Web Chat: The Concealed Costs of Energy

As American families hit the road for summer travel, high prices at the pump are a problem. Expert Michael Greenstone, director of the Hamilton Project at Brookings, says that even higher energy costs are concealed —  the costs of our choices on the environment, national security and our health.

Greenstone took  questions about the true costs of energy in a live web chat moderated by POLITICO on June 15. The transcript of this chat follows.

Read Michael Greenstone’s op-ed with Adam Looney in today’s POLITICO »

12:30 Seung Min Kim: Hi everyone, and welcome to our weekly chat with the Brookings Institution. Here with me today is Michael Greenstone, who will be answering your questions about gas prices (just in time for the summer driving season!) and energy policy. Thanks for joining us, Michael.

12:30 [Comment From Maria: ] Your op-ed in today’s Politico refers to the private and social costs of energy. Can you explain what this means?

12:31 Michael Greenstone: The private costs of energy are those costs paid by consumers and businesses, basically the costs we pay at the pump and in our monthly electricity bill.

Social costs, on the other hand, refer to the harm that energy generation causes to others. These costs include a wide range of damages ranging from soot and smog that cause children to have respiratory problems to greenhouse gases that cause rising temperatures. No one sends us a bill for these costs, but we still pay for them with shorter life spans, increased respiratory diseases, a changing climate that threatens our way of life, and weakened national security.

12:32 Seung Min Kim: Here’s that op-ed.

12:32 [Comment From Diana W.: ] If we took the policy approach of pricing various energy sources based on their true, full costs, what would the new range of costs look like?

12:33 Michael Greenstone: Taking the social costs into account has a dramatic impact on which energy sources are the better deal. For example, coal power plants provide roughly 45 percent of America’s electricity at a seemingly bargain price–just 3.2 cents per Kilowatt hour (kWh) of electricity (about the amount of power needed to run your vacuum cleaner or coffee maker for an hour). However, this low sticker price masks the fact that the true cost of that energy is 170 percent higher. Each KWh of coal-generated electricity comes with an additional 5.6 cents of social costs, including about 3.4 cents in health damages and 2.2 cents in climate change-related damages.

Conversely, the full cost of electricity from a new natural gas plant is about 6.5 cents per kWh.

Here is a table that the Hamilton Project, which I direct, put together on the full costs for various electricity sources:

 12:33 [Comment From Guest: ] In your ideal world, what would a new U.S. energy strategy look like?

12:35 Michael Greenstone: Policymakers should work to create a level playing field where all energy prices reflect the full costs of producing and transmitting energy, as well as any resulting health, environmental, or national security costs. Once energy prices reflect both private and social costs, businesses and consumers would be free to make more informed choices. A new level playing field may increase gas and electricity prices in the short run, but in the long run Americans will benefit from longer and healthier lives, improved cleaner environment, and foreign policy that is less constrained.

This new energy strategy could also spark innovation by making businesses consider the true costs of energy, not just the private costs. Right now, businesses have little incentive to develop technologies that have low-social costs. With a level playing field, many firms may redirect research and development towards new technologies with low social costs, leading to advances in the energy sector that could drive down the costs of renewable energy sources so that clean fuels are more competitive with traditional fuels, or result in new fuel options that today are just ideas. Ultimately, this could be good for our competitiveness too.

12:36 [Comment From Rachel W.: ] What’s going to happen in the nuclear power industry following the crisis in Japan?

12:38 Michael Greenstone: This is an excellent question. It is clear that it is going into retrenchment in Germany and some other countries. It is still unclear what will happen here in the US. However, the truth about nuclear is that it is not currently cost competitive in the US largely because our energy policy does not account for the social costs of other energy sources. Put another way, current policies are largely causing nuclear to be uncompetitive.

12:39 [Comment From Lori: ] It seems with all the instability in the Middle East, research, development and investment in alternative energy sources would be a priority for our country. Why isn’t it?

12:41 Michael Greenstone: We have an excellent history of federal investment in basic research for medicine and science, through the NIH and NSF. The history of support for energy research is not as strong, both in the way we allocate funding and the total amount. We spend a surprisingly small amount on energy R & D.

One recent program deserves mention. The ARPA-E program is looking like a real gem, although it is still funded at low levels, relative to the scale of the energy challenges.

12:41 [Comment From Joseph Luk: ]You mentioned about “leveling the playing field”. Can you substantiate on the pros and cons of the approaches we can take to do so? For example, maybe we can level the playing field for Solar through subsidies, but then I thought subsidies have a distorting effect on prices…etc.

12:42 Michael Greenstone: The best textbook economics policy would be one that puts all energy sources on a level playing field, rather than subsidizing particular ones (e.g., solar).

12:43 [Comment From Tyler: ] Do you think that Congress will reconsider cap-and-trade any time in the near future, and what does that mean for our ability to participate in international negotiations?

12:45 Michael Greenstone: This is a very important question.

Climate change is a global problem and can only be solved with coordinated global action. We will not solve it alone and it will not be solved without US involvement. Cap and trade was one clear way to make a commitment that the international community could see and react to. There are others though.

I think there is a grand bargain to made though that centers around the current budget problems. Specifically, it appears that we will need new revenue to confront the budget deficit. Wouldn’t we rather get it by pricing carbon than by raising income taxes?

12:46 [Comment From Franklin: ] With high gasoline price increases dominating the news, what can U.S. policymakers do to reduce the pain at the pump?

12:47 Michael Greenstone: Gasoline prices impose a real burden on many American families and this burden is particularly severe given the very hard employment situation faced by many American families. However, there is no easy way to avoid these rising gas prices in the near term. And, due to the projected growth in India and China, it seems reasonable to presume that global demand will continue to rise.

However, there are a series of policies that are worth exploring that could help over the longer term. For example at current natural gas prices, it is actually cheaper to convert a gasoline powered car to one that can run on natural gas and then use CNG. However, there isn’t an infrastructure in place to fuel these cars. Further, as I mentioned above, government support for basic research, development, and demonstration is at relatively low levels. Funding increases could identify new fuel sources.

12:47 [Comment From Kyle: ] Based on the table you provided above, natural gas seems to be a very cost effective source of energy. But what about the potential environmental problems that have received recent press?

12:50 Michael Greenstone: Great question and I should have clarified this point.

Those numbers do not reflect any environmental damages associated with fracking. At this point, we just don’t know enough about the leakage and other problems with fracking. This should be a top national priority to understand this (indeed, I think the DOE has a panel looking into it) both in terms of getting a near term answer and studying it over the long run. Clearly, those numbers would need to be updated with whatever results emerge.

The tantalizing feature of natural gas is that due to fracking it suddenly appears that we have huge reserves of it. I believe it is potentially the largest game changer in terms of energy in the last 50 years.

12:51 [Comment From Lyndon: ] If you could change one thing about US energy policy, what would it be?

12:52 Michael Greenstone: I would level the playing field so that all energy sources are priced at their full costs. In the current system, we are essentially fooling ourselves by pretending that some of the cost don’t exist. I would then have government get out of the way and let the private market sort out the winners and losers.

12:53 [Comment From George A.: ] Some policymakers have suggested opening up domestic reserves and/or increasing domestic oil exploration in an effort to fight rising gas prices – would this be effective?

12:54 Michael Greenstone: There would certainly be economic benefits from increased domestic oil exploration and production in some locations. However, these benefits would not include noticeably lower gas prices and might come along with some environmental damages.

The basic problem is that oil production in the US represents less than 10 percent of worldwide oil production and it is estimated that we have just 2 percent of reserves. Even if the US dramatically expanded domestic production this would only result in a small increase in total world oil supply that could be offset by reductions from Saudia Arabia or OPEC more generally. Furthermore, this expanded production would only come on line after several years and would not increase supply in the short run.

12:54 [Comment Bill in Va.: ] I saw a report that said the electricity generating companies in the USA have the second-lowest % investment of any major sector in R & D at a time when China and even Ireland are making advances in Smart Grid technology (about which Pres. Obama recently spoke). What’s it going to take to make strides with industry and the political system to move toward a Smart Grid? Or is our “free market” system and broken politics not going to allow that.

12:55 Michael Greenstone: The smart grid has a lot of promise and I think it is worth engaging in some serious experimentation to determine the full extent of the benefits.

12:57 [Comment From Austin: ] Is there any short term solution to higher gas prices?

12:58 Michael Greenstone: There is a global market for oil and this makes it very difficult to identify short-term solutions to high gas prices.

Thank you all for the excellent questions. This was fun.

12:58 Seung Min Kim: And thanks to Michael for his insightful answers!