Pain at the Plug?

On Friday the EPA announced a “proposal to cap the amount of heat-trapping greenhouse gas emissions from new power plants. Coal-fired plants -- unlike most natural gas facilities -- won't meet the standard without costly technology to capture and store carbon emissions.”

The EPA argues that today’s coal powered electric plants discharge a disproportionate amount of CO2 into the atmosphere.  The industry argues that the technology required is not tested and that the requirement is therefore unreasonable and possibly a costly mistake.  Finally, their statement mentioned that added costs must be passed along to customers resulting in “more pain at the plug than Americans have experienced at the pump…"  That’s certainly a colorful way of phrasing what we all know – there’s no magic money tree.

As utility costs increase due to regulation, fuel costs, or for any other reason, they must recover those costs from somewhere.  They can lower dividends, but that will likely drive the price of their stock down.  I personally own a small number of utility shares, as do many other small investors.  These dividends yield a better return than savings accounts, but if they go down and the investment becomes more risky, investors will be harder to find.  Bankers will also be less inclined to make loans or will do so at higher interest.  This may seem like their problem until they go to the regulatory board and plead for rate increases to cover higher costs.  Then we will see it in our bills and hear the outrage of our neighbors.  Doubtless the media will have a field day covering stories of increased hardship just as they do when gasoline prices spike.

The EPA and environmental advocates make a good case that these costs are already out there – what economists call external costs – hidden in the free discharge of CO2 and “sulfur dioxide, nitrogen oxide and heavy metals (such as mercury and arsenic) and acid gases (such as hydrogen chloride), which have been linked to acid rain, smog and health issues.”  These are health and quality-of-life issues.  But when those costs are captured, it is the consumer or taxpayer who pays.

Headlines like this are easily ignored as unimportant.  What’s in it for me?  But economic understanding brings us to a different conclusion.  Even when the changes are desirable and beneficial, it’s not the corporations or the government that pays. The evidence is in the article:  “Mississippi Power has raised rates 15% this year and plans an additional 3% increase next year to help pay for the new Kemper County plant [which employs this technology], whose price tag has risen from an initial $2.4 billion to $3.8 billion…” 

This will affect you each time you switch on a light or TV, or recharge your phone, or your refrigerator or furnace snaps on.  We have become so dependent on electricity, and there are few substitutes.