Opinion: Externality 101, Understanding the ‘Hidden’ Costs of Fossil Fuel

R. William Potter | August 15, 2013 | Opinion
Renewables don't hurt us or our environment, an advantage that has a demonstrable dollar-and-cents value

Credit: Amanda Brown
R. William Potter
During a freshman economics course at Princeton we learned about “externalities” — the costs of production that are not reflected in the purchase price of the output.

Externalities distort our economy, pollute the environment, and damage public health. Too bad more of our state’s energy policymakers seem not to have learned the lessons of those long-ago lectures that have stayed with me.

If they had, they would know that “price” is not the same as “cost” — especially when it comes to energy policy.

When externalities are factored into the equation, we would gladly pay more for electricity produced in ways that minimize social and environmental impacts. They might also see why paying higher utility rates to promote solar is not a subsidy but a valid payment for the externality services that solar renders to New Jersey.

Here’s why.

Ideally, the price of all goods and services would account for their negative impacts, making them show up as pricing signals. Thus, the greater the harm the higher the price. The marketplace would provide a level playing field and consumers would tend to prefer “externality lite” products, inducing makers of dirtier and more harmful stuff to clean up their acts.

Would that it were so. Markets seldom work that way. Externalities are treated as “free goods,” since part of the cost of production is borne by — externalized to — the environment as more pollution and destruction of natural resources or to society as higher healthcare and insurance costs, and even higher death rates.

Picture darkness at noon in Chinese cities as an extreme example of the failure to consider externalities, where dangerously polluted air is shortening life expectancy even as the economy booms.

Because of our failure to account for externalities in price signals, the environment and public health end up subsidizing dirtier and more dangerous producers. We may pay less for the energy we use, but our quality of life suffers along with our health.

Here’s where government must step in. For only the government has the legal authority to compel producers to “internalize” their production costs.

That is accomplished through “command-and-control” regulation or taxation or incentives — or some combination of all three. If government is doing its job well, cleaner and safer sources will enjoy a competitive advantage over their dirtier and more dangerous counterparts.

Thus, understanding externalities — and, more importantly, applying that insight in policy making — is critical to unraveling the often confusing debate over how much should electric utility customers pay in their rates to “subsidize” renewable energy development, specifically solar photovoltaic (PV) systems, like the solar panels gracing thousands of utility poles and many a home or business rooftop.

When we pay more for solar than for conventional sources of electricity, it’s because of solar’s lower externality cost. In this light, raising utility rates to promote solar is not a subsidy at all; it is a payment we legitimately make for the societal services rendered by solar developers who help to protect the environment, combat global climate change, and improve the health of residents.

A recent article on this website reported that solar PV in New Jersey yields “far more benefits” to the Garden State than comparable power development in “sunbaked states like Arizona” — 15 times the benefits, to be precise, “even though the solar panels in the East produce far less electricity than in . . . Arizona.”

According to the study, recently published by the National Academy of Sciences, this disparity in benefits is because “the solar panel in New Jersey displaces significantly more criteria pollutants . . . than a panel in Arizona.”
In other words, each kilowatt-hour of renewable power in this state means one less kilowatt-hour generated by an old, coal-burning power plant with its harmful cocktail of pollutants wafting into the air — and into our lungs — on prevailing winds.

Another study was commissioned by the Mid-Atlantic Solar Energy Industries Association (MSEIA). It estimated the “monetized value” of solar generation at $170 to $224 per megawatt hour. When compared to the current charges paid for solar PV — at about $125 per megawatt-hour — solar looks like the best bargain in the power business. (Full disclosure: I have been legal counsel to the MSEIA and for various member companies but had no input into this study or its results.)

Unfortunately, these basic concepts appear to have made scant impression with the Christie administration. The state Board of Public Utilities, which regulates electric and gas rates, remains focused primarily on limiting out-of-pocket rates by scaling back solar development. While rates are always a justifiable factor, the equation is unbalanced and this leads to unbalanced energy policy. At a time when we should be increasing support for more solar, the BPU seems headed in the opposite direction.

In the state’s 2011 Energy Master Plan, the BPU complains that keeping rates “at or near current levels will not be possible” due to solar’s growth. The report’s authors worry that subsidizing more solar in New Jersey — which ranks second only to California in solar growth, with a capacity equal to that of a large nuclear power plant — will actually harm the economy by “reducing business activity.”

True, the Master Plan briefly acknowledges that “solar requirements lessen the amount of CO2 and other emissions” that cause global warming, but its overriding fear of “large cost increases to ratepayers” due to solar’s success dominates the report.

Those fears are exaggerated at best. Using data from the plan, we find that solar accounts for only 2.5 percent of the average electricity bill — equal to a few dollars a month for homeowners – which is “projected to increase by 1.58 cents/kilowatt-hour due to solar” by 2025. But those projections fail to consider the continuing decline in the price of solar panels, which is making solar a direct cost-competitor with natural-gas-fired power plants, even while leaving out the externality costs of fracking.

A look at Europe makes the case for solar even stronger. Germany, for example, is rapidly phasing out nuclear power in a rapid transition to renewables, all without hurting its economy, the strongest on the continent. In 2012, Germany met 26 percent of its power needs from renewable sources — well ahead of New Jersey’s modest goal of 20 percent by 2020 — and created 370,000 new jobs at the same time.

Which makes me wonder: If only our energy policy decision-makers had sat through the same Econ 101 lectures — or if we could replay them on YouTube — would they enthusiastically promote solar growth in New Jersey rather than searching high and low
for ways to hinder it?