It seems increasingly important to hash out the debate over whether to let free-market forces resolve current energy issues. The pro-market argument in regard to oil is straightforward: as oil is depleted, limited supplies will send prices skyward and create incentives for the development of energy sources that are cleaner, more abundant, and closer to home. The same high prices will motivate innovation in the transportation sector and dissuade consumers from buying gas guzzlers.
Arguments for intervention rest on openings for market failure. The “hard path” of energy in the U.S. has brought us a small number of large providers. Current gasoline prices don’t include the environmental costs of extracting oil, transporting it to refineries, refining it, transporting it to service stations, or burning it in engines. Also omitted from prices at the pump are the external health costs of all these activities, the effects of global warming, and (hypothetically, of course!) the cost of wars related to oil.
Both sides acknowledge the general issues; we must confront specifics to decide whether market failure in the oil market warrants intervention. Complexities abound—imperfect information itself clearly contributes to market failure here. What follows is a partial list of externalities that would need to enter the cost-benefit calculus before efficient decisions would result. How many consumers, students, or policymakers know the specifics?
The EPA reports that the combustion of a gallon of gasoline causes the release of 20 lbs of carbon dioxide. Exhaust from petroleum-fueled engines also releases the following:
Particulate matter (PM). Fine particles of carbon and an assortment of toxic acids, metals, and chemicals make up PM. The particles are small enough to reach the deep recesses of our lungs. Studies link PM with premature death, respiratory related hospital visits, aggravated asthma, acute respiratory symptoms including aggravated coughing and painful breathing, chronic bronchitis, decreased lung function, and work and school absences.
Volatile Organic Compounds (VOCs). VOCs evaporate into the air and are present in one-fifth of U.S. water supplies. VOCs can include acetaldehyde, acrolein, benzene, 1,3-butadiene, formaldehyde, naphthalene, and polycyclic aromatic hydrocarbons. Some VOCs are known to cause cancer in humans. Other health problems resulting from VOC exposure can include damage to the liver, kidney, and central nervous system; eye, nose, and throat irritation; headaches; nausea; and loss of coordination.
Sulfur Dioxide (SO2). Sulfur dioxide is emitted from diesel engines and coal-burning power plants. SO2 is a cause of acid deposition. Lifeless trees and lakes in formerly pristine areas of North America and Europe are among the results of acid deposition. Acid also speeds the decay of buildings, paint, and many other exposed materials.
Carbon Monoxide (CO). CO is a tasteless, colorless, odorless toxic gas, the breathing of which inhibits the blood’s ability to carry oxygen to vital organs including the heart and brain. Depending on the level and length of exposure, CO can cause problems from dizziness to death.
Nitrogen Oxides (NOx). Exhaust from gasoline and diesel engines is the largest source of NOx emissions in the U.S. NOx compounds are a source of particulates, acid deposition, strong acid aerosols, and ozone pollution.
Ozone (O3). In sunlight, NOx, CO, unburned hydrocarbons, and evaporative emissions from gasoline react to form ground-level ozone, the principal component of smog. The EPA describes O3 as a “potent irritant” that causes repertory problems and lung damage.
With gasoline at $3.00 a gallon, sales of larger SUVs are still brisk. Would the same be true if price equaled social marginal cost? The technology exists for solar panels on our homes to power electric cars in our garages, but current fossil fuel prices have done little to change the way we travel. When I traveled overseas as a child I rode in a 747 that burned a gallon of fuel about every 280 yards. When I took my own children overseas 35 years later the same type of plane carried us over the ocean.
Rather than spurring progressive moves toward innovation, solar rooftops, public transportation, bike lanes, and biodiesel, the transportation market has hardly swayed from the status quo. In some cases it has backpeddled. In June the Ford Motor Co. abandoned it’s pledge to produce 250,000 hybrid-electric vehicles per year by the end of the decade. The free-market responses have more to do with a fixation on oil, and include attempts to seek oil in the last pristine places.
Given the artificially low prices of fossil fuel and the severity of resulting problems, I believe that market solutions are too little too late. Inadequate incentives for clean energy have ushered in inefficient levels of R&D, global climate change, ill health, environmental degredation, dependence on foreign suppliers, and unrest in oil-rich regions.
Free markets can work nicely in the absence of market power, imperfect information, and externalities, but in the energy market, the inconvenient truth is that we’re strapped with all of the above.
Dave Anderson
www.DavidAAnderson.com
