United States Citizens Need to Drive a Sensible Energy Policy that Takes Externalities into Account

In economics, an externality is a cost or a benefit that accrues to a party who did not participate in a transaction.   The disposal of carbon into the atmosphere when a motorist drives a car is one example of an externality.  The motorist paid the filling station for the gasoline to power the car, but the rest of society bears the cost of the carbon exhausted into the atmosphere.  When coal or other fossil fuel is burned to produce electricity, the electric company and consumers of that electricity are primary participants in the transaction, but those who use a certified green source of electricity or generate their own electricity are burdened with the externality. Consumers who use the fossil-fuel-generated electricity sparingly, are also unfairly burdened with a coal externality.  Many electricity consumers who have no choice also experience the externality of the environmental impacts of fossil-fuel-generated power, which was not a part of their transaction with the electric company.  

On October 8, 2012, the Wall Street Journal reported a forecast that the cost of one mega-watt hour of photovoltaic for new generation capacity in 2017 will be $152.70 (page R2).  At that price, photovoltaic looks ~1.5 times more expensive than coal and ~2.5 times more expensive that natural gas.   But this comparison doesn’t take into account the externality associated with coal and natural gas, which among other things, produce green house gases that pose a dire threat to the planet.  The cost-benefit comparison among energy sources would look different if the externalities were taken into account. 

Externalities are often difficult to quantify, and parties impacted by externalities often don’t have rights to claim compensation for costs they bear.  In the absence of specific laws or regulations, parties impacted by externalities are left with tort to claim compensation for costs they bear as the result of someone else’s transaction or activity.  Tort law is a slow, laborious, and complicated process.   For example imagine how much time and effort will be required for farmers and insurance companies who suffered losses due to human-caused climate change in the draught of 2012 to gain consideration for their losses through the courts. 

There is no scientific doubt that climate change is an externality that is real and is caused by human activity.  Insurance companies now corroborate the scientists (See USA Today 10 October 2012, Page 1, "Weather Disasters Target North America").  Although it threatens the financial interests of fossil fuel companies, energy policy should be informed not only by the transaction costs of fossil fuels, but also by the externalities that have been confirmed by science and the insurance industry.

The energy policy of the United States and many other countries would be different if externalities were accurately accounted for in the planning.  The United States energy policy might look more like that of Germany or China.  Germany produces more solar electricity than any other country, and is capable of producing 30 gigawatts or nearly half of its electricity needs through solar power.  China produces more wind energy than any other country and is capable of producing 63 gigawatts. 

Germany and China are investing in solar and wind energy even though the direct transaction costs associated with these energy sources are higher than alternatives.  They’re doing it because they understand the externalities (and because, unlike fossil fuels, these sources will produce energy for centuries).  If we in the United States would heed economics as a unified nation, and take into account the externalities associated with energy from fossil fuels, we’d be the leading producers of solar and wind power.

The reason the United States is not the leading producer of solar and wind energy is not because we don’t understand economics – we do.  The reason the United States is not the leading producer of solar and wind energy is not because we don’t have sufficient sun or wind resources – we have superior resources.   The reason the United States is not the leading producer of solar and wind energy is not because we don’t understand the technology – we are the source of key technologies that Germany and China are harnessing. 

The reason the United States is not the leading producer of solar and wind energy is because the fossil fuel industry has, through campaign contributions and lobbying, achieved strategic influence over the government.  It is time for citizens of the United States to regain control, so that we can make the sound economic decisions that Germany and China have made.  It is time for citizens of the United States to regain control, so that we can make the sound energy policy decisions that are right for the nation, not the decisions that are right for the fossil fuel industry but wrong for everyone else.