Pain Everywhere!

On Monday ("Pain at the Plug?") I explained that regardless of the good intentions, the EPA’s proposed cap on new power-plant emissions would likely translate into increased electric bills for everyone.  Coal is a dirty source of power, but economic understanding leads to the inevitable conclusion that any future costs related to cleaner emissions will be borne by the electric consumer.

Of course, this might not be the case, the electric industry may choose to build no new coal-fired plants, favoring the cleaner natural gas with a mix of solar and wind power.  These other sources however are not without their own problems and controversies.  Solar energy is not available on cloudy days or at night and, like wind, has a much bigger environmental footprint than traditional power plants.  Wind power also faces mounting bad press in that “almost 600,000 birds are killed by wind farms in America each year, including over 80,000 raptors such as hawks and falcons and eagles” (not to mention hundreds of thousands of bats).  The practice of fracking, used to increase the recovery of natural gas is bringing citizens out in opposition, signing petitions, and just this week, demonstrating in Washington to "demand that the government reopen investigations into fracking-related drinking water pollution in Pennsylvania, Texas and Wyoming.”  It seems good options are hard to find.

Diversification, the investment principle of spreading out money over a number of different instruments so that one bad stock or one bad sector (e.g., bonds) does not ruin future prospects, applies here as well.  Diversification of energy sources protects against unforeseen shortages or disruptions.  If the above three energy types have problems, one of the few remaining alternatives is nuclear, which has zero emissions, but scares people enough to make opposition an easy sell.  Taking all this into consideration, it is quite likely that more of those cleaner, but more expensive coal-powered plants will be built in the future.

Individuals and families are not the only ones who use electricity.  Stores, manufacturers and governments do too.  GM uses it to power their robots.  Wal-Mart uses electricity to light the parking lots and keep the ice cream frozen.  The town uses electricity to heat and cool public buildings and to light the streets at night.  How would airports, restaurants, and printers, even Internet companies, run without electricity?  If the price of electricity goes up, the cost will not be restricted to uses at home.  Everything we buy will be more expensive.

When the time comes to pay for cleaner air, eventually the bill comes to us.

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.

Another Hidden Tax

A few days ago the Environmental Protection Agency (EPA) proposed new rules requiring lower-sulfur fuels for motor vehicles to reduce smog-causing emissions.  The rules would take effect in 2017.  Articles from yahoo.com and USA Today give the details.  The minute my readers see these headlines, versed as they are in the fact that there is no magic money tree, they understand that we are going to be paying the cost of this change.

Some people will say, “I am willing to pay more for my next car and for gasoline if it means cleaner air.  That’s fair, but let’s look into all the questions associated with the proposed change.

There will be a cost.  The EPA estimates that gasoline will be about 1 cent per gallon more, and add about $130 to the cost of a car by 2025.  Their justification is that full implementation of the rules “will help avoid up to 2,400 premature deaths per year and prevent 23,000 cases of respiratory ailments in children.”  Note the use of “up to” in the last quote.  As I’ve pointed out before, up to means no more than, and very possibly fewer.

Fuel industry experts estimate a 6-9 cent per gallon increase and say that the extra refining “would actually increase greenhouse gas emissions because of the energy-intensive equipment required to comply.”

If I take a conservative estimate of 16 million vehicles sold per year by 2017 and 3 cents per gallon at current gasoline consumption of 134 billion gallons per year, our annual bill comes to $6.1 billion.  That’s a hidden tax of $200 per person per year, which hits the less wealthy people the hardest.  It works out to more than $2.5 million per life saved and reinforces my earlier posting  about how agencies pass rules without any real standards for cost justification - the old if-it-saves-just-one-life argument.

Beyond cost are the considerations of marginal improvement in air quality.  When it comes to air quality, water quality or the purity of anything, the question must be: how much is enough?  It is either impossible or prohibitively expensive to achieve 100% clean water or air.  There must be, and is, a set level of acceptability.  Unfortunately, government agencies and advocacy groups want to push that standard to the next level and the next.  It is easy to argue that if x parts per billions is good, then x-1 parts per billion is better, but there is a point where there is no discernible difference in terms of comfort and safety.  Where is the debate on what is acceptable and at what point this incremental raising of standards should stop?

So when you see or hear headlines about an agency setting a stricter standard, you should automatically ask:  how much will it cost me, is the cost justified and is the increased level of purity scientifically justified or is it just another idealistic step toward unachievable perfection?