The United States has often been accused of using too much energy.  But energy is a necessary input … to a productive economy.  Our issue is not too much consumption but instead two little domestic production.

The United States needs to developing two-phase solution.

Phase I

Create an environment that encourages the development of alternative fuels.  This environment would include tax incentives, government loans and grants, regulatory support and mandates and an extended domestic patent protection.  The challenge to the American public is to develop alternative fuel devoid of fossil fuels that can be produced on a significant scale.  To entice inventors and companies alike, the following incentives should be adopted.

Step One

All vehicles or fuels devoid of fossil fuels would be exempt from taxation, initially.  Once a new fuel or vehicle achieves 10% market share, this exemption would continue for an additional 10 years.

Special funding of energy initiatives such as hybrids and ethanol would cease.  The policy is to replace fossil fuels not extend the reliance on them.  This tax incentive would be significant.  The tax incentive assumes consumption taxation has replaced the income tax.  The exempt status could be as high as 30% competitive advantage over traditional fuels.

Step Two

The government would make a $1 billion loan or equity investment available to any inventor or company who captures 10% of the market.  The equity loan incentive would be available for each 10% of market share converted, up to 50% market penetration.  This incentive would be available to each alternative energy source achieving a 10% penetration.

Step Three

An annual science competition with a multimillion dollar prize should be held.  This competition will be open to businesses and individuals alike.  The competition would be targeted at alternative fuels and vehicles, solely.

Step Four

One of the big challenges of a new fuel source is the development of an infrastructure support the distribution.  The development of an infrastructure is one area where the government can assist.  The government currently assists the fuel retailing industry with their environmental liability by assessing a tax on fuel and at the same time setting up a sinking fund to assist with the removal of underground storage tanks.  A similar concept can be applied to assist with the role of alternative fuel infrastructure.  Once a product achieves 10% market penetration a mandate could be issued that 10% of the fuel sites would be required to offer the new energy fueling.  The conversion would be funded through a surtax on fossil-based fuels and a sinking fund established each time a new fuel achieves a 10% milestone (10% 20% 30% etc.) the mandate would increase.  This should continue until 50% penetration is achieved.  At 50% the mandate would cease, the sinking fund close and the fossil fuel tax removed.  Market forces would then be relied on to build out the rest of the infrastructure.

Step Five

The final incentive the government can offer is longer patent protection to entice companies and inventors alike.  The time protected by patent would be reset if the innovation captures 10% of the market.  The patent period would be reset again should the innovation capture 40% of the market.

Energy is critical to America’s productivity.  Finding new sources is important.  The government should encourage innovation but not pick winners; electric cars and ethanol subsidies are examples of government trying to pick winners.  To date both potential solutions are long way from becoming a meaningful solution, furthermore solution should replace fossil fuels not extend our dependency on them.

Phase II

If one believes and trusts in American ingenuity and our ability to rise to a challenge then there is no reason not to utilize our fossil fuel resources.  Developing alternative fuels will take time and in the interim, America needs to push forward toward energy independence, with all due haste.

When it comes to oil, the government should encourage exploration and extraction where ever it can be done efficiently, effectively and safely.  With the elimination of the income taxes, a per barrel fee would be a reasonable replacement for oil drilled off government lands.  We have a huge debt, selling our natural resources should help reduce this debt.  Domestic production would have an advantage over imported oil by not being subject to import tariffs and income taxes either domestic or foreign.  The gasification of coal and natural gas should be explored and pursued as much as possible.  Replacing external sources of energy with domestic supply is critical.  A primary input to productivity is energy.  This nation cannot expect to perpetuate prosperity through outsourcing of primary inputs to productivity.

A dual pronged energy policy that leverages market forces and private ingenuity to develop new sources of energy and aggressively utilizes our natural resources with responsible stewardship is the best solution for fueling America’s productivity.

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