Energy use is an integral part of our lives. Whether heating our homes in winter, cooling them in the summer, keeping our lights on so that we can read until the wee hours of the night, or powering our factories to manufacture goods; energy drives our economy and greatly supports our quality of life. Unfortunately, energy doesn’t come without costs, and often calculating these costs isn’t as insignificant or precise as we would like.
Despite the obvious benefits of the energy sources we currently rely on, it is increasingly clear that the costs associated with our current sources extend well beyond what we pay at the gas pump or to utility companies. The true cost of energy includes not only what shows up at the pump or on the utility bill (known as the “private costs”); but also includes the less obvious impacts of energy use on human and environmental well-being, as well as future national security. Economists refer to these additional costs as negative externalities, or “external costs”. The challenge, of course, is determining the costs that are associated with these externalities.
So how much does a litre of gasoline, a cubic metre of natural gas or a kilowatt of electricity truly cost? Some of the externality costs that are not currently accounted for in the market (private costs) for energy include:
- Environmental impacts of air pollutant emissions and the resulting health care costs and associated public health toll in illness and premature death;
- Carbon dioxide emissions causing climate change;
- Environmental and ecological impacts of fossil fuel spills;
- Nuclear radioactive risk, waste disposal and management;
- Recent water quality concerns about local damages associated with hydraulic fracturing (“fracking”); and
- Redistribution of water supply and ecosystems as a result of the construction of a hydro dam.
By accounting for the full social and environmental costs of energy, and identifying the numerous subsidies available to different energy providers, we get a clearer picture of the true costs of energy. This allows for a more meaningful comparison of options. It also sets the stage for a discussion around energy subsidy reform.