Coal is dirty and costly

Economic analysis of the costs of air pollution damage to the United States shows that coal-fired power generation is under-regulated and incredibly costly.

In a recent article published in American Economic Review, three economists calculate the cost imposed on society by air pollution from 10,000 pollution sources from different types of industry. Their analysis includes five major traditional air pollutants (sulphur dioxide, nitrogen oxides, volatile organic compounds, ammonia and particulate matter). In a separate analysis specifically for the electric power generation sector, estimates of the costs of damage due to carbon dioxide emissions are also included.

The "gross external damages" (GED) are estimated by calculating the measurable costs of pollution impacts on human health, decreased agriculture and timber yields, reduced visibility, accelerated depreciation of materials, and reductions in recreation services. Most of the damage due to air pollution resulted from human health effects, especially premature deaths from exposure to elevated levels of PM2.5. (The value placed on mortality risks is subject to some debate and this study employed a value of US$6 million per premature mortality.)

Overall, they estimate that aggregate air pollution damages (i.e. not including CO2 damages) from all industries in 2002 – the last year for which the necessary data was available – amounted to US$184 billion. Coal-fired power generation caused the largest GED of all industries, at US$53.4 billion/year, followed by crop production (15.3 bn), livestock production (14.8 bn), highway, street and bridge construction (13.0 bn), truck transportation (9.2 bn), and water transportation (7.7 bn).

It should be noted that pollution from households, including private cars, was not included in the US$184 billion, since it is said to reflect non-commercial activities.

In order to determine whether correcting for external costs would have a substantial effect on the net economic impact of different industries, the paper also compares the GED to the value added (VA) by a given industry. According to the authors, a GED/VA ratio greater than one "indicates that the air pollution damage from these industries is greater than their net contribution to output." Among the industries with a high GED/VA ratio are solid waste combustion and incineration, petroleum-fired power generation, sewage treatment facilities, and coal-fired power generation.

The authors suggest that one interpretation of these results is that air pollution from the industries with high GED/VA ratios is not efficiently regulated. Another possibility is that the value added as measured in the current national accounts may not fully reflect the value added by a given industry.
Using the example of SO2 from coal-fired power generation, which is regulated by a cap-and-trade programme, the authors say that "to equate the marginal cost of abatement with marginal damages, the quantity of allowances should be sharply reduced."

When the GED associated with coal-fired electricity generation was examined more closely, it was shown that emissions of SO2 are responsible for the bulk of damages (87%), followed by emissions of PM2.5 (7%) and NOx (6%). Mortality and morbidity dominate the damage, accounting for more than 98 per cent of the monetised damage.

The study also looked at GED in relation to electricity prices. In 2002, the average market price for electricity supplied to residential consumers in the US was 8.4 cents per kilowatt hour (kWh), while in states that primarily rely on coal-fired power, consumer prices were lower, averaging 6 cents/kWh. It was found that electricity produced by coal-fired plants had the highest GED of 2.8 cents/kWh, followed by oil-fired plants at 2 cents and natural gas plants at 0.1 cents.

If the estimated GEDs from CO2 emissions are also included, the damages caused by coal- and oil-fired plants rise by 30-40 per cent, meaning that for coal-fired plants the GED/kWh would increase to 3.6 cents, and for oil-fired plants to 2.7 cents. These figures are based on using a central estimate for climate change damage of US$27 per ton of carbon – lower and higher estimates of US$6/ton C and US$65/ton C were also used for sensitivity analyses.

The results of the study show among other things that emissions of SO2 and CO2 from coal-fired power plants are under-regulated, and that it would benefit both the US economy, public health and the environment to strictly regulate these pollutants.

Earlier this year, a study led by Harvard University professor Paul Epstein estimated that the life cycle effects of coal cost the US public between US$175 and 523 billion annually. Accounting for the damages would double or even triple the price of electricity from coal per kWh generated, making wind, solar, and other forms of non-fossil fuel power generation, along with investments in efficiency and electricity conservation methods, economically competitive.

Christer Ågren

Environmental Accounting for Pollution in the United States Economy. By N. Z. Muller, R. Mendelsohn and W. Nordhaus. American Economic Review 101, August 2011.
Full cost accounting for the life cycle of coal. By P. Epstein et al. Annals of the New York Academy of Sciences 1219, February 2011.

Concerned customers want banks to invest in something more sustainable. Photo: Nell Redmond/Creative Commons

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