NOW I used to think that I was cooldrivin' around on fossil fuel, but then I saw what I was doin' was drivin' down the road to ruin. - James Taylor
Energy consumers in the United States are hard-pressed to know which road they're on. Example: Between 1962 and 1986, on-site household energy consumption shrank by a third. The apparent savings came from new, higher-efficiency homes and appliances, a population shift to the Sun Belt, and people who weatherized their homes and adjusted thermostats a few degrees discomfortward. Yet primary energy demand attributable to households actually increased. The on-site efficiency gain was wiped out by a trend toward electric space and water heating, which merely moved primary fuel consumption for those purposes out of the house and down to the local power plant. There it occurred far less efficiently because of generating and transmission losses. (The light company devours twice as much fuel to power a 96 percent-efficient electric water heater as is consumed by a gas model with only a 65 percent efficiency rating.) Was a mistake made? Or was there a compensation to going electric? Answering such questions requires calculating what economists call externalities - transaction costs not borne by the transacting parties. Consider a utility's decision in former times to build a coal-fired power plant. Customers paid only for the electricity. People living downwind, sometimes even in other states or Canada, bore the cost of emissions-related health and environmental damage. Often externalities are hard to value, such as the loss of a scenic valley to a hydroelectric dam. The people who bear external costs may be nowhere in sight, like a fisherman halfway around the world whose waters are fouled by a spill from a US-bound tanker. Future generations will be the ones to cope with radioactive waste produced by today's nuclear-powered generating plants. Hard as it may be to add the cost of externalities to the price tag of a resource or technology, there's growing interest in trying. Otherwise, resources that aren't as cheap as they look will be overconsumed. And money will mistakenly be invested in technologies that only seem to be more cost-efficient than alternatives, says Richard Heebe, a senior research associate at the Rocky Mountain Institute. Mr. Heebe argues that some portion of the military's cost should be reflected in the price of imported oil. If that happened, "the price of imported oil per barrel would increase anywhere from $50 to $100," says Nicholas Lenssen, a research associate with the Worldwatch Institute. "It would definitely decrease the perception that oil is cheap." It would also spur conservation. (Efficiency is the term Heebe prefers "because it doesn't give the image of freezing in the dark.") Of course, no one really expects that Patriot missiles someday will be paid for at the gas pump. "The number is simply too huge to be manageable," says a Department of Energy (DOE) economist. "Nobody's going to listen to you if you go down that path." "It's hard for the public to support internalizing subsidies and externalities," Heebe admits. "Obviously, oil companies would resist it very heavily," adds Mr. Lenssen. "So would the Pentagon and their supporters. They don't want to be seen only as protectors of oil fields." The DOE economist adds that attempting to internalize costs at a time when US competitiveness is lagging "may not be the swiftest thing we could do. And that's the level of issue you come down to. "How well do we know the economic system? Can we actually predict what will happen?" he asks. "There's a real argument in favor of a very incremental approach to some of these decisions. Nobody wants to walk off a cliff." However, "if we never internalize any of these costs, from the perspective of informed governance we should still know what they are," the economist says. Clearly, where energy is concerned, the game of externalities is no trivial pursuit. It's a serious political tug-of-war over federal subsidies, market shares, cleanup costs, and economic development worth hundreds of billions of dollars each year. For example, a train needs one-third as much fuel as a truck to move a ton of cargo. But track maintenance and right-of-way taxes boost railroad costs. Trucks, on the other hand, pay only two-thirds of their fair share for keeping the highways up, according to a Federal Highway Administration study. The remainder is an externality imposed on other drivers through gasoline taxes. Avoiding that cost lets trucks charge "artificially low" rates and take some of the $200 billion annual freight hauling business away from trains, says Carol Perkins, a spokeswoman for the American Association of Railroads. But railroads can't get the government to level the playing field. "Truckers are a very powerful lobby," Ms. Perkins says. The nation's 40,000 trucking companies have a presence in every congressional district. The 500 US railroad companies don't. Sometimes externalities finally come home to roost - and land heavily. The Environmental Protection Agency has ordered all filling stations to replace leaking underground storage tanks, install leak monitoring devices, and take out liability insurance within 10 years. The cost is so high - $30,000 for a single tank - that up to 25 percent of the nation's small filling-station operators will go out of business instead, the EPA predicts. The Clean Air Act Amendments of 1990 went a long way toward internalizing the health and environmental costs of air pollution from power generation. Some utilities will spend hundreds of millions of dollars to comply with new emissions rules. For Ohio, the new law is a one-two punch. It is the state with the most generating capacity not in compliance. And Ohio produces the high-sulfur coal that causes its power plants to pollute. If those plants switch to burning low-sulfur coal from out of state, 63 percent of Ohio's 32 million tons of annual coal output could be lost, says Neal Tostenson, president of the Ohio Mining and Reclamation Association. That would cost producers $600 million and affect 7,000 mining jobs. Rather than let the coal industry feel the brunt of the newly internalized cost of cleaner power generation, Ohio lawmakers last month took action to spread it among state taxpayers. Utilities can now learn before installing a scrubber whether regulators will let them recover its cost ($250 million and up) through higher rates. And utilities that install such compliance equipment and burn at least 90 percent Ohio coal will receive a tax credit of $1 per ton of local coal consumed. Looking ahead to construction of new generating plants, several states have assigned a value to the external environmental costs of power generation by type of facility. That enables cleaner technologies or demand-management strategies to compete on a fairer basis for selection as the lowest-cost source of new power. The landmark effort on the topic to date is a study conducted by Pace University that evaluated the environmental costs of all methods of electrical generation. The study found that electricity from existing coal-fired plants, for instance, is twice as expensive when environmental costs are counted. "Our figures are probably pretty conservative," says Richard Ottinger, who directed the study. He says Pace considered only the environmental costs of the fuels from consumption to disposal, and omitted the front-end costs related to extracting the resources. Such a "full cycle" study is now being performed by the DOE and European nations. Several states are using the Pace figures as a starting point. "They're having a marked result in shifting plants, mostly from coal to natural gas," Professor Ottinger says. A Nevada law that took effect in January goes a step further. It directs utility companies to consider both the environmental costs and the economic development implications of new plants. That further improves the odds that utilities will make use of the state's large geothermal and solar potential, explains Janet Hartmann, a spokeswoman for the Nevada Public Service Commission.
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