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Volume 1 | Issue 4 | Aug 2010
This In Focus article can be found in Orange Water, Green Jobs
The Abandoned Mine Reclamation Fund: Making the Polluter Pay…a Little, at Least
Mike Mancini for Solutions
A tributary of the Cheat River.

Coal is cheap. At only a few cents per kilowatt-hour, it usually costs less than natural gas and nuclear power, its chief competitors. Coal's low nominal price and its abundance are the main reasons it is so heavily used. In the United States, for instance, coal accounts for 45 percent of all electricity generation, more than nuclear and natural gas combined.

But there's a difference between price and cost, and the nominal price of coal-fired electricity doesn't capture all the costs of coal. The monthly checks from electric utility customers pay for the coal and its transport to generating plants, the cost of building and operating the plants and transmission lines, the salaries of the technicians and executives who run the utility, and, of course, the utility's profit.

Here are some of the things those checks generally don’t pay for: the public-health costs of power-plant emissions of soot and heavy metals; the environmental effects, such as acid rain, of acidic compound emissions; the toll of disease and premature death among miners (which, as the recent accidents in China and West Virginia remind us, can be shattering); and the enormous and long-lasting effects of carbon emissions on the climate, the biosphere, and the health and welfare of billions of people.

These costs are substantial, but most of them are not borne by the people who benefit from the electricity generated by burning coal. Economists call such costs “negative externalities,” and they can be found throughout the economy, from industrial livestock operations overusing antibiotics, thus making them less effective at treating human diseases, to the visual blight of littering and the social effects of drug abuse. (Externalities can also be positive—as when somebody benefits from an amenity he’s not paying for, such as a neighbor’s beautiful flower garden.) Another energy-related example is the storage of waste from nuclear power plants, which remains dangerous for thousands of years and will have to be dealt with by generations not yet born.

Apart from being unfair, negative externalities distort economies and make them inefficient, because they send the wrong price signals. If the true cost of burning coal was always reflected in its price, alternatives such as efficiency and renewable energy would look even more attractive to investors and consumers. So economists routinely advocate policies that seek to get the prices right, or at least closer to right—that is, to incorporate all of the costs of an activity in the price paid by the beneficiaries. In the case of externalities involving pollution effects, these are often called “polluter pays” policies.

One of the strengths of the Abandoned Mine Reclamation Fund is that the money in the fund comes from a tax on coal itself, so that the industry—and ultimately the consumers of coal-fired electricity, as the tax is passed along—pays for the damage the use of coal inflicts on communities and the environment.

To be sure, the fund is an imperfect tool for including the damage coal does in its price. For one thing, a ton of coal delivered to a U.S. power plant averaged almost $39 in 2008, according to the U.S. Energy Information Administration, while the tax is less than 1 percent of that (35 cents per ton). Because the cost of the damage isn’t captured by the market, a price has to be conjured up by some combination of analysis, guesswork, and politics. In this case the price is set by legislation and is probably too low.

But it’s far better than nothing. In fact, a key step toward a truly sustainable economy would be to assess the real costs of every economic activity and arrange the system so that end users pay all those costs. As it stands, the global economy ignores countless externalities—species extinctions and rainforest clear-cutting, for example—that are not simply unjust but actually endanger the economy’s long term viability. It’s hard to see how a sustainable system can be built unless ways are found to make externalities show up on the public’s radar and require everyone to pay what he or she truly owes.