There are many who, I believe, are misinformed when they say that government should play no role in business and industry. Don't get me wrong, I don't think there should be state-owned enterprises. While sometime mixed public-private corporations sometimes fit specific needs on a limited basis, government should generally stay out of the management of businesses.
A role that government should play, however, is using its regulatory muscle to change the direction of business and industry, whether it is to try to provide reasons for businesses to keep jobs in the United States, or change the mix of industries to provide better job opportunities or support local development of strategic industries, like mining, steelmaking, or fuel production. It is the government's role in promoting fuel production that I will be discussing here.
What many people are not familiar with are the tax credits provided to the petroleum and natural gas industries. Companies like Exxon, ConocoPhillips, and Shell are given generous tax breaks by the federal government to produce petroleum and natural gas in United States territory. These are left over, in part from the time of the Arab oil embargo of the 1970s, but show no sign of disappearing. What the government does with these tax credits, or by offering more offshore oil and gas leases along our shores, is direct industry toward a goal: increased domestic production of oil and gas. This is something that will probably continue, as we attempt to become a nation no longer dependent on Middle Eastern supplies of petroleum.
Ethanol, whether used as part of gasoline-ethanol blends or as all-ethanol vehicle fuels, will need to play a much larger part in the future of the United States' mix of available vehicle fuels if we are to attain overall energy independence. Right now, however, ethanol production is a relatively small part of overall production of refined fuels. Moreover, most of the ethanol produced in the United States is refined from corn, a food crop. If we are going to increase production of ethanol, it must not be from a staple food crop such as corn. Using corn as a feedstock affects world food prices and availability. While many would like to suggest switchgrass and algae as potential feedstocks for ethanol production, neither is yet commercially-viable. Yet sugarcane continues to provide a useful non-food feedstock (how much sugar do you really need in your food?) to the Brazilian sugar-ethanol industry. It is the largest ethanol industry in the world, providing enough for domestic consumption in that country, helping Brazil become energy independent.
If the United States is going to increase ethanol production, and move towards energy independence, it is going to need to take a role in the industry that is equally as pro-active as the one played in the oil and gas industry. The questions here are how would the government guide the United States ethanol industry into the use of a sugarcane feedstock, and increase ethanol production overall, using this feedstock? What is the viability of this plan for the United States ethanol industry?
The United States can guide the United States ethanol industry into the utilization of sugarcane in the same way it supports domestic oil and gas production, through tax credits. Initial subsidies may also be required, but these can be phased out over time, as the price of gasoline rises and ethanol becomes more competitive. The government can favor the use of sugarcane by giving greater tax credits/subsidies to sugarcane-based ethanol than to corn-based ethanol. The government could also give tax breaks to landowners who plant sugarcane on their land in areas where the climate is conducive to sugarcane.
This sort of regulatory environment could help places like Hawaii, where agricultural production is being replaced by the fickle tourism industry. With large-scale production of sugarcane ethanol in Hawaii, the islands could become energy independent, drastically lowering the price of fuel there, as well as providing a new agricultural and industrial base to the islands, to provide a firmer foundation for an economy largely dependent on tourism. This could also add further agricultural and industrial jobs in both Louisiana and Florida.
These sort of changes will not happen without government intervention.The corn lobby in the United States, which remains powerful, has made strong efforts to make corn the most competitive ethanol feedstock in United States ethanol refineries (see this article). Moreover, investors are not going to invest in new capacity without some reason to do so. Many nascent industries require government intervention to get them off the ground.
This article from Ethanol Producer Magazine outlines the unique economic possibilities available for sugarcane-based ethanol production in Hawaii. While local entrepreneurs and the Hawaii state government can help play a role in fostering a nascent industry there, ultimately it will take federal intervention. The result could be a more well-balanced Hawaiian economy, as well as the possibility for surplus ethanol production in the future that could be exported to the rest of the United States and its dependencies, as well as abroad.
The regulatory environment is the appropriate medium for government intervention in the economy. It is a way for the government to guide business and industry in a way that keeps government out of the management of business. Most people understand that Adam Smith's "invisible hand" doesn't really exist. The reality is that the invisible hand is the government's hand. Government creates the rules of the market, and businesses exploit the market to their advantage, building the economy and providing people with employment. It's never as simple as the Tea Party tells it. Take note.
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