Home » Posts tagged 'externalities'
Tag Archives: externalities
by John Brian Shannon | February 2, 2015
By now, we’re all aware of the threat to the well-being of life on this planet posed by our massive use of fossil fuels and the various ways we might attempt to reduce the rate of CO2 increase in our atmosphere.
The First Option: Economic Incentives to Lower Fossil Fuel Use
Disinvestment in Fossil Fuels (A) or Outright Elimination of Fossil Fuel Subsidies (B)
A) Divestment in fossil fuels is under discussion as one way to lower carbon emissions
The case for divestment generally flows along these lines; By making investment in fossil fuels seem unethical, investors will gradually move away from fossil fuels into other investments, leaving behind a smaller, but hardcore cohort of fossil fuel investors.
Resulting (in theory) in a gradual decline in the total global investment in fossil fuels, thereby lowering consumption and CO2 additions to the atmosphere. So the thinking goes.
It worked well in the case of tobacco, a few decades back. Over time, fewer people wanted their names or fund associated with the tobacco industry — so that the tobacco industry is now a shadow of its former self.
Interestingly, Solaris (a hybridized tobacco plant) is being grown and processed into biofuel to power South African Airways (SAA) jets. They expect all flights to be fully powered by tobacco biofuel within a few years, cutting their CO2 emissions in half. Read more about that here.
b) Another way to curtail carbon emissions is to completely remove fossil fuel subsidies from the equation
In 2014, the total global fossil fuel subsidy amounted to $548 billion dollars according to the IISD (International Institute for Sustainable Development) although it was projected to hit $600 billion before the oil price crash began in September. The global fossil fuel subsidy amount totalled $550 billion dollars in 2013. For 2012, it totalled $525 billion dollars. (These aren’t secret numbers, they’re easily viewed at the IEA and major news sites such as Reuters and Bloomberg)
Yes, removing those subsidies would do much to lower our carbon emissions as many oil and gas wells, pipelines, refineries and port facilities would suddenly become hugely uneconomic.
We don’t recognize them for the white elephants they are, because they are obscured by mountains of cash.
And there are powerful lobby groups dedicated to keeping those massive subsidies in place. Ergo, those subsidies likely aren’t going away, anytime soon.
The Second Option: Reducing our CO2 footprint via a carbon tax scheme
But for all of the talk… not much has happened.
The fossil fuel industry will spin this for decades, trying to get the world to come to contretemps on the *exact dollar amount* of fossil fuel damage to the environment. Long before any agreement is reached we will be as lobsters in a pot due to global warming.
And know that there are powerful lobby groups dedicated to keeping a carbon tax from ever seeing the light of day.
The Third Option: Levelling the Subsidy Playing Field
Continue fossil fuel subsidies at the same level – without any carbon tax.
Quickly ramp-up renewable energy subsidies to match existing fossil fuel subsidies.
Both divestment in fossil fuels and reducing fossil fuel subsidies attempt to lower our total CO2 emissions by (1) reducing fossil fuel industry revenues while (2) a carbon tax attempts to lower our total CO2 use/emissions by increasing spending for the fossil fuel industry
I prefer (3) a revenue-neutral and spending-neutral solution (from the oil company’s perspective) to lower our CO2 use/emissions.
So far, there are no (known) powerful fossil fuel lobby groups dedicated to preventing renewable energy from receiving the same annual subsidy levels as the fossil fuel industry.
Imagine how hypocritical the fossil fuel industry would look if it attempted to block renewable energy subsidies set to the same level as fossil fuel subsidies.
In 2014, renewable energy received 1/4 of the total global subsidy amount enjoyed by fossil fuel
Were governments to decide that renewable energy could receive the same global, annual subsidy as the fossil fuel industry, a number of things would begin to happen;
- Say goodbye to high unemployment.
- Say goodbye to the dirtiest fossil projects.
- Immediate lowering of CO2 emissions.
- Less imported foreign oil.
- Cleaner air in cities.
- Sharp decline in healthcare costs.
- Democratization of energy through all socio-economic groups.
Even discounting the global externality cost of fossil fuel (which some commentators have placed at up to $2 trillion per year) the global, annual $548 billion fossil fuel subsidy promotes an unfair marketplace advantage.
But instead of punishing the fossil fuel industry for supplying us with reliable energy for decades (by taking away ‘their’ subsidies) or by placing on them the burden of a huge carbon tax (one that reflects the true cost of the fossil fuel externality) I suggest that we simply match the renewable energy subsidy to the fossil subsidy… and let both compete on a level playing field in the international marketplace.
Assuming a level playing field; May the best competitor win!
By matching renewable energy subsidies to fossil fuel subsidies, ‘Energy Darwinism’ will reward the better energy solution
My opinion is that renewable energy will win hands down and that we will exceed our clean air goals over time — and stop global warming in its tracks.
Not only that, but we will create hundreds of thousands of clean energy jobs and accrue other benefits during the transition to renewable energy. We will also lower healthcare spending, agricultural damage, and lower damage to steel and concrete infrastructure from acid rain.
In the best-case future: ‘Oil & Gas companies’ will simply become known as ‘Energy companies’
Such Energy Darwinism will reward investors that simply but profoundly migrate from fossil fuel energy stocks, to renewable energy stocks within the same energy company or group of energy companies.
At the advent of scheduled airline transportation nearly a century ago, the smart railway companies bought existing airlines (or created their own airlines) and kept their traditional investors and gained new ones.
Likewise, smart oil and gas companies, should now buy existing renewable energy companies (or create their own renewable energy companies) and keep their traditional investors and gain new ones.
- The Responsible Investor’s Guide to Climate Change (Project Syndicate)
- Full Cost of Coal $500 Billion/Year in U.S., Harvard Study Finds (CleanTechnica)
- The Social Cost of Carbon Six Times Higher Than Estimated – Stanford Study (CleanTechnica)
- Duke Energy Takes Equity Stake in REC Solar, Embraces Distributed Generation (Renewable Energy World)
- Southern Company subsidiary acquires two Georgia solar projects totaling 99 MegaWatts (PRNewswire)
Air Pollution Costs the West Almost $1 Trillion Annually
by John Brian Shannon
Air pollution has a very real cost to our civilization via increased healthcare costs, premature deaths, lowered productivity, environmental degradation with resultant lowered crop yields, increased water consumption and higher taxation.
However, air pollution is only one cost associated with fossil fuel use.
There are three main costs associated with energy
- The retail price that you pay at the gas pump or on your utility bill for example (which is paid by consumers)
- The subsidy cost that governments pay energy producers and utility companies (which is ultimately paid by taxpayers)
- The externality cost of each type of energy (which is paid by taxpayers, by increased prices for consumers, and the impact on, or the cost to, the environment)
Externality cost in Europe and the U.S.A.
A recent report from the European Environment Agency (EEA) states that high air pollution levels (one type of externality) in the EU cost society €189 billion every year and it’s a number that increases every year. (That’s $235 billion when converted to U.S. dollars)
To put that number in some kind of context, the cost of the air pollution externality in the EU annually, is equal to the annual GDP of Finland.
Let’s state that even more clearly. The amount of taxation paid by EU taxpayers every year to pay for airborne fossil fuel damage is equal to Finland’s entire annual economic output!
It’s getting worse, not better, notwithstanding recent renewable energy programs and incentives. Even the admirable German Energiewende program is barely making an impact when we look at the overall EU air quality index.
That’s just Europe. It’s even worse in the U.S., according to a landmark Harvard University report which says coal-fired power generation alone costs the U.S. taxpayer over $500 billion/yr in externality cost.
Each stage in the life cycle of coal—extraction, transport, processing, and combustion—generates a waste stream and carries multiple hazards for health and the environment. These costs are external to the coal industry and thus are often considered as “externalities.”
We estimate that the life cycle effects of coal and the waste stream generated are costing the U.S. public a third to over one-half of a trillion dollars annually.
Many of these so-called externalities are, moreover, cumulative.
Accounting for the damages conservatively doubles to triples the price of electricity from coal per kWh generated, making wind, solar, and other forms of non fossil fuel power generation, along with investments in efficiency and electricity conservation methods, economically competitive.
We focus on Appalachia, though coal is mined in other regions of the United States and is burned throughout the world.” — Full Cost Accounting for the Life Cycle of Coal by Dr. Paul Epstein, the Director of Harvard Medical School Center for Health and the Global Environment, and eleven other co-authors
The report also notes that electricity rates would need to rise by another .09 to .27 cents per kilowatt hour in the U.S. to cover the externality cost of American coal-fired electricity production.
The externality cost for solar or wind power plants is zero, just for the record
Dr. Epstein and his team notes: “Coal burning produces one and a half times the CO2 emissions of oil combustion and twice that from burning natural gas (for an equal amount of energy produced).”
There’s the argument to switch from coal to natural gas right there
Also in the Harvard report in regards to the intrinsic inefficiency of coal:
Energy specialist Amory Lovins estimates that after mining, processing, transporting and burning coal, and transmitting the electricity, only about 3% of the energy in the coal is used in incandescent light bulbs.
…In the United States in 2005, coal produced 50% of the nation’s electricity but 81% of the CO2 emissions.
For 2030, coal is projected to produce 53% of U.S. power and 85% of the U.S. CO2 emissions from electricity generation.
None of these figures includes the additional life cycle greenhouse gas (GHG) emissions from coal, including methane from coal mines, emissions from coal transport, other GHG emissions (e.g., particulates or black carbon), and carbon and nitrous oxide (N2O) emissions from land transformation in the case of MTR coal mining.” — Full Cost Accounting for the Life Cycle of Coal report
It’s not like this information is secret. All European, American, and Asian policymakers now know about the externality costs of coal vs. renewable energy. It’s just that until recently everyone thought that the cost of switching to renewable energy, was higher than the cost of fossil externalities.
It’s not only an economic problem, it’s also a health problem
Air pollution impacts human health, resulting in extra healthcare costs, lost productivity, and fewer work days. Other impacts are reduced crop yields and building damage.
Particulate matter and ground-level ozone are two of the main pollutants that come from coal.
90% or more of Europeans living in cities are exposed to harmful air pollution. Bulgaria and Poland have some of the worst pollution of the European countries.
An estimated 400,000 premature deaths in European cities were linked to air pollution in 2011. — CleanTechnica
Externality cost in China
Remember the Beijing Olympics where the city’s industry and commercial business were shut down to allow visitors and athletes to breathe clean air during their stay (and Wow!) look at their clear blue sky for the first time in decades. Great for tourists! Bad for Beijing business and industry, with the exception of the tourism industry (for one month) of course.
The Common Language Project reported in 2008 that premature deaths in China resulting from fossil fuel air pollution were surpassing 400,000 per year.
China faces a number of serious environmental issues caused by overpopulation and rapid industrial growth. Water pollution and a resulting shortage of drinking water is one such issue, as is air pollution caused by an over-reliance on coal as fuel. It has been estimated that 410,000 Chinese die as a result of pollution each year. — clpmag.org
The die is cast since it is becoming common knowledge that renewable energy merely requires a small subsidy to assist with power plant construction and grid harmonization — while fossil fuels continue to require truly massive and ongoing subsidies to continue operations.
Subsidy cost of fossil fuels
Already there is talk of ending fossil fuel subsidies, which in 2014 will top $600 billion worldwide
Want to add up the total costs (direct economic subsidy and externality cost subsidy) of fossil fuels?
Add the $600 billion global fossil fuel subsidy to the to the $2 trillion dollars of global externality cost and you arrive at (approx) $2.5 trillion dollars per year. Then there is the more than 1 million premature deaths globally caused by air pollution. All of that is subsidized by the world’s taxpayers.
Compare that to the total costs of renewable energy. Well, for starters, the economic subsidy dollar amount for renewable energy is much less (about $100 billion per year globally) and there are no externality costs.
No deaths. No illness. No direct or related productivity loss due to a host of fossil fuel related issues (oil spills, coal car derailment, river contamination, explosions in pipelines or factories) for just a very few examples.
The fossil fuel industry is a very mature industry, it has found ways to do more with ever-fewer employees, and it gets more subsidy dollars than any other economic segment on the planet.
By comparison, the renewable energy industry is a new segment, one that requires many thousands of workers and it gets only relative handfuls of subsidy dollars. And, no externalities.
It becomes clearer every day that high-carbon fossil must be displaced by renewable energy
No longer is it some arcane moral argument that we should switch to renewables for the good of the Earth; Fossil fuel is proving to be a major factor in human illness/premature deaths, it sends our money abroad to purchase energy instead of keeping our money in our own countries, and the wholly-taxpayer-funded subsidy cost of fossil is out of control and getting worse with each passing year.
The time for dithering is past. It’s time to make the switch to renewable energy, and to start, we need to remove the worst polluting power plants from the grid (and at the very least, replace them with natural gas powered plants) or even better, replace them with hybrid wind and solar power plants.
To accomplish this, governments need to begin diverting some of the tens of billions of dollars annually paid to the fossil fuel industry to the renewable energy industry.
Germany’s Energiewende program was (and still is) an admirable first step. Once Germany has completed it’s energy transition away from oil, coal and nuclear — having replaced all of that generation capacity with renewable energy and natural gas, only then can it be hailed a complete success — and German leaders should go down in history as being instrumental in changing the world’s 21st century energy paradigm.
Dank an unsere deutschen Freunde! (With thanks to our German friends!)
If only every nation would sign-on to matching or exceeding the ongoing German example, we wouldn’t have 1 million premature deaths globally due to fossil fuel burning, we wouldn’t have almost 2 trillion dollars of externality cost, we wouldn’t need $600 billion dollars of direct subsidies for fossil fuel producers — and we would all live in a healthier environment, and our plant, animal, and aquatic life would return to their normally thriving state.
Taxes would reflect the global $2.5 trillion drop in combined fossil fuel subsidy and fossil fuel externality costs, employment stats would improve, productivity would increase, the tourism industry would receive a boost, and enjoyment of life for individuals would rebound.
It’s a truism in the energy industry that all energy is subsidized, of that there is no doubt. Even renewable energy receives tiny amounts of subsidy, relative to fossil.
But it is now apparent that over the past 100 years, getting ‘the best (energy) bang for the buck’ has been our nemesis. The energy world that we once knew, is about to change.
The world didn’t come to an end when air travel began to replace rail travel in the 1950’s. Now almost everyone travels by air, and only few travel by train. And what about the railway investors didn’t they lose their money when the age of rail tapered-off? No, they simply moved their money to the new transportation mode and made as much or more money in the airline business.
Likewise, the world will not come to an end now that renewable energy is beginning to displace coal and oil. Investors will simply reallocate their money and make as much or more money in renewable energy.