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The real cost of energy

Erica Gies

All energy production has environmental and societal effects. But calculating them — and pricing energy accordingly — is no easy task.

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[...] Electricity production is rife with externalities. Mining for raw materials often causes water pollution, habitat destruction and socio-economic harm. Burning coal pollutes the air, sickening and killing people, and introduces toxic mercury into the aquatic food chain. Nuclear-power plants require the clean-up and maintenance of radioactive materials after decommissioning. Energy production uses water, sometimes at the expense of agriculture and ecosystems. Centuries of fossil-fuel use have released more than 1 trillion tonnes of carbon dioxide and other greenhouse gases, causing climate change that is already leading to a rise in sea level, extreme storms and droughts. [...]
Despite the challenges, economists are trying to put a price on some of these impacts. Many think that you can achieve a more equitable outcome by assigning an ‘accurate’ price to a good. Ian Parry, an environmental fiscal policy expert for the International Monetary Fund, wrote in a 2016 article that accurate prices redirect “investment and financial flows towards low-emission technologies”, effectively incentivizing technologies with lower externality costs (see Getting prices right would reduce global carbon emissions by 25% and reduce premature deaths from fossil-fuel air pollution by 60%, he says. Efforts to correct prices are already beginning to turn humanity’s energy ship around. [...]
[...] clean-air legislation [...] obliges coal plants to control the emission of particulate matter, sulfur oxides, nitrogen oxides and, more recently, mercury by installing filters. “These devices aren’t free,” says Frank Ackerman, principal economist at Synapse Energy Economics, a research and consulting firm in Cambridge, Massachusetts. “And once you bolt three or four of them onto a coal power plant, coal-fired electricity isn’t cheap any more.” [...]

Cost of carbon. Air pollution from coal is a short-term, local externality, meaning that people who live near the coal plant experience the negative impacts almost immediately. Climate change, however, is a long-term, global externality: the impacts are felt farther in the future and around the world. That makes the causal link less obvious, helping people to avoid paying for or even addressing it. Nevertheless, economists have been attempting to measure the costs of climate impacts to put a price on CO2-equivalent emissions, a measure that calculates the global-warming potential of all greenhouse gases in units of CO2. [...] The United States, the world’s second-largest emitter of greenhouse gases after China, still notably lacks any sort of carbon-pricing scheme. But, in 2009, then-president Barack Obama assembled an inter-agency working group to calculate a social cost of carbon (SCC). [...] One of the key judgement calls in the SCC calculation is something called the discount rate: “the most important number you’ve never heard of”, says Ackerman. Carbon dioxide emitted today will remain in the atmosphere for hundreds of years causing damage. But instead of paying those future costs in full now, economists employ a discount rate — like compound interest on a savings account, only in reverse — to determine what it is worth to us now to reduce costs in the future. A higher discount rate, say, 5%, generates a lower SCC today, effectively giving ourselves a price break in exchange for future people paying more. For that reason, some people consider higher rates unethical and advocate for a number closer to zero. The working group used a 3% discount rate to arrive at $40 per tonne.

In the flow. Externalities other than air pollution and climate change have received little attention by comparison. [...]
Human mortality dominates the economic models because that is what society has deemed to be valuable; endangered-species survival, unique habitats and historical sites are deemed lesser concerns, and are valued as such. But just how valuable is a human life? Economists use a variable called the value of a statistical life, which is the amount of money society is willing to spend to save a life. But putting a price on a life raises ethical issues, says Ackerman. “What’s the value of not killing someone? And the bonus question is: should it be a larger number in a richer country?” It’s also unclear what that figure actually means. “If we’ve gotten up to $9 million per statistical life in the United States,” he says, “that doesn’t mean for $10 million you can kill someone with impunity.” Also, he adds, the practice of trying to put a price on the priceless can create “misleading theories on how to think about the world”. Things such as human lives, irreplaceable species, unique habitats and cultural sites clearly have value. Ackerman sums up this thought by paraphrasing the philosopher Immanuel Kant: “Some things have a price, and other things have a dignity.” [...]

Nature, Vol. 553, No. 7682. (2017), pp. S145-S147, 
Key: INRMM:14486301



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