Fossil Fuels and Externalities
After my stand-alone talk at the International Trade Forum last Friday, I was asked to participate in a panel on the future of the energy industry, where the moderator peppered us with excellent questions on the promises and challenges associated with renewable energy, as a function of the cost of wind, solar, etc.
I’m always surprised when otherwise bright people fail to understand the concept of externalities, and how this applies to energy derived from fossil fuels. Of course it’s easy and profitable to make something and sell it when someone else pays for the disposal of the waste you create in the process; that’s just common sense. Yet we take cheap, reliable power for granted, and it never enters our minds that it is we (actually, our descendants) who will pay an extraordinary price for this nonchalant, business-as-usual approach.
Anyone who has either a major or minor in economics understands externalities very well. However, I cannot recall how far towards my minor in economics I was before learning about externalities. It really is not a difficult to understand.
It would be unreasonable to expect everyone to study economics at the college level. However, I strongly believe that some of the basic concepts of economics, including externalities, should be taught in high school. Without an understanding of these basics, it is impossible to evaluate adequately the actions of legislative bodies or the proposals of politicians.
Education should not be simply a matter of learning what one needs to know to earn enough money to live comfortably. Education should also teach what people need to know to be good citizens. It seems that that is often overlooked.
Frank “externalities” are part of the study of “macroeconomics” which typically follows a first term microeconomics introductory course.
Breath,
It was decades ago that I studied economics so I don’t remember when various aspects of economics were taught. However, it seems to me that something so important as externalities should be taught very early, even though it is not a part of microeconomics. It is just as important as learning about “guns and butter”. Perhaps it could be slipped into a course which covers pollution. I do remember learning something about that in high school.
Frank,
It depends on how ‘externalities’ are calculated that renders the equation either difficult or easy to understand.
Economic analysis can be either incredibly detailed and complex or deliberately simple depending on the result required.
It can be far more difficult to balance and analyze all the externalities than advocates conceptualize. Externalities are often confused with disadvantages while benefits are ignored. Some externalities are exceedingly contentious and difficult to assess in terms of economic value, rendering any assessment vague and unreliable.
That’s the real reason most economic studies try to avoid getting mired in the complexities and politics of ‘externalities’.
Marco,
Even so, the concept of externalties is easy to understand. However, I will acknowledge that the calculations can be difficult, but that is another matter. Also, at least conceptually, externalities can be either positive or negative although the negative ones are generally more common.
Frank,
Yes indeed, you are correct. It’s the the complexities not the concept that are so often misunderstood and distorted to suit support erroneous conclusions.
Nice assessment yes externalities are important . Going Forward they will become more a part of the energy debate especially when we get to really talking and acting with Carbon Taxes.
As Marco points out making accurate determinations and then quantifying them as accurately as possible becomes challenging.
Some are common sense and they should be counted but there will be great debates and tugs of war on some of the externalities. Regulators in the utility sector are struggling with determining a accurate Value of Solar DG systems in respect to value for the Grid.
Some of the qualitative values or benefits for solar dg are easy to quantify. Others have a numerical value to the owner of the solar system but not to the grid. The restrictive cost of service methods for making rates was not designed to recognize certain future benefits.
This can be corrected but getting the parties to agree on a fair value of solar to the grid which impacts buy back rates and firm power on demand is a real challenge to determine.
the market will evolve faster once some external costs are included into the prices for some fuels.
The policy makers need to incorporate some externalities into their policy development and programs to guide the marketplace to better decisions. Too often entrenched interests prevent a real analysis and debate.
I have to agree that quantifying externalities can be exceedingly challenging even though the principal is easily understood. There can be more variables than one might suppose; that is what makes it challenging.
Take, for example, fuel ethanol. At first glance, it would seem, unlike gasoline, to be carbon neutral and that therefore its use should be encouraged. However, it is made from corn and corn requires considerable fertilizer. The way nitrogen fertilizer is made, making it requires considerable energy and the source of that energy has to be considered. Then there is the fuel required to plow the fields and transport the the corn to where it will be used to make the ethanol. The amount of energy required to make ethanol from the corn must also be considered. And, once the ethanol is made, more energy is required to transport the ethanol where it will be blended into gasoline.
Even the above is not a complete list of everything which must be considered when determining whether fuel ethanol reduces CO2 emissions, increases CO2 emissions, or has a neutral effect. And, CO2 emissions are an externality.
Evaluating ethanol for externalities is more difficult than evaluating coal usage for externalities, but it does illustrate the problem.
Frank good example with Ethanol – lots of bad Externals and it has a strong political backing from that party that claims to advocate for Free Markets, Business Efficiency – the Ethanol program is a great example of political interference in good energy policy.
The studies on its EROEI have concluded that it now has finally reached around 2 which is a improvement from the below 1 ratio of 10 years ago r so.
Energy Economic studies done by knowledgeable Ag Economists and Energy Economists have long ago concluded that a modern society like ours requires a EROEI of 5 to make a technology marginally viable. Tar Sands have been around 3 as another poor attempt at prolonging the Carbon Age and its dirty profits that cost more than they produce.
Hopefully enough serious Policy Makers will use these analytical tools , limit the politics input and approach Carbon Taxes with the most efficient outcome in mind.
I support Carbon Taxes and see it as a driver to mo0re innovation, Improved Efficiency and more business opportunities for Co that provide Real Solutions , lots of jobs. So the economic gains w out weigh the price increases that may result.
Toast to Pricing Externalities that are reality based.
Factor in the bad externalities and leave the window dressing out of the equation.
Silent,
Carbon taxes may be a good idea, but I’ll let others tackle that.
Because ethanol has become an important source of income to farmers and others in the ethanol industry, the ethanol lobby has considerable influence. For that reason, it will be difficult to repeal regulations which require adding ethanol to gasoline. The AMA (not American Medical Association, but rather, American Motorcyclist Association) has joined other groups to have ethanol requirements repealed.
One problem with ethanol is that it is hygroscopic. After absorbing a certain amount of moisture from the air, the ethanol – water mixture separates from gasoline and ends up on the bottom of fuel tanks where it can create serious problems. Even when separation does not occur, it tends to be corrosive thereby requiring engine and vehicle manufacturers to use special materials to prevent corrosion in fuel systems. It is even more of a problem for engines which use carburetors instead of fuel injection because the fuel in carburetor float bowls is more exposed to the air thereby causing it to absorb moisture from the air more readily. When equipment with engines is not regularly used, moisture absorption is an especially serious problem.
The Chevrolet Volt and similar hybrid cars for which the engine is used only as a range extender have special problems with ethanol laced gasoline. If drivers make only short trips, the engine may never start. As the fuel ages, it absorbs more and more moisture from the air. So, the cars have to be programmed to start the engine simply to use enough fuel to prevent the fuel from becoming stale and absorbing excessive moisture.
Back in the early 1980s, when the problem of refrigerant CFC gasses were found to be depleting the ozone layer, I became very much aware that, although some environmentalists were highly knowledgeable, many were shockingly incompetent. The incompetent ones asserted that we should be willing to give up modern conveniences, including refrigeration and air conditioning, to save the ozone layer. Because of their incompetence, they were unaware that we had refrigeration and air condition before refrigerant CFC gasses had even been developed. Likewise, many were unaware that electric heaters use far more power than electric can openers; as a result, they thought that by not using electric can openers, we could greatly reduce CO2 emissions.
I realize that it would be unreasonable to require everyone to have a degree in physics. I myself don’t have a degree in physics, but I’ve had two years of physics at the college level. It seems to me that our educational system should require adequate courses to teach the subjects necessary for responsible citizenship. That would include an adequate background in the sciences, the history of various forms of government, citizenship, economics, etc.