Externality is a situation in which the activity of one entity affects the welfare of another entity in a way that is outside the existing market (Rosen, 2005, p. 47). Simply put, externalities are the costs or benefits that arise from market transactions which are not reflected in prices. And when we speak of negative externalities, obviously, these are costs to third parties (other than the producer and consumer). Why is there negative externality? I learnt from Economics that under a competitive system, the market price of a good takes into account both the negative and positive effects of using the good. However, there are certain goods like clean water and clean air that are sold and bought in the market. As a result there is no market price that can be observed for such goods. Since there is no price for clean air or clean water, the costs of air and water pollution attributed to the production and use of nonrenewable energy is not well-accounted for.
One of the major and continuing concerns of economies today is the negative impact of energy production and consumption both to the people and the environment. For instance, though it is a fact that the use of fossil energy resources has sustained global economic growth, the increase in the rate of utilization of this nonrenewable energy has damaging economic, social, and environmental consequences. And the most pressing problem attributed to the energy sector is the “greenhouse effect.” In this paper, I examine the negative externality associated with the non-renewable energy sector in the United States. In particular, I present the economic, social and environmental costs of nonrenewable energy production and consumption. Likewise, the techniques in the reduction of the spill-over effect are also discussed.
The Nonrenewable Energy Sector in the United States.
Energy sources like coal, crude oil, natural gas and uranium are non-renewable energies that are consumed by people faster than the production of nature of these resources. As cited by the Institute of Energy Research (2009) from the US Energy Information Administration, 89 percent of the power generated in the US in 2009 is provided by nonrenewable energy sources. Likewise, as of 2012, 82 percent of US energy demand is met by fossil fuels, namely coal, oil, and natural gas (http://www.instituteforenergyresearch.org/energy-overview/fossil-fuels/).
Coal is primarily used to generate electricity in the US. Forty-nine percent of the electricity in the US is provided by coal power plants. The current list of coal power plants by GlobalEnergyObservatory.org revealed that the United States has the most number of power plants (approximately over 500 power plants) among countries in the world.
It is a common knowledge already that coal is the most polluting among the nonrenewable energy sources. Coal is considered as the maor contributor to global warming because of the large amount of carbon dioxide (CO2) that it releases in the atmosphere; CO2, as we are all aware of, is a green house gas. Likewise, the combustion of coal (as well as crude oil) emits selenium, mercury and arsenic that mainly contribute to the formation of acid rain that pollute waterways and land.
Another form of renewable energy source is the crude oil, commonly known as petroleum. Oil is converted into fuel sources like paraffin wax, heating oil, aviation fuel, propane, diesel, and gasoline. Also referred to as the transportation fuel, oil accounts for 90 percent of the world’s transportation fuels and is complementarily used to many products in households and industries (http://www.all-recycling-facts.com/non-renewable-energy.html). As The Institute of Energy Research (2012) reports that, to date, oil meets 36 percent of US energy demand, with 70 percent directed to fuels used in transportation; 24 percent in industry and manufacturing, 5 percent in commercial and residential sectors, and 1 percent to generate electricity (http://www.instituteforenergyresearch.org/energy-overview/petroleum-oil/). Though it is one of the important nonrenewable energy source in the world, crude oil has a high level of toxicity and oil-related accidents that have hazardous impact to the environment (oil spills as example). Also, the fumes from oil combustion contribute to acid rain formation that damages the environment.
Natural gas is another energy source that is also nonrenewable and is becoming one of the electricity generators. This energy source is less polluting than coal and crude oil since it does not emit CO2 in the atmosphere. However, it is composed of methane, which is a hazardous gas, more damaging than CO2. In Texas, USA natural gas is the state’s most common electricity producing fuel.
The non-fossil energy, the uranium, is another form of nonrenewable energy. Uranium is a radioactive chemical element that is primarily used in the production of nuclear energy. Though the nuclear power generation does not release greenhouse gasses, the radioactive by-products are equally damaging. In the US, nuclear plants are the second source of electricity next to coal-powered plants.
External Costs of Nonrenewable Energy
Arthur C. Pigou, an English economist and a professor in Cambridge University defined negative externality as the external cost associated to the consumption or production of a product.
Economic costs. There are several economic costs associated with the use of nonrenewable energy, particularly coal. The most obvious of the economic costs of coal are the tax breaks and subsidies given by the government that are not reflected in the price of coal in the market. Big investments are involved in the mining and burning of coal and most often, the cost and risk to such investment are passed on to the taxpayers. The taxpayers bear the burden through the government’s programs like loan guarantees and infrastructure subsidies. Several cases were noted to support this observation.
The coal spill that occurred in Tennessee had costs the taxpayers up to $ 1 billion to clean up the site. To date, the US Environmental Protection Agency took charge of the clean up under the Superfund law of which most of the cost will be shouldered by the taxpayers. Moreover, as with the coal industry concerns in Kentucky, the state government is supporting the coal industry, spending $115 million on subsidies; while the coal industry pays less in taxes. (I would like to emphasize at this point that the non-renewable subsidies were permanent provisions in the U.S. tax code). Energy subsidies also encourage income inequality since low-priced energy largely benefits the high-income consumers who have the largest share in energy consumption.
Aside from costs that are borne by to taxpayers, economic costs also include lost productivity and health care costs in relation to the health hazards of pollution caused by coal. This was the case in the state of Ontario. Likewise, in the state of Alaska, the mining of coal destroyed the ecosystems that sustain the tourism, commercial fishing as well as recreational fishing industries of the state. The operation of coal mining obviously directly impacts the employment in Alaska as coal mining destroys ecosystems.
Another perspective was provided by the Land Policy Institute of Michigan State University. The organization identified the following costs that are attributable to nonrenewable energy sources. First, the generation of electricity through the use of fossil fuel and nuclear energy is becoming more expensive due to high fuel transport costs and increasing materials cost to build coal, gas and nuclear power plants. Second, the reliance of US on foreign petroleum acquisition is a national security risk. Third, transporting fossil fuels great distances to where electricity is produced is expensive, wasteful and does not support local economies. In the case of Uranium which is used by power plants, this chemical element is found to be radioactive for thousand years, is very expensive and difficult to store properly, and is in limited future supply unless breeder reactors are used that also make weapons-grade materials, thereby posing a potential national security risk.
Social Costs. As the government subsidizes the nonrenewable energy industry, the government is actually tightening the budget, thereby sacrificing most of the needs of the society in terms of health, education, and social security.
Also, the accumulated health care costs of increased cases of asthma in both adults and children due to particulate matter in coal plant emissions is another social costs that is not reflected in the market price of coal. The World Health Organization (WHO) reported in 2006 that the US spent US$120 billion a year in health costs, primarily due to premature deaths from air pollution (as a result of combustion of fossil fuels). In 2011, the United Nations Environment Program (UNEP) and World Meteorological Organization (WMO) reported that pollution due to the burning of fossils and other fuels have high indirect costs to the society. The black carbon particles as well as the nitrogen and sulfur oxides released from combustion have detrimental impact on the health of the public.
The depletion of the nonrenewable energy is another cost to the society as the depletion poses the threat of unavailable energy source for future generations, thereby making these energy forms very expensive in the future.
Environmental Costs. According to UNEP (2010), the use of fossil fuels has hazardous effects to the ecosystem and biodiversity. Effects include reduced natural capacity of the planet to respond to climate change, increased level of dangerous substance in the biosphere, acidification of water bodies, decreased quality and availability of water, and deforestation.
In his study on the externality costs as market barriers for renewable energy, Owen (2006) discussed that the environmental externalities of the production or consumption of energy, either from renewable technologies, nuclear power or fossil fuel combustion can be classified into the following: 1) costs arising from emission of pollutants other than carbon dioxide (CO2) that caused damage to health and the environment; and, 2) costs resulting from the impact of climate change attributable to emission of greenhouse (Owen, 2006, p. 636).
Among the costs of the emission of pollutants attributed from electricity generation (fossil fuel power plants) are health damages from nitrogen oxide and sulfur dioxide, and damages from acid rain. Other costs include noise, visual pollution, and power industry accidents. Meanwhile, as to the external damage costs associated with greenhouse gas emissions from electricity-generating facilities, costs include damages from flooding, changes in agricultural patterns and other effects.
The Land Policy Institute of Michigan State University asserted that the mercury from oil and coal combustion have accumulated in the soil and water and have bio-accumulated to contaminate the fish in Michigan waters and the sea.
Moreover, in the process of extracting coal, mining companies utilizes ground shafts in removing coal under the earth. Mining companies uses the “mountain-top mining” during the extraction process which involves the removal of the summit or top of the mountain to reach the coal underground. The EPA, however, recognizes such technique to be very damaging to the environment and quality of living. Such technique causes deforestation of land because of the burning and selling of lumber, noise and related pollution due to blasting of 2500 pounds of explosives every week to remove the mountain tops, fallen rocks and builders in streams, rivers and valleys, and flattened mountain ranges.
The use of MTM has been prevalent in West Virginia and Kentucky which are the top coal-producing states in the US. it has contaminated the water supply, sent toxins into the air, depleted the forests, and has impoverished the local communities as 1,200 miles of waterways have been interred and 470 mountains have been blasted.
Dealing with Negative Externality in the Nonrenewable Energy Sector
Internalizing the externalities. Theoretically, the most efficient process for imposing the “polluter pays principle” would be to internalize as many of the externalities of power generation as possible. Using the marketplace would permit energy producers and consumers to respond to such price signals in the most efficient and cost-effective way. However, only external damage costs associated with emissions from fossil fuel combustion have been considered explicitly in calculation; also costs associated with emissions of pollutants other than CO2 can be very variable and tend to be site specific. Another mechanism to internalize extenality into market prices. In theory, an energy tax would represent a relatively straightforward solution, however, the practicalities of the imposition would be fairly complicated: the tax would be required to be imposed at diferential rates depending upon the total estimated damages resulting from the fuel in question (e.g. carbon tax would not impose cost on nuclear industry); the tax would have to be imposed by all nations to ensure that the competitivenesss of their industries in global markets would not be compromised; and the resulting tax revenue would have to be distribured in such a way that implicit energy subsidies were not introduced; finally, the worst social impact of energy taxes on poorer sections of society would have to be offset to ensure that the tax burden was not disproportionate in its incidence.
Alternative approach to the problem of reflecting external costs is to introduce environmental credits for the uptake of renewable energy technologies. However such credits do not internalize the social costs of energy production but rather subsidize renewable. In addition, the tax payers pays the subsidy and not the electicity producer, thus rejecting the “polluter pays principle”.
In the presence of market failure, government intervention is justified to minimize the impact on the community. When taxing polluters is deemed to be politically unacceptable, then governmentally benign technology could be encouraged through granst and subsidies. Governments may try influence the actions of households and firms by voluntary means such as information campaigns, advertising, environmental product labeling, demonstrations and faciutilitaing environmental initiatives.
Economic instruments. In principal, this would involve imposing an emission tax on consumption of the commodity in question, reflecting the damage incurred by society. In practice, this is more likely to involve taxation at a level that would control emissions to an acceptable standard (i.e. a control cost). Alternatively, tradeable permits could be introduced to restrict emissions to the required standard. In theory the two instruments are equivalent for meeting a given standard, although in practice they can differ significantly in their impacts.
Regulation and property rights. This involves placing mandatory thresholds on the adoption of low emission technologies or practices by power utilities and car manufacturers, energy use in buildings and land and other resource management codes. Renewables obligations are being increasingly adopted by governments around the world. Known as Portfolio Standards in the US, Renewables Obligation in the UK and as the Mandatory Renewable Energy Target in
Australia, such legislation obliges electric utilities to use renewable energy sources to meet a specified target percentage of their supply. The aim is to bring ‘‘green’’ energy online quicker than would otherwise happen by providing incentives for renewables generation. The targets
are mandatory, with financial penalties for those who fail to meet them. By setting minimum standards for public exposure to pollutants, governments give property rights to individuals
or groups of individuals that would enable them to take civil action against polluters who exceed mandated standards.
The solution to the problem of true cost is simple in theory and difficult in practice: simply force companies or organizations to "internalize" negative externalities. In many cases this will cause the market price to rise—to then reflect the true cost of the object or commodity. Governments already compel some internalizing of externalities through regulations. These regulations limit the amount of pollution a company can release into the environment, therefore the company "pays" the cost of cleanup beforehand. Examples include sulfur and mercury emission restrictions on coal, water quality restrictions on mining operations, and hazardous waste disposal restrictions.
Another approach is to directly charge companies for the pollution they release. A carbon tax or emissions trading scheme attempts to put a price on the cost of a negative externality, in this case carbon dioxide emissions. The idea of taxing a negative externality is called a Pigovian tax, and the opposite activity (paying someone who produces a positive externality) is the basis of a subsidy. The effects of a Pigovian tax, as with any tax or subsidy, can be complex. Whether they have the desired effect, and unintended effects, is often an issue of debate.
Unpriced costs include a range of negative impacts from the discovery, extraction, production, distribution, and consumption of fuels and power. A strong case can be made that energy fuels are underpriced, because market prices do not take full account of a variety of social costs associated with fuel use. Fossil energy using today’s conversion technologies produces a variety of unpriced costs (or negative externalities) including greenhouse gas emissions; air, water, and land pollution; and oil supply vulnerabilities associated with the need to import oil and the uneven geographic distribution of petroleum resources. As a result of these unpriced
costs, more fossil energy is consumed than is socially optimal. Negative externalities associated with fossil energy combustion can be ‘‘internalized’’ through policy interventions. Domestic carbon trading is one example of such a policy. The idea of the carbon trading system is to
create fossil fuel prices that better reflect the full cost of fossil fuel consumption, causing consumers to make decisions that take into account the full cost of the resource. These higher prices should cause consumers to use less fossil fuel. At the same time, the government-collected carbon permit revenues can be recycled to consumers. .
References
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