Environmental Externalities and Air Pollution

We live and work in a world driven by a fossil fueled economy. Our cars and other dominant forms of transport run primarily on gasoline derived from oil. Our homes and work places stay heated and cooled using electricity generated by utilities heavily dependent on coal and natural gas.

Many air pollution issues such as climate change, acid rain and smog are directly related to our energy choices.

Solutions to air quality issues range from calls for greater energy efficiency to increased reliance on renewable energy sources to more stringent pollution control regulations.

Often the primary argument against these ‘pollution solutions’ begins with a logic of cost. Opponents to these policy options might suggest that renewable energy sources may be a good idea, but they cost more to produce a KWH of electricity than their fossil fuel counterparts.

In recent years, environmentalists with a keen sense of economics have confronted the cost argument head on. They’ve adopted many economic models to show that the price of a gallon of gas or a KWH of electricity is not always as transparent as the cost listed on the billboard at the gas station or on your utility bill.

What Are Environmental Externalities?

The concept of ‘environmental externalities’ can be used to offer a different perspective on the costs of a fossil fueled economy.

In economics, the term externalities refers to activities of individuals (or firms) that affect other non-involved individuals. The most publicized issue of externalities today is probably the issue of second hand smoke. Smokers, so the logic goes, harm not only themselves, but others who breath their smoke second hand, when they smoke inside poorly ventilated buildings. This would be considered a negative externality.

Externalities can also be categorized as positive. For example, individuals who sweep the sidewalks in front of their homes or stores provide positive benefits (externalities) to all other individuals who use those sidewalks. One need look no further than down to often see flowers blooming because some individual or group wanted to spread some beauty around the neighborhood

Negative externalities take center stage in the public utility sector. For example, electricity prices usually take into account factors such as the price of the fuel and plant operation expenses. Historically, these cost calculations tend to exclude many factors. These costs, or negative externalities, get transferred to others.

Evironmental Externalities Examples

Calculating the cost of negative externalities often starts by organizing the costs along three broad areas, security, environment, and health.

Consider the issue of security costs for maintaining a fossil fueled economy. U.S. dependence on imported oil, for example, translates into the U.S. identifying the Middle-East as an area of strategic security interest.

In one very real way, the story of most Americans’ lives is the story of maintaining stability in this politically volatile region of the world. The costs associated with war and peace in the area can be calculated in the trillion dollar range. That figure does not even attempt to value the cost of life.

Economically, this cost is a negative externality that does not show at the pump. It shows up on the tax statement and/or letter to a grieving home.

Dependence on fossil fuels also creates a variety of negative environmental externalities. For example, fossil fuel energy production is the primary contributor of the greenhouse gases (GHG) associated with climate change. All of the costs of the potential problems associated with climate change, loss of coastal land, dramatic weather changes causing floods or drought etc. are not costs that are, or will be borne by the energy producers. They will borne by those directly affected in the U.S. and around the world.

One need go no further than the Adirondacks of New York to discover that the costs of acid rain include losses from fish kills in the dead rivers and lakes of the region. The coal burning power plants in the Midwest avoid these costs.

Health issues also add unarticulated costs to fossil fuel energy production. During the past decade thousands of research projects documenting the ill effects produced by the fossil fuel energy production process have been published. For example, the National Resource Defense Council (NRDC) recently released a report called Danger in the Air stating that “Every year, some 64,000 people may die prematurely from cardiopulmonary causes linked to particulate air pollution”.

In summary, if all the costs associated with fossil fuel energy production were borne by the energy producers then energy production costs, including the cost of gasoline and electricity would be higher.