The oil spill, global warming and negative externalities

oilrig300Economists have a dry way of describing things. One economic term is very relevant right now. The term is “negative externalities”.

What is a “negative externality”?

In economics, an externality (or transaction spillover) is a cost or benefit, not transmitted through prices], incurred by a party who did not agree to the action causing the cost or benefit. A benefit in this case is called a positive externality or external benefit, while a cost is called a negative externality or external cost.

A negative externality is an action of a product on consumers that imposes a negative side effect on a third party. Many negative externalities are related to the environmental consequences of production and use.

Two examples of negative externalities are greenhouse gas emissions from burning oil, gas, and coal.causing global climate change and water pullition by industries that adds poisons to the water, which harm plants, animals, and humans. Wikipedia

When one uses energy, the cost of the damage caused by production and burning of fossil fuels is not included in the price you pay for a gallon of gasoline or a ton of coal used to generate electricity.

When a company cuts corners in its industrial processes and dumps untreated wastes into a river, which someone else has to pay to clean up, the cost of that cleanup is not included in the price you paid for whatever that industry produced.

Lots of people complain about “government interference” in the private sector. However a lot of environmental regulation is aimed at stopping the creation of “negative externalities” that we taxpayers end up paying for, and forcing those cost consequence back to its source. Thus laws that require anti-pollution efforts and that punish those who pollute our drinking water supplies is a way of adding the negative externality cost back to the producer of the problem.

Typically businesses being regulated to prevent them from creating negative externalities whine about the additional cost of such regulations and compliance, arguing they won’t be able to compete at a price level with their competition. This is the essence of corporate socialism, because corporation can socialize their avoided costs onto everyone else, stuff their profits into their pockets, and leave the rest of us holding the bag to clean up the mess they made.

Our foreign trade “globalization” policies also create an unfair playing field when our industries have to compete with those manufactorers  in countries, like China, who don’t give a rat’s rear end about negative externalities. CVoal is a cheap fuel in China because they don’t care how many coal miners die, nor are they as sensitive to the costs of air pollution hanging over their cities, as we are.

The Gulf of Mexico oil spill is a great example of the creation of a negative externality. The goal of getting more oil to fuel our lifestyle and make a profit for BP trumped any recognition of the massive economic and environmental damage that flowed from their blown out well. Is the cost of this mess going to turn up in the price of gasoline in the US? Probably not. Will it turn up in our tax bills? Probably yes.

Did government fail in its duty to avoid the creation of the negative externality of the oil spill? Obviously.

But is government regulation the sole answer to this kind of problem?

Lets look at the global warming problem being caused by burning fossil fuels. Besides the negative externality of all the environmental damage being caused by burning fossil fuels, we the consumers are being seriously misled into thinking we don’t have to pay for the cost of these negative externalities. We will pay….but not at the gas station or in our electric bills.

There are two costs not being reflected in consumer prices for oil, natural gas and coal. The first is the negative externality cost, and the second is the replacement cost.

For every thousand cubic feet of natural gas we consume, for every barrel of oil we consume and for every ton of coal we consume, that supply must be replaced so we can continue to consume the stuff.
The cost of replacing existing supplies of fossil fuels continues to rise, driven by such ventures as the Deepwater Horizon oil platform drilling 18,000 feet under a mile of sea water.

An alternative to government regulation is to create a price structure for energy that includes the costs of replacement and factors in the cost of negative externalities, and makes sure the money you pay to buy a gallon of gasoline will cover all those now hidden costs.

If you think this is some pie-in-the-sky idea, consider for a moment the City of Tucson’s water rates.

Back in the 1970’s Robert Cauthorn, a Tucson city council member and an economics professor at the U of A figured out that every drop of mined groundwater used today in Tucson was going to have to be replaced by a much more costly drop of water in the future. He focused on the replacement cost issue.
Pricing water at its average cost today was sending everyone the wrong signal, encouraging people to waste water without realizing the cost of water would have to increase in the future.

So Cauthorn led an effort to restructure Tucson’s water rates so that the more water one used, the more per 1,000 gallons folks paid. The higher rates for the larger amounts of water use were tied to how much it would cost to go out and bring Central Arizona Project (CAP) water into the city…the replacement cost.

The reaction to pricing Tucson’s water at its replacement cost was swift and vicious, led by Republicans who launched a successful recall campaign against 3 of the four city council members who voted for the rate increase. Cauthorn resigned and ended up pioneering development impact fees in Broward County, Florida.

After all the dust settled and the new city council members sat in their chairs for a while, they realized Cauthorn was right, and for the most part the replacement cost driven water rate structure was retained.

The result is obvious everywhere you go in Tucson. Lawns were replaced by low water use landscaping. Plumbing codes changed. Per capita water use in Tucson was radically reduced.
No one told anyone that had to tear out their lawns. But faced with the real cost of water, folks were able to make their own decisions about what to do about the cost of mining groundwater and having to replace it.

Meanwile we have the farms and mines in the area continuing to pump fossil groundwater and not paying to replace it. Tucson’s water ratepayers are going to get stuck with the bill from this.

Right now we are probably looking at a true cost of oil resulting is $6.00 a gallon for gasoline. Of course no one wants to pay twice the cost per gallon because none of us have the economic ability to adjust to a sudden increase in the cost of doing everything in the country. The reaction to forcing the price of gasoline to cover replacement and negative extrernality costs would set off a national recall election.

But, can we avoid paying the replacement and negative extenality costs of using fossil fuels? No we can’t. It is how and when we bite this bullet that we can control.

The carbon tax and the cap and trade schemes are ideas being bandied about as ways to move our economy to full cost recognition. The problem, as many point out, is these will in fact raise the cost of energy to consumers.

Politicians opposing a means to charge replacement and negative externality costs are playing the Emporer’s New Clothes game with the public. One way or another we will all end up paying to replace our fossil fuel energy sources and we will end up paying for the air and water pollution in our health insurance bills, in our taxes, and all sorts of other places where we can’t point our fingers at oil companies who will have made their profits and run.

The real debate should be how to transition to real costs, and make sure the money collected from the sale of a gallon of gasoline doesn’t end up in the shareholdrers pockets, and instead funds development of replacement energy sources and funds efforts to mitigate environmental damage.

Seeing BP continue with its shareholder dividend suggests one cannot trust corporations to play straight here.

The real answer is government will probably have to tax energy production and manage the use of the funds generated to create alternative energy sources and clean up the mess we’ve created with 100 years of fossil fuel addicition.

Sadly no one trusts the government to do this, either.

I vote to make the government do this solely bacuse at least we consumers get to elect our government officials, whereas we don’t have squat to say about running BP, Chevron and Peabody Coal and other fossil fuel outfits since we can’t afford to buy lots of their stock. We just have to elect the right people, starting with not electing anyone getting money from fossil fuel industry political action committees.

The second leg of the problem is where do we, the consumer get the money to pay for higher energy costs?

The first thng that happens when faced with higher costs is what happened in Tucson…people adopted a water conservation ethic that is unprecedented in the United States. Folks figured out how to keep their water costs relatively stable by using a lot less water. The green lawn turned out not to be a necessity of life in Tucson. The 30% water rate increase at the time produced a 30% reduction in water use…and no one was worse off for the result.

Whole new industries emerged in Tucson based on water conservation, low water use plant nurseries, and constructing more water efficient buildings.

The higher water rates did not destroy Tucson’s economy.

We also saw a direct relationship between higher gasoline costs and a shift of consumers buying  more fuel efficient cars. Cars were still being made…they were just more fuel efficient.

There is an enormous economic development potential in energy conservation in this country.

There is also an enormous new industrial potential to become energy independent from foreign oil by developing renewable energy sources inside our borders. For every job lost on an oil rig in the Gulf of Mexico there must be created a new job building solar panels, wind turbines, fuel cells, smart grids and everything else needed to make this work. Instead of just having tax credits to buy a solar panel for your home, how about a level playing field so our solar panel manufacturers can compete fairly with the Chinese? And make all our renewable energy products in the USA?  We should be exporting renewable energy stuff, not importing it as we do now.

The first thing we all have to decide is if we want to the status quo to continue, or do we want to go a new way?

Insanity is defined as doing the same thing we’ve always done and expecting a different outcome.

Of course the fossil fuel industry wants us to believe everything is just fine and we can find more oil and coal and natural gas if the government would just get out of their way.

If you believe that, go fishing in the Gulf of Mexico.

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About Hugh Holub

Attorney and writer.
This entry was posted in economy, national politics and tagged , . Bookmark the permalink.

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