Home > Energy Policy, Environment > The Economics of Energy

The Economics of Energy


I went to HEB today and bought some essentials that my kitchen was sadly lacking. On the list were almonds, eggs, and chocolate. Each had a price that reflected the cost of its inputs (for example cocoa beans, milk, hazelnuts) and outputs (disposal of chicken poop).

The cost of energy is largely the same as that of my chocolate bars. We pay for the price of fuel, transportation, and waste disposal. But, one key element is currently left out of the equation  – carbon dioxide (and most other greenhouse gases).

The cost of emitting a unit of carbon dioxide (CO2) into the atmosphere today is $0, making the atmosphere a free airfill. No tipping fee required. But the true costs – asthma, higher frequency of natural disasters, long term decreasing crop yields – are undeniably > $0. The economics of energy just don’t add up.

Energy and environmental policy folks in Washington are trying to change this misrepresentation of the true cost of energy. They talk about tax vs cap and trade, price collars, and release valves. If you boil down these words, what they really want to do is:

  1. put a price on carbon dioxide emissions – because they aren’t free
  2. set a maximum emissions level for each year (which decreases over time) – because paying for these emissions isn’t enough.  We must reduce the total amount.

This will undoubtedly raise the PRICE of energy in the short term. But, it will also undoubtedly lower the COST of energy in the long term by forcing us to reduce our impact by paying the true cost of energy.

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Categories: Energy Policy, Environment
  1. Ilovedub2004
    March 26, 2010 at 9:31 am

    Go back 100 years and imagine a hypothetical policy discussion:

    “Horses are a major source of pollution; their solid waste is unpleasant, a threat to public health, and feeding them raises food prices. Let’s put a tax on horses so that buying them will include ALL the costs to society that horses generate.”

    The punitive taxes would have slowed economic, and more importantly, technological growth and actually delayed the solution to the horse-apple problem.

    There are lots of things wrong with burning fossil fuels; but cheap energy now facilitates its replacement.

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