How to calculate the true cost of energy

at 10:48 AM ET, 04/25/2012

There are two ways to think about the cost of energy. There’s the dollar amount that shows up on our utility bills or at the pump. And then there’s the “social cost” — all the adverse consequences that various energy sources, from coal to nuclear power, end up foisting on the public.


(Charlie Riedel/AP)
Economists have been working to quantify these social costs for some time: from the premature deaths due to air pollution to the damage wrought by the Deepwater Horizon oil spill in the Gulf Coast. Yet rarely has anyone tried to tally them up in a comprehensive fashion. Which is what makes this new paper from Michael Greenstone and Adam Looney of the Hamilton Project so valuable. The two economists sift through all of these economic papers and try to calculate what the price of various energy sources would actually look like if these external social costs were included.

The graph below offers a good overview of their results. The blue bars represent the current market cost of various energy sources. On top of that, Greenstone and Looney have added estimated health damages from air pollution (the purple bar), as well as the cost of climate-changing carbon emissions that come with burning fossil fuels (the gray bar). They do not, however, include external costs from drilling or mining:

The change is especially stark for coal. On market price alone, electricity from existing coal plants is easily America’s cheapest energy source, which explains why coal still provides 45 percent of the country’s electricity. But it’s mainly cheap because coal users don’t have to pay for the downsides: Soot from coal-fired power plants, for instance, still causes thousands of premature deaths each year and hundreds of thousands of illnesses, but those costs are borne by other people, in the former of shorter lives and higher health care bills.

If coal users had to pay these costs out of their own pockets, Greenstone and Looney estimate, the price of burning coal at an existing plant would jump from 3.2 cents per kilowatt hour to 8.8 cents per kilowatt hour. Natural gas looks much cheaper by comparison — in part because it emits half as much carbon-dioxide as coal and considerably less lung-damaging air pollution. And new coal plants would end up being more expensive than even wind or nuclear power.

A similar analysis can be done for automobiles. On average, the private cost to purchase, maintain, and fuel a vehicle adds up to about $0.51 per vehicle mile. But, Greenstone and Looney calculate, if you included all the other externalities — pollution, greenhouse gases, the damage inflicted by car crashes — then the social cost of a car would rise to about $0.61 per vehicle mile. That’s about $16,000 extra for a car that is driven 150,000 miles.

Greenstone and Looney stress that there are still plenty of uncertainties in their research. For instance, nuclear power looks cheaper than coal in the graph above. But, they note, that’s partly because it’s very difficult to put an exact price tag on the risk of a reactor meltdown. The same goes for damage that, say, hydroelectric dams can wreak on fisheries. And they don’t include the social costs from mining and drilling. This paper is the most comprehensive attempt to tally up all these costs to date, but it’s still not quite complete.

And some of their choices could be debated. The “social cost of carbon” that they use — estimated at $21 per ton in 2010 and rising over time — was the median estimate of a study done by an interagency U.S. government task force. But some economists, like Frank Ackerman of the Stockholm Environment Institute, have argued that this number downplays the damage that global warming could inflict. Many other studies have come up with a higher social cost of carbon — the Intergovernmental Panel on Climate Change came up with an average of $43 per ton. If that was used, then coal and natural gas would prove even pricier.

At the end of the paper, Greenstone and Looney argue that the government should put a price on the social costs of fossil fuels — either through a cap on emissions or a tax. “If firms and consumers faced the full cost of their energy use,” they write, “they would have a greater incentive to make more-informed and socially efficient decisions about energy consumption.”

 
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