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October 18, 2011 / Mike Piskur

Approaching the True Cost of Coal

In August 2011, three economists published a paper titled “Environmental Accounting for Pollution in the United States Economy.” It attempts to estimate air pollution damages for each industry in the United States, and finds that:

Solid waste combustion, sewage treatment, stone quarrying, marinas, and oil and coal-fired power plants have air pollution damages larger than their value added. The largest industrial contributor to external costs is coal-fired electric generation, whose damages range from 0.8 to 5.6 times value added.

The report, largely ignored in the mainstream press, garnered attention from academics and bloggers, most notably Paul Krugman. He said the report “should be a major factor in how we discuss economic ideology” and offered this assessment:

What (the authors) do is estimate the cost imposed on society by air pollution, and allocate it across industries. The costs being calculated, by the way, don’t include the long-run threat of climate change; they’re focused on measurable impacts of pollution on health and productivity, with the most important effects involving how pollutants — especially small particulates — affect human health, and use standard valuations on mortality and morbidity to turn these into dollars.

Even with this restricted vision of costs, they find that the costs of air pollution are big, and heavily concentrated in a few industries. In fact, there are a number of industries that inflict more damage in the form of air pollution than the value-added by these industries at market prices.

In other words, the report is about quantifying and internalizing the true costs of coal, which at this moment are externalized, and therefore ignored by the polluters and ultimately paid by society as a whole. This report focuses on increased mortality from sulfur dioxide and other pollutants, but does not account for climate change effects. This is the key point: the burning of coal carries huge economic and social costs that are not reflected in the price Americans pay for electricity. This is happening now, in every part of the United States and the world.

Chicago Reader

The American economy is replete with externalized costs. In everything from food to water to gasoline, the price paid at the store or tap or pump does not cover the true cost of those goods, many of which are interconnected. Pollution is perhaps the most common cause of these ignored/punted costs. For instance, a $1.79 bottle of pop sugar water does not include the fossil fuels (in the form of nitrogen fertilizer) required to grow the massive amounts of corn needed to produce the high fructose corn syrup that sweetens the drink. Most of this corn grows in Iowa, Illinois, and Nebraska, and nutrient runoff enters streams and rivers along with upstream municipal and industrial waste. This flow of nitrates, wastewater, and other runoff ultimately finds its way into the Mississippi River and the Gulf of Mexico, where hypoxia has created a Dead Zone. This oxygen-starved area cannot support life – obviously a serious problem – and creates major environmental and economic impacts. It’s probable that connections exist behind aquatic dead zones and a federal agricultural policy that lavishly subsidizes the monoculture crops that depend on a steady diet of synthetic fertilizer. High fructose corn syrup itself is a major source of America’s obesity epidemic and other public health problems like diabetes, which carry huge social costs and contribute to the steady increase of health care costs in America. Keep in mind this is just one, albeit complex, example.

The World's Aquatic Dead Zones

Approximately 45 percent of America’s electric power comes from coal. The report estimates that aggregate pollution damages from the market sector for all industries in 2002 were $184 billion. Utilities and agriculture are responsible for $63 billion and $32 billion in damages, or 34 percent and 17 percent of the total damages produced by market activity, respectively. Moreover, these sectors have the highest ratio of damages to value added, which the authors define as the cost of outputs minus the cost of inputs, not including land, labor and capital. These ratios are 38 percent for agriculture and 34 percent for utilities. In other words, selective accounting ignores or hides a third of the true cost of electric utilities. The EIA states that “the average price paid for coal in July 2011 was $2.44 per MMBtu”, but this amount is kept artificially low. Krugman argues:

At one level, this is all textbook economics. Externalities like pollution are one of the classic forms of market failure, and Econ 101 says that this failure should be remedied through pollution taxes or tradable emissions permits that get the price right. What Muller et al are doing is putting numbers to this basic proposition — and the numbers turn out to be big. So if you really believed in the logic of free markets, you’d be all in favor of pollution taxes, right?

It’s important to be clear about what this means. It does not necessarily say that we should end the use of coal-generated electricity. What it says, instead, is that consumers are paying much too low a price for coal-generated electricity, because the price they pay does not take account of the very large external costs associated with generation. If consumers did have to pay the full cost, they would use much less electricity from coal — maybe none, but that would depend on the alternatives.

Claims that the United States is the “Saudi Arabia of coal” or that wind and solar energy can’t compete with fossil fuels depend on obfuscating the economic truth. Conventional wisdom states that renewables can’t replace coal until the world runs out of the latter, and that won’t happen for a century or more. In fact, despite the externalized costs, solar energy is on the verge of becoming cheaper than coal, and the price of renewable technologies will only decrease as technology improves and the market matures. It bears repeating that this study does not account for the effects of climate change, which if properly quantified and internalized would make coal an economic nonstarter. The sooner we acknowledge these facts, the better, and the transition to a post-carbon economy will be that much less painful.


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