Energy's Hidden Cost

You could face a 25% higher electric bill if the damage to human health from coal-burning power plants is included in the retail cost of electricity, according to a National Research Council (NRC) report released on Oct. 19.

In the congressionally mandated study examining the hidden costs of energy production, a 19-member NRC panel finds that $120 billion in damages are incurred each year because of premature deaths caused by air pollution from electricity generation, transportation, and industrial and commercial heating. These costs are “hidden,” says Jared L. Cohon, president of Carnegie Mellon University and the NRC panel chairman, because they are not factored into either the market prices of coal and oil or the electricity and gasoline produced from them.

The dollar amounts are primarily based on the health impacts and premature deaths of nearly 20,000 people annually, a death rate derived from a host of other external cost studies. The emissions data the panel examined are from 2005 and include results for sulfur dioxide, particulates, and nitrogen oxides. The total is conservative, Cohon stresses, and does not reflect the impact of climate change, the harm to ecosystems, or the effect of toxic air pollutants such as mercury or lead.

The biggest chunk of damages—$63 billion—is caused by electricity generation, and nearly all of that is due to emissions from coal-fired power plants. The exception is nearly $1 billion worth of damages due to electricity generation from natural gas.

Another large chunk of damages comes from transportation. The report finds $56 billion in damages from use and production of motor fuels, based on a life-cycle analysis that includes extraction, refining, and use in a vehicle. Only one-third of transportation-related health damage is caused by motor vehicle operation, the report notes. The rest comes from extraction and production of motor fuel and the manufacturing of vehicles.

The report also examines heating for buildings and industrial processes and finds about $1.4 billion in damages, mostly from natural gas that’s been burned for heat.

Although the report does not directly include the costs of climate change, it finds a wide range of societal costs due to carbon dioxide emissions, varying from $1.00 per ton of the gas to $100 per ton. That would work out to between $7 billion and $700 billion in annual damages from U.S. greenhouse gas emissions.

The range in damages caused by CO₂ emissions results from variables used in calculating possible future temperature changes associated with climate change. It is also affected by the difficulty in accurately assessing the damages caused by today’s emissions on future generations.

Like the effects of air pollution, most of the hidden costs due to damage from climate change would be caused by coal-fired power plants, the report notes, adding that those facilities are the largest single source of CO₂ emissions in the U.S. Indeed, electricity generation is so fundamental to the U.S. economy and industry that it is the primary focus of the report.

Trying to quantify the pocketbook impacts of these hidden costs on electricity, the NRC report estimates that the damages from coal use average about 3.2 cents per kWh of electricity generated and vary from one-fifth of a cent to more than 12 cents per kWh, Cohon explains. The higher number is equal to the average retail price of electricity in the U.S.

Coal is critical to the U.S. because it is responsible for producing about half the nation’s electricity. The report finds a large variance in pollution controls among the nation’s 406 coal-fired power plants. The cleanest half of the plants produce 25% of all coal-generated electricity and are responsible for only 12% of the damages attributed to coal. On the other hand, 10% of the dirtiest plants (about 40 of the facilities) produce 25% of all coal-generated electricity, but their emissions are responsible for 43% of the damages.

Maureen L. Cropper, an NRC panel member, an economics professor at the University of Maryland, and a senior fellow at the economic think tank Resources for the Future, warns against aggregating these costs.

“You have to really look at this on a plant-by-plant basis,” she says, arguing that the cost to reduce emissions and subsequent damages is far less than the cost of the damages from power plants without pollution controls. “There are plants out there with a billion dollars in damages, and the relevant question becomes, ‘What would it cost to install a scrubber?’ ”

The cost of buying and installing a scrubber to remove the air pollution, she says, would be $100 million, far less than the plant’s damages.

Not examined in the report are other coal-related damages, such as mountaintop mining and stream degradation. Also, Cropper notes, the report does not reflect what happens to pollution captured by a scrubber or ash placed in a holding pond. “If a company captures particulates and dumps them in the Monongahela River,” she says, “that is not in our study.”

On a positive note, the panel says pollution is likely to decrease as coal companies retire old plants or install pollution controls to comply with new laws. Also, natural gas’s share of electricity generation could increase in the future. Natural gas currently generates 20% of the U.S.’s electricity and $740 million in annual damages, the report says.

The report briefly discusses wind and solar energy sources as well as nuclear power plants and finds little damage from their operation. However, the report notes that nuclear waste and the nuclear-fuel production cycle deserve future analysis.

The panel also explores the health impacts from corn-grain-based biofuels and finds them to be similar to or slightly worse than those of gasoline because of the energy required to produce and convert corn to biofuel. The report does, however, find a drop in damages for ethanol from cellulosic feedstock.

The report is driven by Congress’ concern over the external effects of energy production—what economists call “externalities,” or costs that are not reflected in the final price of a good, in this case energy. The report’s findings indicate that the price of energy in the U.S. is artificially low and does not reflect its actual cost.

Artificial prices lead to “market failures,” the report notes, and it warns that a case could be made for government intervention in the form of “regulations, taxes, fees, or tradable permits” to correct the market and adjust the price of a product to more accurately reflect its true cost to society. Congress, however, did not ask NRC to recommend strategies to address external costs.