Fall 2001 Energy - The True Cost Perspective

Fall 2001 - Energy

The True Cost Perspective
by Meg Lee

Photographs by Chris Goodenow

"Prices are a signal to consumers," said Dan Hagen, a Western Washington University economics professor. "They are meant to convey information on the cost of producing a good."

Hagen, a specialist in environmental economics, said the information a good’s price conveys is sometimes a misrepresentation. The market often distorts the prices consumers pay for some products, such as gasoline or electricity, because it ignores environmental and human-health effects when determining price.

Economists generally divide the cost of a good into two categories: internal and external. Some production costs, such as wages or raw material prices, are "internalized" when the producer increases a good’s price. Costs not directly paid by producers or consumers, such as pollution or the loss of a finite resource, are harder to assign a direct monetary value. These "external" costs often pass on to society and the environment.

"An external cost is an economic distortion," Hagen said. "All the costs of a good should be absorbed by the producer of the good. This should also reflect damage to the environment.

"The fact this is not always the case is the problem."

America’s passion for the automobile provides a prime example of how the market hides external costs from consumers. For example, gasoline consumers see one thing: the price of the gas.

This price is the only communication consumers receive from petroleum industries, but it does not include the effects of cars’ pollution. When the pollution leads to respiratory ailments and other adverse health effects, patients, hospitals and insurers — not the car driver or the petroleum industry — absorb the costs of treating these ailments.

Clifford Cobb, author of "The Roads Aren't Free," a research article on the external costs of driving, said automobiles’ emission of fine particulate matter is their most damaging byproduct.

"The primary source (of particulate matter) is the combustion of gasoline," Cobb said. "These ultra-fine particles are a combination of chemicals that are released from the tail pipe. One of the effects we see is the increased mortality of people who are already ill, or with decreased immune systems."

The Environmental Protection Agency defines fine particulate matter as particles 10 micrometers in diameter or smaller, roughly one-seventh the size of a human hair. The EPA began regulating fine particulate matter in 1987 when conclusive scientific studies showed it causes more health problems than any other airborne pollutant.

Additionally, the EPA reports that cars account for approximately 17 percent of total worldwide greenhouse gas emissions.

Cobb cited a cost estimate by the Intergovernmental Panel on Climate Change, which estimates the price of greenhouse effect-related climate change at $300 billion annually. Cobb said he believes this estimate is very low and that it’s difficult to put a monetary value on the effect’s damage.

Gross Domestic Product figures used in the estimate are a measure of the health of an economy, Hodges said, and do not accurately reflect the costs of environmental damage.

"For example, agriculture is 3 percent of GDP," Cobb said. "If global climate change reduced the production of agriculture by 50 percent, the GDP would drop by only 1 percent. Of course, this is ridiculous because it doesn't take into account the higher prices of food and worldwide starvation this damage would cause."

Hart Hodges, another Western economics professor, knows how difficult assigning cost to environmental damage can be. Hodges was part of a Department of Interior team that assessed the environmental damage of catastrophic events like oil spills. He estimated the monetary values of damage to ecosystems and disruption of natural resources.

Hodges described an oil spill: If salmon are killed, the costs can be derived starting at the market price of the fish.

"Assessing the value of mortality is relatively easy," Hodges said. "The cost of damage to natural resources, such as timber, or to the commercial fishing industry can also be more easily determined."

But Hodges said subsequent effects, felt throughout the ecosystem or in tribal communities that subsist on the fish, are as hard to determine as they are far-reaching.

"In the gray area are damages that are impossible to assess in terms of money, such as the loss of a culture," he said.

The American economic system leaves this damage out of the equation when determining the price of gasoline.

Rather than pass external costs on to consumers, the government helps industries offset costs incurred from excavation and transportation in the form of federal subsidies.

Regardless of automobile use or ownership, U.S. citizens support these programs simply by paying various taxes.

Friends of the Earth, Taxpayers for Common Sense and the U.S. Public Interest Group led the Green Scissors Campaign Group, which produced a report describing 74 federal government subsidies and billions of dollars in programs that support environmentally and socially harmful projects.

One of these subsidy programs, called the Petroleum Research and Development Program, will spend $280 million this year in support of exploration and petroleum recovery.

"The issue with the gas industry is its failure to internalize costs of gasoline," Hodges said. "Most countries have substantial gas taxes of $2-$3 per gallon — we don't have this."

Department of Energy studies show that if a consumer pays $1.50 for a gallon of gas, about 18 percent of the price pays for the oil’s refinement, 17 percent covers distribution and marketing costs, 28 percent pays for taxes and 37 percent pays for the crude oil. Much of the environmental damage caused by extracting, delivering and consuming the gallon is not added to the consumer’s bill.

The International Center for Technological Assessment released a study stating the cost of gas would rise anywhere from $5.60 to $15.14 per gallon if federal subsidies were removed and the market price included external costs.

"When people say gas is cheap, they are missing all the costs that are not included," ICTA spokesman Mark Briscoe said. "The cost range is broad because many of the external costs are hard to estimate.

"The report is mostly to get people to realize that they do not pay for these prices at the pump, but pay for them in other ways."

Briscoe said people should think of these costs each time they get in the car.

"When prices are increased, it cuts into the amount of driving we can do," Hodges said. "So many trips we take are unnecessary. The lowest emission car is one that sits in the garage."

Fall 2001 - Energy

The True Cost Perspective by Meg Lee

The True Cost Perspective
by Meg Lee