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.
