The production and use of energy have many well-known benefits to society, but they also have “hidden costs” or “externalities” that are not reflected in market prices, such as the harm to human health and the environment from local pollution.
According to a recent assessment for the United States by the National Research Council, these hidden costs amounted to $120 billion in 2005. This figure represents an underestimate as it excludes some damage components that are difficult to quantify, such as damages to ecosystems. It also excludes greenhouse gases, whose external costs could vary between $10 and $100 per ton of carbon dioxide, depending on the rate at which future climate damages are discounted. As an illustration, using a damage estimate of $30 per ton of carbon dioxide emitted by burning fossil fuels would more than double the estimate of damages.
Damages from Electricity Generation
Coal, which currently accounts for nearly half of power generation, produces more hidden costs in aggregate than any other form of energy production. These damages include in particular the effect of air pollution on human health, crop yields, and building materials. Health damages include premature mortality, which was valued assuming a “statistical life” of $6 million, and morbidity (for example, chronic bronchitis and asthma). Non-climate damages from using coal to generate electricity came to $62 billion in 2005 or 3.2 cents per kilowatt hour (kWh), about one third of the average residential electricity price. Of these hidden costs, 94 percent represented premature mortality and 85 percent was caused by sulfur dioxide emissions (most of which are transformed into airborne particulates).
The difference in damages among power plants were substantial: the 10 percent of plants with the highest damages produced 43 percent of aggregate damages from all plants; while the 50 percent of plants with the lowest damages produced only 12 percent of aggregate damages. Each group of plants accounted for 25 percent of electricity generated from coal; hence damages per kWh were almost 4 times higher for the highest 10 percent of plants than for the lowest 50 percent. Most variations in damages per kWh were due to differences in emission rates, although plant location also plays a role as this affects the size of the exposed population. Differences in pollution intensity reflect the more stringent regulations imposed on newer plants, which suggests there are wide possibilities for reducing damages, even with present technology.
Damages for natural gas-fired plants are much lower than for coal plants. Non-climate damages from plants accounting for 71 percent of electricity generated from natural gas totaled about $740 million in 2005 or, on average, 0.16 cents per kWh (one twentieth of the damages per kWh from coal). As with coal, there are big differences among plants: The least-damaging 50 percent of gas plants, which accounted for 23 percent of net generation, produced 4 percent of the damages, while the most damaging 10 percent of plants, which accounted for 24 percent of net generation, produced 65 percent of the damages. Climate damages can range from 1 to 3 to 10 cents per kWh for coal plants, depending on whether damages per ton of CO2 are valued at $10, $30, or $100. A gas-fired plant produces roughly half this climate damage on a per kWh basis.
Going forward, air pollution damages from coal-fired generation are projected to fall steadily to around $38 billion by 2030 based on expected technological change and pollution regulations. Projected reductions in pollution intensity from natural gas facilities are not as dramatic as for coal plants, but aggregate damages are still expected to fall by .05 cents per kWh.
Other sources of electricity, such as wind generation, appear to have very low hidden costs in comparison with fossil fuel plants, though wind currently accounts for only 1 percent of power generation. Even for nuclear power (which currently provides 20 percent of electricity), the risk of accidents, security breaches, and releases of high-level waste appear to be very small with current technology. However, other hidden costs could not be estimated until the political process comes to a decision on storage facilities for disposal of spent fuel.
In 2005, highway vehicles caused $56 billion in health and other non-climate damages, with light-duty vehicles (cars, minivans, SUVs) accounting for about 60 percent and heavy-duty vehicles (trucks and buses) the other 40 percent. Pollution from cars and trucks varies remarkably little from one technology to another, from a low of 1.2 to a high of 1.7 cents per mile. Perhaps surprisingly, less than a third of the highway-related damages are caused by the tailpipe emissions of cars, trucks, and buses. Most are incurred in producing and refining the fuel, and in manufacturing the vehicles.
Congress has mandated the use of ethanol, most of which is currently made from corn, as a highway fuel. But the report showed that pollution costs from corn-based ethanol are similar to or slightly higher than costs from conventional gasoline, because of the energy required to grow the corn and turn it into fuel. Electric vehicles also produce some of the highest non-climate damages, as they rely on electricity powered largely from fossil fuel plants for their fuel and energy intensive battery manufacturing. Hybrid electric vehicles had some of the lowest costs (1.2 cents per vehicle mile) but as general vehicle efficiency increases, the differences between hybrids and gasoline vehicles are expected to shrink. In 2005, diesel had some of the highest costs when used in both light and heavy vehicles.
As was the case for power generation from coal, the midrange figure used to illustrate climate damages ($30 per ton of CO2) marks the point at which climate-related damages from transportation are expected to equal or exceed non-climate damages.
The report projected significant decreases in non-climate damages per mile traveled for heavy duty vehicles between 2005 and 2030. In 2005, damages per mile were three to four times higher for heavy than for light duty vehicles. Damages per mile for heavy duty vehicles are predicted to fall substantially by 2030 due to full implementation of the Highway Diesel Rule.
Some broader costs were omitted from the damage assessment. Although dependence on imported oil has well-recognized implications for foreign policy, and some of the effects can be viewed as external costs, it is currently impossible to quantify them. For example, the role of the military in safeguarding foreign supplies of oil is often identified as a relevant factor. But the energy-related reasons for a military presence in certain areas of the world cannot readily be disentangled from non-energy-related reasons.
The transmission grid that distributes the country’s electric power to consumers develops failures from time to time because it is overloaded and has inadequate reserve capacity. Those failures constitute another kind of hidden cost; measuring the social costs of these outages, however, is difficult. The possibility of grid failure underscores the importance of carefully analyzing the costs and benefits of investing in a modernized grid—one that takes advantage of new smart technology and that is better able to handle intermittent renewable-power sources.
Government action has a potentially important role to play in reducing energy-related damages. For example, the full implementation of the federal diesel-emissions rule would result in a sizeable decrease in non-climate damages from diesel vehicles between 2005 and 2030. Similarly, major initiatives to further reduce emissions from coal-fired power plants or shift to a cleaner electricity-generating mix (such as renewables, natural gas, and nuclear) could substantially reduce hidden costs, including those from grid-dependent hybrid and electric vehicles.
Maureen L. Cropper, a professor of economics at the University of Maryland and a former lead economist at the World Bank, has focused on valuing environmental amenities, estimating consumer preferences for health and longevity improvements, and the tradeoffs implicit in environmental regulations.
National Research Council. 2009. Hidden Costs of Energy: Unpriced Consequences of Energy Production and Use. Washington, DC: The National Academies Press.
Muller, N.Z., and R.O. Mendelsohn. 2007. Measuring the damages from air pollution in the U.S. Journal of Environmental Economics and Management 54(1):1–14.
Muller, N., R. Mendelsohn, and W. Nordhaus. 2009. Environmental Accounting for Pollution: Methods with an Application to the United States Economy. Working paper. May 26.