Internalizing Externalities: Hidden Costs of Energy

This is the BIG externality.  Highlighted by Tim Habb from Environmental Economics:

From the inbox:

I’m just skimming through the morning research feeds, and saw something that might interest you if you didn’t see it already. The National Research Council just completed its report on externalities of energy production and use:

The web version is free, but for some reason they charge a hefty fee to download the PDF

From the conclusions to the summary (Hidden Costs of Energy: Unpriced Consequences of Energy Production and Use):

In aggregate, the damage estimates presented in this report for various external effects are substantial.  Just the damages from external effects the committee was able to quantify add up to more than $120 billion for the year 2005. Although large uncertainties are associated with the committee’s estimates, there is little doubt that this aggregate total substantially underestimates the damages, because it does not include many other kinds of damages that could not be quantified for reasons contained in the report, such as damages related to some pollutants, climate change, ecosystems, infrastructure and security.

Yep, you read that run-on sentence correctly–costs of climate change are not included and they still get a pretty big number.  And…

But even if complete, our various damage estimates would not automatically offer a guide to policy.  From the perspective of economic efficiency, theory suggests that damages should not be reduced to zero but only to the point where the cost of reducing another ton of emissions equals the marginal damages avoided.  That is, the degree to which a burden should reduced depends on its current level and the cost of lowering it:the solution cannot be determined from the amount of damage alone.

In other words–clean-up is costly.  We have to weigh those costs against the benefits of clean-up (reduced damages).  Policy shouldn’t be determined by the shock value of big numbers.

Holy moly! To put that into perspective it is only a fraction of GDP, and still a fraction more for our deficit even if you took into account many other kinds of damages AND doubled the cost given what is needed for clean up.  But, then again, this is only for energy…


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