Sunday, June 20, 2021

The Expense Of Externalized Costs

                                                                                                            written 13 June 2021

                                                                                                        published 20 June 2021


            A fundamental assumption in economic theory is that price includes all costs of production.  In reality, there are always unincluded "externalized costs".  These may be considered too minimal or too difficult to calculate, or fraudulently hidden for competitive advantage.  These costs are always paid, just not by the person profiting from the sale of the product.

            A good example of an externalized cost is our global plastic problem.  Every manufacturer saves money with the convenience of cheap, versatile, durable, light weight disposable packaging.  Most winds up in our landscape, air, water, and food, causing blight, wide spread health problems, and death throughout the biosphere.  The enormous cleanup costs are difficult to calculate, so they are "externalized", never affecting the price of the individual products, which continue to seem affordable.  This not only distorts the fundamental function of pricing, prohibiting consumer comparison, but threatens the viability of our entire society as it kills the biosphere upon which we all depend.

            Another significant externalized cost is atmospheric CO2 impact.  Gas bubbles in ice core data show a gradual rise in concentration of atmospheric CO2 from 180ppm (parts per million) at the depth of the last ice age to 280ppm in 1800 (50% increase over 20,000 years).  When precision measurements began in 1956, the concentration was 316ppm (12% increase over 150 years).  Last month it hit 420ppm (33% increase over 65 years).  This human produced increase is so rapid, compared to geologic and biological time frames, the full impact has yet to be manifested.

            Like ubiquitous plastic trash, increasing CO2 concentrations are already costing society.  A warming planet is experiencing wilder weather extremes: rapid shifts, hotter temperatures, colder freezes, longer droughts, heavier rainfalls, and stronger wind storms.  One measure is the increasing cost of natural disasters.  In the last 40 years, expensive weather events (costing over $1B) have increased 60% every decade, from $3B in 1980 to $450B in 2020 (in constant dollars).  This is definitely an underestimate.  While it is difficult to pin any one weather event on climate change, we can assume at least 50% of the increased costs are climate related, for an annual cost of $200B.  These costs are paid entirely by people who are not profiting from selling fossil fuels.  The total US fossil fuel bill is about $1T per year, so the above assumption means fossil fuels cost at least 20% more than what we pay as consumers. 

             As these weather disasters increase in size and frequency, damage will eventually exceed the rate of rebuilding, and whole systems will collapse.  We are beginning to see climate refugees from some parts of the world, including Central America, where immigration is partially driven by agricultural infrastructure destruction from successive storms.  Putting a price on this kind of destruction going forward in very difficult.  

            The value of the American physical infrastructure is about $1,000T, and the odds of environmental collapse of this system due to climate change have been estimated at 1 in 20 within 30 years and 1 in 4 within 50 years.  One way to guesstimate the annual risk is to divide the value at risk by the odds and the time interval.  For the 30-year risk, that give $1,000T/(20x30), or $1.6T.  For the 50-year risk we get $5T.  These are the respective annual externalized costs of toasting off the planet by ignoring the climate emergency.

            When we add the costs of current climate damages and the risk of total economic collapse, we see that the real cost of fossil fuel energy is 3 to 6 times what we are currently paying.  We think we are getting a "good deal" because most of the expenses are not included in the price, but inevitably show up later.

            The point of this thought exercise is to contrast the real costs of shifting to renewable power against the true cost of our current energy system.  Gasoline now sells for about $4/gallon, but really costs $12-$24/gallon.  That makes the cost of an electric car seem more reasonable.  In Ukiah, retail power costs about $0.16/kwhr, 30% of which is carbon based.  Using the above real costs for that 30% would give a retail rate of $0.30-$0.40/kwhr.  Compared to that, solar with storage is a bargain, and we get to leave a habitable planet to our grandchildren.  Such a deal.