No Such Thing as a Level Playing Field in Energy Choices

Rodney Sobin, of Richmond, penned the following response to my column, “Coping with $60 Oil” (Oct. 31, 2005). As much as it pains me to think that there are people who disagree with me, I thought his comments worth posting on the blog:

Your column makes many good points with which I mostly agree. You are exactly on target in emphasizing energy efficiency. The scope for reducing energy use in transportation, homes, offices, and industry is tremendous, yet Virginia is just about last in the nation in promoting such approaches and the federal effort is anemic at best. And, as is often addressed by Bacon’s Rebellion contributors, Virginia’s land use and transportation policies are sorely lacking in terms of mitigating sprawl, including the automobile and energy intensive lifestyle it engenders.

I also agree with you about the hazards of picking winners. Promoting certain listed technologies often has the unintended consequence of impeding the development and use of other promising technologies or approaches. Instead, policies should promote some target level of performance rather than a particular technology. For example, a tax break or HOV lane access for hybrid cars may benefit someone with an SUV that gets, say, 18 mpg rather than 16. Whoop-de-do. While someone buying a non-hybrid 40 mpg fuel sipper that meets California superultralow emissions standards gets nothing. An incentive based on performance would be technology neutral–if you meet energy and environmental criteria you get the benefit regardless of fuel or engine type. If you have an efficient, clean car, then fine, regardless of whether it burns gasoline, diesel, ethanol, hydrogen, or dung or what type of engine, batteries, fuel cells, or whatever it has.

Where I do quibble with you is on subsidies and tax breaks. I agree with you in principle under close-to-perfect market conditions. But the reality is that conventional fossil energy is highly subsidized, not only in terms of tax breaks and the like but in terms of external costs that are not included in market prices. You and I do not pay for health impacts, agricultural and fishery losses, and ecological damage when we pay at the gas pump or pay the utility bill. Nor do we cover the international political and military costs of oil dependence.

The marketplace is tilted because of these implicit subsidies. For example, using EPA-approved methodologies, it is estimated that 989 deaths, over 1400 heart attacks, and over 23,000 asthma attacks are instigated by power plant emissions annually in Virginia. We don’t pay for these on our electric bills–and the victims are not compensated by utilities or ratepayers. [See for more.] Another example: About a third of the nutrient pollution in the Chesapeake Bay, contributing to dead zones and other ills, comes from nitrogen oxides emitted by our vehicles, power plants, factories, furnaces, water heaters, and so on.

If the prices of coal, oil, and natural gas derived energy included these and other impacts then there would be a level playing field with solar and wind. But they do not. Therefore, taxes or fees to “correct” prices is justified under free market capitalism. Since “tax” is a dirty word in Virginia, tax breaks or other subsidies may be more palatable even if less efficient from an economic perspective as a means to level the playing field. Also, one can design fiscal policies to assure “revenue neutrality” (i.e., no net tax increase) and to mitigate impacts on the poor, who usually don’t have the means to replace clunkers with hybrids or upgrade furnaces, windows, etc.

It is true that it is difficult to evaluate in dollar terms external costs of health, ecological, and other damage in order to determine an appropriate tax or fee to impose or subsidy to offer. But we do know that these costs are far from zero and that it is better to be roughly right than precisely wrong. Don’t let dirty energy sources get a free ride at the expense of our health and wellbeing, farms and fisheries, ecological balance, outdoor recreation, national security, and other values.

Mr. Sobin works for the Virginia Department of Environmental Quality, but the views do not necessarily reglect those of the DEQ.

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8 responses to “No Such Thing as a Level Playing Field in Energy Choices”

  1. Actually there is a whole science devoted to assessing external costs, and we do it all the time. In many cases these ultimateley boil down to the average value of a human life. In practice, this is done by surveying such things as jury awards, safety analyses, and life insurance payments.

    We have actively traded markets in trading pollution credits that are based on exactly this idea. Those companies that are able to garner pollution savings at the lowest costs can sell some of their savings to companies that are not so fortunate. Landowners that grant conservation easements can sell the tax benefits they can’t use for cash, and so on.

    Where we get tripped up is in applying such things in a one sided fashion. We frequently see the argument that something we don’t like is highly subsidized, either because it is in fact subsidized, or because external costs are not levied. In Sobin’s case he states that if coal, oil, and natural gas paid there external costs, then they would be on a level playing field with solar.

    Not so fast. Remember that the manufacture of glass (and plastic) is among the nations highest energy users. If the people manufacturing solar cells had to pay all the external costs for the fuel they use, solar power might come out farther down the economic list than it is now.

    I was also amused to see him say that a third of pollution in the Chesapeake Bay comes from power plants. He then goes on to say that we shouldn’t let thenm get a free ride in destroying our farms, which contribute a good portion of the other two thirds.

    Among the most ridiculous of these arguments is the one that says drivers don’t pay for the congestion they cause every other driver. This is ridiculous because it is in fact an even trade: the congestion you cause is equal to the congestion you endure.

    It is pretty easy to see that if we actually go out and determine what all these costs are, and then bill each other for them, the paperwork involved will create more pollution than the whole system saves. It would be a whole new industry, but, hey, I’m all in favor of economic development.

    I tend to agree with him that we should apply benefits or incentives that are technology neutral. Unfortunately, we have an entire lobbying industry whose purpose is to make sure that does not happen. Where I start to wonder is why credits should only be given for energy and environmental gains.

    What if someone developed an automobile that polluted no less, and used less fuel, but cost only 5 or 10% of current car costs? Would we be willing to give him a credit for the savings against continued fuel and pollution costs?

    Here is a concrete example. We typically measure highways and vehicle use (a transportation system) according to
    Level of service
    Average traffic speeds
    Average congestion delay
    Parking convenience and price
    Crash rates per vehicle mile
    Pollutioncaused/fuel consumed

    The argument is that if auto users were charged their full cost, cars would be so expensive no one would use them, our entire society would be transformed, everyone would have unlimited options, we would be less obese, have fewer mass murderers, and fewer rare koala bear diseases. (These are no joke.)

    A more comprehensive measurement for a system would look like:
    Commute accessibilty
    Land use mix
    Childrens accessibility
    Electonic accessibilty
    Transport diversity
    Mode split
    Transit service
    Motor transport options
    Congestion delay
    Travel costs
    Facility costs
    Freight and commercial transport efficiency
    Delivery services
    Market principles
    Planning practices
    User Rating
    Citizen Involvement
    Crash costs
    Health and fitness
    Community livability
    Cultural preservation
    Horizontal equity
    Mobility for non drivers
    Disability mobility
    Nonmotorized transport
    Climate change emissions
    Other Air Pollution
    Noise Pollution
    Water Polution
    Land use impacts (didn’t we cover that before?)
    Habitat protection

    This list is from Todd Litman “Evaluating Urban Transportation Quality. I might add to it such things as
    Probability of having a seat.
    Convenience to your doorstep.
    Number of locations served. (might be included in the accessibility measurement.)

    Aside from the fact that some of these “meaures” are purely subjective, or even of questionable value, or subject to external costs of their own, I defy anyone to actually measure a community transportaion system this way. You could build the system for what the measurements would cost.

    It turns out that some people have actually tried to do this. It turns out that automobility has higher costs and higher external costs (some of which are moot), than other systems. It also turns out that auto users pay a higher proportion of those costs than users of mass transit.

    It is not too hard to figure out that if mass transit provided an equal level of service as the automobile, (guaranteed seat, door to door service, individual temperature and music) then it would be many times as expensive as automobiles.

    That is a patently ridiculous argument, because if mass transit providd an equivalent level of service, it wouldn’t be mass transit. But the argument is no more ridiculous than it is to argue that mass transit is cheaper or pollutes less, without considering all the costs, part of which is level of service.

    Just as with energy consumption, the answer depends on where you draw the system boundary. We could put all our farms back in business and generate all our energy needs with horse power (we did that once). Then the farms would pollute the bay even more.

    We could generate all our power with wind and wave generators, but it might change the climate, and kill all the bats.

    My favorite idea is to put hundreds of little wind generators under the overpasses and generate electricity from the blast of passing trucks.

    It doesn’t even matter if you pay for this with new taxes or with tax expenditures in the form of incentives: somebody is going to have to pay.

    As an energy official, Mr. Sobin should understand the three laws of thermodymics/conservation:

    You can’t get something for nothing.

    You can only get something for nothing at absolute zero.

    You can’t get to absolute zero.

    The key words in Mr. Sobin’s argument are “and other impacts”.

  2. James Atticus Bowden Avatar
    James Atticus Bowden

    Thanks to the orginal post and Ray Hyde’s exposition.

    I’m a half loaf guy. I’ll take a half if I can’t have a whole. Then, take another half…

    Consider,if you will, the ‘finitudes’ I wrote about in the Bacon archives – Virginia’s air,water and land in our stewardship generation to generation.

    Every year there is a GICOD(good idea cut off date) as the GA convenes. Apply carrots and sticks you can figure out in the time available. Tax those who use the finitudes too hard or abuse, reward those who preserve and protect – whether it is an individual, corporation (profit and non), or city/county government.

  3. JAB: I wish (and I’m sure others on the BLOG do too) that I had your economy of words.

    GICOD: I love it, another JAB gem.

    Tax those who use the finitudes too hard. Another gem. Surely there cannot be any valid reason for a 350 hp Infinity.

    But you cannot get something for nothing. If you choose to reward those who preserve and protect, then where is the money coming from? I have been roundly criticized for saying that conservation is not free. Conservation necessarily means that someone is going to pay more for having less. The trade off is that there will be something left for tomorrow.

    Yet as I sit here trying to do my level best to preserve and protect 180 acres and 200 years of family history and ancient construction, I have to tell you, I feel more punished than rewarded.

    All those newcomers who moved in during the last 200 years changed the rules that allowed them to move in. Under the new rules, I am REQUIRED to preserve and protect, but without the tools that were available to the last three generations.

    The county claims I am preserving their resources to the tune of between $65,000 and $130,000 per year, depending on whose numbers you believe. I’d be happy to get the interest on what they claim I’m saving them.

    Preservation is not near as much fun when it becomes an obligation instead of a privilege.

    And I won’t be here tomorrow.

  4. Rodney Sobin Avatar
    Rodney Sobin

    Thanks to Mr. Hyde for his comments.

    He’s correct in mentioning a market for some pollutants. Under a cap-and-trade system polluters develop a market to trade pollution allowances. The cost of the allowances is based on the number of allowances made available and demand for them. The price may or may not have anything to do with the “external” costs of health, ecological, and other impacts depending on the number of allowances available. Cap-and-trade has been very good for reducing the cost of SO2 emissions reduction. We’ll see if Virginia’s adoption of trading for cetain water pollutants will succeed.

    Mr. Hyde is also correct in pointing out that solar has its costs and impacts–for instance, energy used to make components. If externalities of environmental and health damage are included then fine, the price gets incorporated in the product. Maybe solar becomes more competitive with fossil fuels or maybe it doesn’t. The market can decide rather than bureaucrats. I said the that I’d like to see externalities “internalized” to level the playing field, which is different from leveling the price.

    He finds amusing my example of air deposited nutrients to the Chesapeake Bay and then mentioning protection of farms from air impacts given that farms are responsible for much of the nutrient load to the Bay. I’m not sure why. The principle of internalizing external costs apply to farms as well as power plants or any of us. That agriculture pollutes water doesn’t make it ok for crops to be damaged by smog. In turn, farm product prices should reflect their impacts on the environment–farmers shouldn’t get a free ride at the expense of, say, watermen. (There are plenty of ways for reducing pollution from agriculture.)

    Hyde says that among the most ridiculous arguments is that drivers don’t pay for traffic congestion. Maybe or maybe not, but it is not an argument that I made.

    Then he sees a big bureaucracy developing as we bill people for environmental costs. On the contrary, the big bureaucracy is our current system of “command-and-control” regulations and permitting in which states and the feds determine, usually on a site-by-site basis, how much of what pollutant is allowed and how it will be controlled and how it will be documented, etc. based on which processes are used and what industry is being addressed. While I think there will remain a need for some baseline “command-and-control” regulation to prevent acute health and environmental threat, use of fiscal approaches–such as tradeable pollution allowances and charges/taxes/fees is much less bureaucratic. Fiscal approaches allow industry to figure out least-cost means of meeting objectives. Fiscal approaches are more technology neutral as compared to “though shalt install pollution control device X,” and they provide more opportunity for innovation.

    Hyde is also correct in pointing out there are other externalities (positive and negative). Also I am fully aware of the laws of thermodynamic: There are no free lunches but I prefer that the one dining pay the tab.

  5. Well said, and thanks for the clarifications. All good counterpoint to my remarks.

    The argument about drivers not paying for congestion was not meant to be attributed to you. Instead, my main point was meant to be that we often see the full payment argument made from a one sided basis as a means to promote a particular ideology. If, as you propose,that means is universally applied then it makes sense.

    We could be very surprised at the results, however.

    I do think a large bureaucracy will be involved. For one thing, someone is going to have to make hard choices about who gets charged for what, and those charges can only be applied from a command and control perspective. They will need evidence to support their position, and there will be lawsuits involved. Then there will be a continual stream of new complainees saying that so and so isn’t paying his share because…. and then ….. will have to be investigated, so the appropriate market adjustments can be made.

    I’m not sure we can achieve a free market by artificially adding non-market externalities, but it will be interesting to watch.

  6. I have a question. Entropy is always increasing. If every system has to pay all its external costs, doesn’t that imply ther can be no profit?

  7. Rodney Sobin Avatar
    Rodney Sobin

    Mr. Hyde, thanks for your additional points. This is a good discussion.

    First off, I want to reiterate the concern about externalities. People are made ill and even killed by air pollution–none of us pays for that at the gas pump or on our utility bill–the victims pay. Watermen and recreation industry pay for the Chesapeake Bay’s dead zone rather than us paying for it in the price of our food, energy, and sewer charges. And a disproportionate fraction of our international security costs have to do with oil–and are not borne by taxpayers in proportion to oil use (directly or indirectly in products we consume). Thirds parties and society at-large paying costs (whether monetary or not) that should be borne by the buyer and seller in a market transaction is market imperfection that Adam Smith acknowledged.

    I do not believe a big bureaucracy would be needed compared to current bureaucracy in order to incorporate (many) environmental costs. But there would be a difficult political process.

    The easiest way to incorporate externalities is through a tax or, if you want a euphemism, an environmental users fee. For instance, $X per ton of CO2–easy to calculate based on carbon content of fuel; or charge more polluting cars more for registration than less polluting ones based on year and model.

    For large air polluters there’s already a fee for certain pollutants with the funds going to administer permitting programs. However the charge is modest and limited to a certain number of tons (i.e., beyond a certain level one pays the same regardless of how much one pollutes). If the fee were more significant to approximate health and ecological damage and didn’t have a cap, it would help incorporate the external cost (as opposed to simply funding a regulatory program). A firm can decide to pollute more and pay more fee, or it can prevent or control its emissions better. (A question is whether the revenues should go to compensate for harm and remediate damage or go to general funds, perhaps with offsetting reductions in income and other taxes.)

    The same principle applies to, say, nutrients in water or imposition of a carbon tax based on carbon content of fuels with respect to climate change.

    It is true that this approach is easier to use for some pollutants than others based on ability to monitor who is polluting. And for some pollutants may be inappropriate. Paying a tax/fee/charge is not license to poison people. There may still be a need for a baseline of conventional regulation.

    The second major approach, as your earlier post alluded to, is a cap-and-trade approach where government defines a total limit of pollutant that’s allowed (ideally based on some assessment of health impact and environmental sustainability, but in reality based on a political process) and then allows industry to determine how to meet its obligations–reduce its pollution or buy allowances from someone who has them to sell.

    The tradeable allowance approach worked well SO2 reductions. It’s too early to tell if it’s working well for nitrogen oxides (precursor of smog) (in VA only applied to big power plants, which is a shortcoming in my view). It has been used in other contexts ranging from the phase down of leaded gasoline (refiners traded allowances) to certain fisheries quotas.

    As with taxes/fees this works better for some pollutants and industries than others. There is a need for monitoring to assure people don’t pollute more than the allowances they own. A big issue is whether to allocate allowances to industries based existing emissions or auction.

    You suggest that adding non-market externalities is incompatible with a free market. Yet we do this via taxes all the time. E.g., motor fuel taxes pay for highway construction and upkeep–though it doesn’t pay 100% nor does it cover environmental impacts of driving. If not, one should pay tolls for ALL roads as market transactions. (Far from perfect market since since the owner of the street in front of your house would have a monopoly.)

    Adam Smith wrote about provision of public goods in the Wealth of Nations (econ texts use lighthouses as an example) as a legitimate function of government. A public good is one type of externality (positive externality in this case).

    Using fiscal approaches to internalize externality costs is more market friendly and innovation friendly than heavy handed command-and-control regulation.

    I’m not sure of your question about entropy, externalities, and profit.

  8. Externalities: Lets suppose I get into a bidding war for a condo I want. I get the condo but I pay several thousand dollars above market. The price is worth it to me because I’m starting a new job on Monday.

    Suddenly, every condo in the place is worth the exhorbitant price I paid. The externalities are that every current condo owner adds several thousand dollars to his net worth, with no effort. They can even go down to the bank and borrow the money against their new equity. Thats good for a few people.

    But everyone else who wants a condo is now faced with the externality of paying a price they can’t afford, and someone winds up freezing on the street.

    Who pays?

    The condo speculators who suddenly made wealth out of nothing by betting condo prices would go up? The person who sold his condo to me and made an obscene profit? Or is it really the poor SOB who froze on the street? Or should I pay for being, like SUV drivers, a conspicuous consumptionist?

    Who gets paid? Everybody that wants a condo and can’t have one?

    Entropy says that disorder always increases. Strictly speaking it is only thermodynamic, but heat and energy are so closely tied to work (the sole means of reversing entropy) that for practical purposes we can say that anything that degrades with time is suffering from increasing entropy.

    Entropy is directly connected to the arrow of time, and as we observe, anything we don’t continually work on, degrades with time.

    It seems to me that your argument of paying for externalities has the problem of the example above: there isn’t enough money to go around. If there was, then somebody would necessarily be getting something for nothing.

    Ludwig Boltzmann formulated the theory as Entropy equals the negative logarithm of work. It is the statistical equivalent of the second law of thermodynamics. He was a naturally morose man, but legend has it he was so depressed by the implications of his work that he committed suicide. The equation is engraved on his tombstone.

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