Energy Debates Confuse Price with True Costs

by Francis P. Koster, Ed.D.

If your neighbor had a beef cow that routinely broke the fence and ate your hay, come time the cow was turned into hamburger your neighbor got wealthier at your expense.

Because the guy who owned the cow did not have to pay for some of the cow’s food, the “price” of the beef would be artificially low. You subsidized him — you provided part of the true “cost” of production for no compensation. The “price” and the “cost” of the beef were not the same, although they should have been. This kind of subsidy disrupts free market economics.

There are side effects when price and cost are different, and this difference impacts our energy future.

There are two kinds of subsidies that cause price and cost to take different paths.

The first is outright government subsidy, practiced by many governments around the world.

Our own government has a long history of taxpayer subsidy to emerging new industries to help them get on their feet. Recipients of this include the railroad industry in the 19th century, the oil and gas industry in the early 1900s, the coal industry in the 1930s and the nuclear power industry in the 1950s. The current hot political debate about “picking winners and losers” has been ongoing for almost 200 years.

Duke University has produced an interesting report on the history of taxpayer subsidy for energy suppliers. It shows that the highest subsidies occur during the first 15 years of a new energy industry. Comparing renewable energy to nuclear power, coal and oil, nuclear got eight times more subsidy than renewables; oil got five times more. The natural gas industry also got five times more. These subsidies to nuclear, coal and oil continue in some form and amount today. (The renewable energy subsidies were just reduced dramatically.)

The second form of subsidy might be called the “cow pie subsidy.” One way to look at this is to imagine that the cow who ate your hay also wandered into your living room and left you a present. You would have to pay to have the mess cleaned up. Again, because your neighbor moved some cleanup costs off his books and onto yours, his price to the consumer can go down. Your pain was his gain.

Many organizations are interested in behaving like your neighbor with the cow. They would like to get subsidies and leave a mess behind for others to pay to clean up.

The “cow pie subsidy” can be shown in all areas of our energy economy. Here are some examples from the coal industry. West Virginia University researchers found that citizens living in coal mining towns have a one-third greater incidence of high blood pressure, two-thirds higher risk for developing chronic obstructive pulmonary disease (COPD), and more than two-thirds higher risk of developing kidney disease. The birth defect rate in areas where mountain top coal removal is done was 235 per 10,000 live births, compared to 144 in non-mining areas, according to a separate study done in 2011 by Washington State University. This is a cost paid by these victims so that the price the rest of us pay for coal-fired electricity is kept low.

After being mined, when this coal is burned to make electricity near your home, this kind of cost becomes yours as well. Communities located near coal-fired electrical generating plants have health care per individual two to five times greater for folks living near the plant than for those living farther away, totaling in excess of $4 billion annually.

Take all those health impacts, add to them the taxpayer subsidies, and you have one large distortion of the market place.

We can create a better future for our country, and our children, by counting all the costs into the price of energy, including subsidies and harm done to our family and friends. If we do, we will make better choices.