A fundamental assumption of economic theory is that the price includes all costs of production. In reality, there are always “externalized costs” not included. These can be seen as too minimal or too difficult to calculate, or fraudulently hidden for competitive advantage. These fees are always paid, but not by the person who profits from the sale of the product.
A good example of an externalized cost is our overall plastic problem. Every manufacturer saves money with the convenience of inexpensive, versatile, durable and lightweight disposable packaging. Most are found in our landscape, air, water and food, causing rust, widespread health problems and death throughout the biosphere. Huge cleaning costs are difficult to calculate, so they are “outsourced”, never affecting the price of individual products, which continue to appear affordable. This not only distorts the fundamental function of pricing, prohibiting comparison of consumers, but threatens the viability of our entire society as it kills the biosphere we all depend on.
Another important externalized cost is the impact of atmospheric CO2. Gas bubbles in ice core data show a gradual increase in atmospheric CO2 concentration from 180 ppm (parts per million) at the depth of the last Ice Age to 280 ppm in 1800 (50% increase over 20,000 years ). When precision measurements began in 1956, the concentration was 316 ppm (12% increase over 150 years). Last month it hit 420 ppm (33% increase over 65 years). This man-made increase is so rapid, compared to geological and biological delays, that the full impact has yet to be manifested.
Like ubiquitous plastic waste, increasing concentrations of CO2 are already costing society dearly. A warming planet experiences extreme weather conditions: rapid changes, warmer temperatures, colder freezes, longer droughts, more rainfall, and stronger windstorms. One measure is the increasing cost of natural disasters. Over the past 40 years, costly weather events (costing over $ 1 billion) have increased by 60% each decade, from $ 3 billion in 1980 to $ 450 billion in 2020 (in constant dollars). It is certainly an understatement. While it is difficult to attribute a weather event to climate change, we can assume that at least 50% of the increased costs are climate related, at an annual cost of $ 200 billion. These costs are paid entirely by people who do not profit from the sale of fossil fuels. The total fossil fuel bill in the United States is around $ 1 billion per year, so the above assumption means that fossil fuels cost at least 20% more than what we pay as consumers.
As these weather disasters increase in size and frequency, the damage will eventually exceed the rate of reconstruction and entire systems will collapse. We are starting to see climate refugees from parts of the world, especially Central America, where immigration is in part due to the destruction of agricultural infrastructure caused by successive storms. Putting a price on this kind of destruction in the future is very difficult.
The value of America’s physical infrastructure is around $ 1,000 T, and the risks of environmental collapse of this system due to climate change have been estimated at 1 in 20 within 30 years and 1 in 4 d ’50 years from now. One way to guess the annual risk is to divide the value at risk by the odds and the time interval. For the risk at 30 years, this gives 1000T / (20 × 30), or 1.6T. For the risk at 50 years, we get $ 5 T. These are the respective annual externalized costs of toast to the planet ignoring the climate emergency.
When we add the costs of current climate damage and the risk of total economic collapse, we see that the real cost of fossil fuel is 3-6 times what we are paying now. We think we are getting a “good deal” as most of the expenses are not included in the price, but inevitably appear later.
The purpose of this brainstorming exercise is to compare the real costs of switching to renewables with the real cost of our current energy system. Gasoline now sells for around $ 4 / gallon, but really costs $ 12 to $ 24 / gallon. It makes the cost of an electric car more reasonable. In Ukiah, retail electricity costs around $ 0.16 / kWh, of which 30% is carbon-based. Using the actual costs above for that 30 percent would result in a retail rate of $ 0.30 to $ 0.40 / kWh. Compared to that, solar with storage is a good deal, and we can leave a habitable planet for our grandchildren. Such a deal.
Crispin B. Hollinshead lives in Ukiah. This article and previous articles are available at cbhollinshead.blogspot.com.