Adding cost of pollution reveals true cost-benefit of power sources


Discussions of energy policy often begin with claims such as "All we need to do is 'drill, baby, drill' or 'we can generate all our electricity with wind or solar power.' " Both statements are usually based on a misunderstanding of where we are and how we got here. As one who teaches about energy issues, I always make sure my students grasp the technical essentials of our present energy systems as well as their embedded economic incentives. In terms of energy policy, we need to mind our Qs and Ps.

Qs are quantities - how much of each type of basic energy is consumed by various users. Ps are the prices of raw energy inputs and, more importantly, the resulting cost of the energy services provided. We don't want energy for its own sake. We're interested in lighting and heating our homes and getting from place to place, and doing so at the lowest total cost. Unfortunately, in most cases costs such as pollution are unaccounted for in energy prices. In 2011, 28 percent of U.S. primary energy went for transportation, our second highest use after electric power production (40 percent). This data comes from the U.S. Energy Information Administration, whose web pages should be the starting point for anybody interested in these issues.

Transportation energy is 93 percent from petroleum. Why? Liquid fuels are the most "energy dense" (most energy per unit volume) forms of energy available, a very important feature when we have to carry our fuel with us. So if we want to reduce oil use, we must find an alternative fuel of comparable energy density. Electric cars aren't in widespread use because batteries have a much lower energy density, which means an electric car can't go as far without refueling, and traveling is what we actually want.

Of the 40 percent of U.S. basic energy used for electricity, almost half came from coal, a number that had been declining since 2011 but is now rising again. Why so much coal, and why did its percentage fall and then rise? The main answer is price - the price of coal, which is too low because it does not include a component reflecting the damages done by burning coal, and the price of natural gas, coal's main competitor in the electricity sector. Natural gas prices fell significantly (85 percent) from June 2008 through January 2012, but have since risen to about twice the January 2012 level. As a result, utilities first switched a portion of electricity generation from coal to natural gas, but when gas prices started to increase again about a year ago, so did coal's share of electricity generation.

What about wind power? Although the fuel is effectively free, wind as well as solar power suffer from intermittency. We can't make the wind blow when we want electricity, but we can easily toss more coal into the boiler. Backup is needed, adding an additional cost to wind power.

Now we can see the strong relationship between the Qs and the Ps. Most people won't consider an electric car, even though its fuel costs per mile are relatively low (about one-fourth the cost of gasoline) because other costs are higher: electric cars are more expensive, and frequent refueling is costly in terms of time and convenience. And while it is easy to integrate small amounts of intermittent electricity sources into the grid, large amounts require major backup facilities, adding to the cost.

How can we use prices to change the quantities? Most economists recommend including the pollution costs of fossil fuels in their prices, using taxes or cap-and-trade systems of controlling emissions. This causes a shift away from those fuels and toward renewables, and makes the associated energy services more expensive, leading buyers to reduce purchases of energy dependent goods and services. This is precisely what happened in the 1980s when overall U.S. energy efficiency doubled in response to the rapid price increases of the 1970s. Getting fossil fuel prices "right" will shift our energy systems away from those fuels and toward cleaner renewable sources. This is nothing more than asking users - you and me - to pay the full cost of what we want.



Phil Thompson is an assistant professor of economics at Western Washington University and a faculty member in WWU's Institute for Energy Studies.

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