by Will Greene
The fight for the planet will take place in the policy arena in the first half of the 21st century, with the ramifications (also known as greenhouse gas emissions) of our success or failure dramatically altering the planet much longer than that. It’s appropriate to point out - we are currently on a failure track, and engines are at full speed.
Every aware citizen, or at least those who wish to move the needle of public opinion in a positive direction rather than simply bemoan our dark future, should hammer home the concept of external costs and use this economic concept as solid reasoning for aggressive climate action.
An external cost, or a ‘negative externality’, occurs when producing or consuming a good or service imposes undesired costs on a third party. When we fill up our gas tanks a transaction is made between the consumer and the seller. The consumer “internalizes” the price of the gas and the gas tax. Other costs, such as the increased healthcare costs for a third party resulting from their inhalation of the pollution from the buyer’s tailpipe, is an example of an external cost. A family living near a major freeway experiences negative externalities on a daily basis as they inhale foiled air resulting from a transaction they had nothing to do with. The external costs of burning just coal alone in the United States is estimated at $345 billion annually by a recent study out of Harvard’s Center for Health and the Global Environment. If these impacts, mostly health and environmental, were included in the price of coal, it would be among the most expensive energy sources (under current accounting systems that disregard health and environment, coal is among the cheapest sources).
Economists refer to this phenomenon as a “market failure” because decisions made by consumers and sellers do not account for the full costs of the transaction, and are therefore inefficient. Perhaps no other line of reasoning can more effectively articulate the concerns of environmentalists and health experts in terms that cause politicians and business leaders to perk up - monetary terms.
If any concept holds the key to a clean energy future, it is the monetization of externalities. It represents a compelling economic argument for why clean energy is (by far) the cost effective choice right now. And it is not a narrative created by tree hugging hippies (I call them heroes) - it is a concept taught in every Macroeconomics 101 course.
If energy regulators, such as those at the Arizona Corporation Commission (ACC), considered all costs by accounting for externalities, resource-planning decisions might look dramatically different. Deals that increase the use of coal by Arizona’s utilities, such as the recent acquisition of two Four Corners Coal Station units by Arizona Public Service (the deal was approved by the ACC), would likely not occur or be shot down by Commissioners as not economical.
In 2010 former Democratic Commissioner Paul Newman introduced rules that granted Commissioners and advocates the ability to submit data that put a monetary value on external costs when considering ACC proposals. The initiative, spearheaded by Commissioner Newman’s policy adviser Nancy LaPlaca, did not mandate that externalities be monetized, only that they be considered if introduced. Many state utility commissions have since replicated Newman’s amendment.
The amendment brought external costs to the forefront at the ACC, although current Commissioner Gary Pierce has since vowed to vote “no” for any proposals that include greenhouse gasses as an externality. We do not yet know where new Commissioners Bob Burns, and Susan Bitter-Smith stand on the issue of climate change and external cost accounting, although they, and other incumbent Commissioners Brenda Burns and Bob Stump, are not expected to champion accounting for external costs.
Climate change is of course the whopper of external costs, as the billions (or trillions) needed to adapt to rising sea levels, encroaching drought, disappearing glaciers, acidifying oceans, depleted biodiversity, and stronger “franken storms” will be spent by those who had little to do with the economic transactions that caused greenhouse gasses to be released in the first place.
Future generations bearing the burdens of today’s inefficient economic decisions will wonder why their rights to pursue happiness were so trampled upon when the tool to account for damages to health and the planet was so readily available. Environmentalists today need to pick up this tool and wield it aggressively.
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