The True Costs of Energy

1. The True Costs of Energy Apollo Good PHYS 575

2. Some Basic Economic Concepts

3. Economic Efficiency • Pareto Efficiency • Can’t make someone better off w/o making others worse off • Pareto Improvements • Efficiency is not equity!

4. Markets • First Fundamental Welfare Theorem • Competitive markets are Pareto efficient

5. Competitive Markets • Large numbers of buyers & sellers • Equivalent products • No entry/exit costs • No transaction costs • Perfect information • … • Most real markets are not competitive

6. Market Failure • When markets produce an inefficient distribution of resources • Several types: • Monopoly • Public goods • Information asymmetry • Externalities

7. Externalities • Activity of one agent that affects the wellbeing of another agent, and occurs outside market mechanism • Positive externalities • Good is artificially expensive, too little consumed • Negative externalities • Good is artificially cheap, too much consumed

8. Energy Externalities

9. Subsidies and Taxes • May be used to: • “Correct” market inefficiencies • Achieve social/equity goals • Extract rents for political influence

10. Health Impacts • Cancer • Lost life expectancy • Accidents (coal trucks, etc.) • Asthma • Heart disease • Hospitalization • Lost work days

11. Amenity Losses • Noise • Aesthetic values

12. Crop Impacts • Nox, SO2, and O3 decrease yields for many staple crops • Acid deposition increases need for liming

13. Structure Impacts • Degradation of steel, mortar, and other building materials • Soiling of buildings • Degradation of paint

14. Global Warming • Large overlap with other categories • Mortality • Morbidity • Coastal impacts • Agricultural effects • Energy demand • Other economic impacts

15. “Non-Use” Values • Bequest value – value placed on leaving something for future generations • Oil, coal, etc. • Environment • Option value – value placed on keeping something around so that you could use it • Existence value • Polar bears • Altruistic Value

16. Other Factors • Energy security expenditures • Military spending • Lives lost

17. Calculating Costs

18. Market Goods • For things traded in markets, use the market price • Gasoline • Certain medical goods/services

19. Modeling • Often used for outcomes with definite costs but complex connection to cause • Respiratory illness • Crop damage • Often used for pollution dispersion patterns • Often used for human health problems • Dose-response functions

20. Valuing Nonmarket Goods • Willingness to Pay (WTP) • Contingent valuation • Revealed preferences • Hedonic regression

21. How Much Would You Pay To Save This Polar Bear?

22. Valuing Human Life • Value of Statistical Life (VSL) • Often arrived at through revealed preference methods • EPA VSL guideline - $7.4 million (2006 dollars) • Value of Yearly Life (VOLY)

23. Net Present Value • A way of translating future costs and benefits into today’s dollars Where PVX is X’s present value, iis the interest or discount rate, and t is the number of time periods

24. Discount Rates • Higher discount rate means less value placed on future costs/benefits (and vice versa) • Cost-benefit analysis is highly dependent on the chosen discount rate! • Example: 1 Trillion in damages 50 years in the future: • 2% DR: $371 billion NPV • 5% DR: $87.2 billion NPV • 10% DR: $8.5 billion NPV

25. Discount Rate Selection Criteria • Expected interest rates • Probability of impact • Severity of impact • Intergenerational equity • Alignment of stars • What you want answer to be

26. Life Cycle Assessment

27. LCA Purpose • LCA attempts to capture the full environmental impact of a good • Cradle to grave • Cradle to gate • Gate-to-gate

28. LCA Steps • Goal definition and scoping • What gets counted and what doesn’t? • Inventory analysis • Identify and quantify inputs and outputs • Impact assessment • Assign monetary/energy/material values • Interpretation

29. LCAs Are… • Becoming standardized tools for industry and public policy • Available online in for a variety of processes/endpoints • http://www.needs-project.org/ (EU) • http://www.nrel.gov/lci/ (US)

30. LCAs Are Not… • Social welfare assessments • They typically do not include things that are hard to monetize

31. (Most of) The True Costs of Energy

32. Early External Cost Studies • Oak Ridge National Laboratories & Resources for the Future (1992-1996) • Could not actually find!  • Supposedly really good! • ExternE (European Commission, 1995) • Results were very local in nature • One of the first to incorporate VOLY

34. National Research Council • Hidden Costs of Energy: Unpriced Consequences of Energy Production and Use • 2009 publication by the National Academies • Similar in structure to ORNL/RFF and ExternE studies, but used more and more recent data • Detailed data or discussion on impacts of various sorts • Did not attempt to monetize all damages

35. This Is A Big Job

36. Conclusion

37. Conclusion • There are lots of different impacts, some of which are hard to quantify/monetize • “Costs” depend on what you count and what you don’t • “Costs” also depend on your assumptions about the future (discount rates, etc.) • “Fuzziness” leaves plenty of room for people with agendas • This is important!