturing jobs.
As the MEDC's own benchmark study recently noted: "True economic competitiveness is the sum result of a state's overall business, social, and economic climate."
Promoting energy R&D in Michigan does not require yet another government
bureaucracy allocating favors to select firms. Privatization of state and
federal research programs would make Michigan the economic powerhouse the
It's true that the United States imports more petroleum today than 30 years
ago-54 percent of American consumption compared to 35 percent in the 1970s. But
more oil is now available from a wider variety of sources than ever before. To
artificially restrict energy to domestic or so-called renewable sources in the
name of "security" would only make the United States more vulnerable to energy
disruptions, not less. And to embrace the notion of an energy crisis when none
actually exists imperils Michigan jobs by emboldening the automobile bashers.
Regardless of the supply outlook, the immediate issue is whether the
Next-Energy initiative will advance R&D. The state's new authority will be
governed by a hand-picked board to finance, direct, or otherwise aid in the
central planning, construction, and design of alternative energy technology
business and infrastructure. The authority is also empowered to issue revenue
bonds and grant a variety of tax credits and exemptions based on very broad
To generate operating revenue for the venture, the Legislature has
transferred to the authority control of more than 700 prime acres in Washtenaw
County that can be leased or sold to energy-related enterprises. However, should
the authority run short of cash with which to repay the notes or bonds sold to
underwrite its projects, the taxpayers would have to cover the debt.
Government involvement in R&D is well established. National labs with
multi-billion dollar budgets have long augmented academic and commercial
research. But states and the federal government have largely failed in attempts
to commercialize nascent technology-despite trillions of dollars in public R&D
In the 1970s, for example, the Carter administration created the Synthetic
Fuels Corp. to develop renewable energy sources (in the name of energy
independence). But the Synfuels program was discontinued in 1982 without
generating a dime's worth of new power-despite taxpayers' $1 billion bill.
Congress then formed the Partnership for a New Generation of Vehicles with the
intent of producing an affordable zero-emissions family sedan by 2004. Despite
$2.5 billion from taxpayers and The Big Three, the program's chief goal was
ultimately deemed unrealistic by the National Academy of Sciences.
The U.S. Department of Energy, meanwhile, administers a variety of
alternative energy programs upon which hundreds of billions of dollars are
Myriad institutional problems confound government R&D-foremost among them the
aversion to risk generally found in government ranks. The incentives under which
well-intentioned government scientists operate can make it harder for them to
distinguish between pipe dreams and real technological promise. Officials
routinely allocate public funds to the least-risky projects in order to minimize
the potential failure of pet bureaucracies. But those tend to be the projects
most likely to draw private capital, thus supplanting privately funded R&D.
As it is, the automotive industry already is heavily invested in fuel-cell
research. BusinessWeek reports that General Motors Corp. hopes to unveil its
"Autonomy" prototype by 2010, while DaimlerChrysler is testing hydrogen powered
busses in 10 European cities while perfecting its "Natrium" minivan. Ford Motor
Co., meanwhile, has developed its "Focus FC5," which relies on hydrogen
extracted from methane.
To the extent that automakers foresee a competitive advantage in fuel-cell
technology, they are unlikely to share their research findings. (After all,
advocates of alternative energy have insisted for years that the internal
combustion engine is headed for extinction.) Appearing last month at a Lansing
press conference to tout the NextEnergy plan, Doug Rothwell, head of the
Michigan Economic Develop Corp. (MEDC) acknowledged that it's unlikely that GM,
DaimlerChrysler, or Ford would directly participate. In other words, the most
prominent players in the field prefer to keep their findings out of government's
The whole notion of "dominance"-whether state or national-is, in fact,
largely outdated. Consider, for example, the case of computer chips. As
chronicled by Everett Ehrlich in The Globalist, Japan's supposed domination of
chip production provoked deep anxiety within the United States. But desperate to
cover the enormous capital costs of chip redesign and manufacturing, the
Japanese unleashed cheap chips the world over. This allowed the United States to
focus instead on powerful, productive, and entertaining software.
As Ehrlich notes: "In a world in which you can have access to any resource,
product, service good, input, component, or factor, the key to corporate
competitiveness is to determine how best to add value to the assortment. It
matters far less to control all the steps along the value chain as long as there
is easy access to the various components."
State interference also risks limiting potential advances by effectively
endorsing one technology over another through special tax and regulatory
treatment. This was precisely the case with California's electric vehicle
mandate, which diverted years of attention and billions of R&D dollars from more
promising technologies. The Engler plan poses a similar risk in prohibiting
subsidization of gasoline or diesel-powered hybrids, for example, while a
"bio-diesel" mandate is also pending in the Legislature.
If the governor and lawmakers are adamant about promoting new energy
technologies, the more effective approach would be to promote as much
experimentation as possible.
This is especially important given the tangled technical challenges facing
fuel-cell development, which will take decades to unravel. These challenges
include the potential environmental threat caused by increased concentrations of
hydrogen in the atmosphere, which could exacerbate the build-up of greenhouse
gases. According to the Center for Automotive Research (CAR), "Significant
invention and refinement still remain before the fuel cell can be considered a
viable candidate for mass production vehicles."
To produce a kilowatt of energy with current fuel cell technology costs about
$300. The internal combustion engine does it for $30. And building the fueling
infrastructure needed to service a fleet of hydrogen fuel-cell vehicles would
cost in excess of $100 billion, according to CAR.
Also to be considered are the consequences of the discriminatory subsidies
granted by the Legislature. As it is, Michigan ranks second-to-last among peer
states in business cost competitiveness. This is largely a consequence of the
state's Single Business Tax. But NextEnergy's implicit subsidies would increase
this tax burden for non-favored firms. And there is concern that the credits and
exemptions could so deplete the state's "rainy day fund" that the scheduled cuts
in the SBT would not take effect. If the governor wishes to underwrite R&D, why
not simply sell off surplus state land to fund across-the-board tax cuts? This
would eliminate the "need" for a costly new bureaucracy and scores of new tax
As the MEDC's own benchmark study recently noted, "True economic
competitiveness is the sum result of a state's overall business, social, and
Alternative energy sources will evolve when the prices of conventional fuels
exceed the research and development costs for alternative sources. As Cato
Institute scholars Ronald Sutherland and Jerry Taylor have pointed out, private
firms may underinvest in "good" R&D, but government is far more likely to
overinvest in "bad" R&D.
At the very least, the Michigan Legislature should re-examine the Governor's
initiative, although Mr. Engler does have a relative solid overall economic
record. Lawmakers must carefully consider whether NextEnergy will be the next
Diane Katz is director of science, environment, and technology policy with
the Mackinac Center for Public Policy.