Energy and Society
Human society is like an organism that needs a constant input of energy to keep its metabolism functioning.
What that means has and continues to evolve. My grandfather remembered the horse and buggy and gas lights in New York City, and lived to see men land on the moon. To my children, it is unfathomable that electric illumination, LED’s, 17 different instant communication platforms and intercontinental travel haven’t always and won’t always be here.
My grandfather certainly didn’t expect or even conceive of a personal computer.
The closest he ever got to a cell phone was watching secret agent Maxwell Smart (From Get Smart, a TV spy parody of the 60’s) use his secret shoe phone. People from different eras have completely different expectations, and as time goes by, our norms and expectations evolve. As we have seen, the evolution of the relationship between people and the energy they use in our society is based upon the continued availability of affordable, high quality energy.
Though life as we know it could not have been imagined a generation ago, most of us assume our place on the technological mountain we’re scaling to be permanent, with the only conceivable future being increasing heights.
Getting energy from the earth to the gas tank or socket requires the physical infrastructure for digging, refining, transporting, selling and use as well as a social infrastructure. Each society has a different relationship among energy, government and citizens.
That social infrastructure has many components. What happened previously to bring us to where we are today? What is the relationship between our history, our economic system, and how we use energy today?
How a society produces and uses energy has something to do with the economic system used in that country. The way energy services are distributed varies with the world’s economic systems. Those systems lie on a spectrum between two theoretical models: Market Economies and Planned Economies. Economic models, like the scientific models we discussed previously, are human attempts to simulate what happens in reality.
There are no truly complete market economies, and there are no purely planned economies.
In a market economy, free competition plus supply and demand set prices of energy and energy services. An individual needing a good service purchases it. The trade is dollars representing perceived current value in this economy (dollars originally represented physical gold and silver), at this time for energy. That, presumably, is the end of the transaction. You pay for a gallon of gas, the gas station takes the money, you take the energy (oil, electricity, etc….), end of story.
In a truly free economy, the only limits are what people are willing to pay for something, which is based in part upon its supply.
Prices of gasoline have dropped from close to $4.00 a gallon to around $2.00 a gallon. In a purely free market, this price drop would likely occur because of a large supply of gasoline relative to the demand for it. In a purely free market, there would be no collusion to create artificial gluts or shortages of available supply.
At the other extreme is a planned economy.
In a planned economy, the government decides what is going to be produced, how much it is going to cost, who is going to get it, and when. When the government says we will do something, it’ll be done.
Each of these models has advantages.
A free-market economy allows people to be creative, find unique markets or more efficient means of tapping an existing market. Conventional wisdom says that free markets spur innovation at a faster rate than planned economies. You might look at a free market as being driven from the bottom up. I need something, so I purchase it; you do the same, we all do the same, and the net result is the market economy. If the price of gas becomes cheaper than oil because of supply and/or technology advances, it is the logical choice for me to make that decision based on the market. Lots of individuals making free choices drive the market.
A current example of this can be seen with photovoltaic (solar electric) systems.
The cost of photovoltaic systems is near to grid parity, meaning that it is about the same price as electricity from the grid. As a result, the logical choice for energy consumers may be to purchase their own decentralized solar utility. Many utilities are very worried about losing their customer base to solar energy because of these free market decisions.
A planned economy also has some advantages.
If we’re looking at a market economy as a bottom-up driven enterprise, a planned economy is top-down. Planners can start with the big picture and work down. When I purchase that gallon of gas, I may not see an issue with long term supply based on the price I see today at the pump. Nor might I see the exhaust coming out of my tailpipe as a problem, but then again, I’m not spending a lot of time thinking about asthma rates in Timbuktu. Someone with the big picture might see a connection between emissions and asthma, and in a planned economy, changes can be made more quickly than in a market economy, like how leadership in China saw a real issue with carbon emissions, and soon after, set out strict regulations to be followed by all.
In reality, there is no such thing as a perfect planned or market economy. All of the world’s so-called planned economies allow some economic choice and freedom. All market economies have some limitations.
In the extreme, I may have the knowledge and technology to build a nuclear reactor in my backyard, but there are regulations against that.
Someone has to be looking at the big picture. When left to our own devices, humans make decisions, for good reason, based on their perceived needs, wants and economic wherewithal. Most people’s decision-making is optimized for getting the most for the least. The need to look out for oneself ensures that as the top priority.
Making decisions based on individual best interests does not in any way ensure that the collective decision-making of a society will add up to the best decisions for the society as a whole. Use climate as an example of this. Apparently, 100+ years of burning fossil fuels, certainly beneficial to the individuals receiving the energy, has not added up to the best decision for society as a whole.
All societies have regulations; some are stronger than others. Somewhere between the extremes you will find each of the world’s economies. Each one has a different set of energy-related regulations.
Assuredly, each system has faults and problems, the biggest of which have to do with humans who don’t want to play by the rules set by society regardless of the economic systems. In planned economies, we have selfish people who want more for themselves, so they just take it. In market economies, we have selfish people who want more for themselves, so they just take it. Oh, I think I just said the same thing. Perhaps the biggest shortcoming of both systems can be summed up by the famous Pogo Cartoon. “we have met the enemy and he is us.”
Greed, graft and corruption aside, even when trying to do the right thing, interactions which bring us our energy create some unintended consequences.
What is The Tragedy of the Common?
The “Tragedy of the Common” is an analogy first described by the Ecologist Garrett Hardin.
The New England town commons, famous in my youth for Rock and Roll concerts, actually had another intended use when first created. This was a common area reserved for grazing cattle.
How many cows can be grazed on a town common?
It is easy to understand that on a small New England common, there is certainly a limit to that number. We can support a certain number (let’s say 20) head of cattle on a common indefinitely. As long as we have 20 or fewer cows, enough grass will grow to feed them indefinitely.
Imagine a common with 20 head of cattle; 5 people herding 4 cows each.
One of our enterprising herd owners decides that her business could do better if she could have more stock. So, she buys just one more cow, Elsie. Now the Common has 21 head of cattle, one more than the carrying capacity. There really isn’t much of a difference in the conditions. The cows get pretty much what they need to survive; a little less food each, but no one starves. There are a few bare spots on the ground from slight overgrazing, but basically, at least to the untrained eye, the common doesn’t look as if any damage is being caused.
Let’s look more closely at what is really happening.
The owner of the 5-cow herd is going to get the full benefit of the extra cow (more product to sell). The slight negative symptoms, caused by the new cow, Elsie, are a little less food per cow and some bare spots experienced equally by all 21 cows. If we were to represent this mathematically, we would find that each of the owners and their cows share equally in the negative effects, each owner absorbing 1/5 of the negative effects of the extra cow.
However, the owner of the cow gets the full benefit of the extra cow while, as we said, only absorbing the 1/5 negative effects. So, when the decision to expand the herd is made, from the owner’s perspective, despite the negative effects, it is an economically rational decision to add a cow to one’s herd.
Seeing the success of the first owners, the other owners decide they can’t be left behind, so they begin adding cattle to their herds. Each individual cow added brings shared negatives to all the inhabitants of the common and the full net benefit to the owner. And so, the rational but devastating decisions keep being made. As noted above, there is a physical limit, a carrying capacity to the common, and not long after it is broached, larger negative effects are felt by all the owners and cows.
Even though the effects are larger, the net individual benefit from more cows still drives the decision making.
At some point, of course, there are just too many cows to sustain the common, and it becomes barren and unable to support any cows. All the herd owners end up equally sharing in the negatives, but after the ecological collapse of the common, brought on by overgrazing, an area that once supported 20 healthy cows will no longer support even one. We see that rational economic decisions within a market do not necessarily translate into good, long term, sustainable for the community.
The Tragedy of the Common not only shows us that we all share the negative effects of certain economic decisions, but it also points out a significant disincentive to do anything about it.
Here’s another example: Imagine three power plants, each running smoothly on fossil fuels. Each plant is profitable, in part because it spews pollution into our common air supply. The owners of the factory get the full advantage of being allowed to pollute for free, but there is an economic and ecological cost to this and, as should be clear by now, we all share in the negative effects of that pollution.
The CEO of one of these companies decides her grandchildren’s health is too important to ignore, so she goes about installing scrubbers on her power plant which will cut the pollution significantly.
This is a very expensive proposition. What are the effects of this decision?
The good side is that one power plant is polluting less, something we can agree is beneficial. But it’s time to sell electricity, and since the costs of the improved factory are higher, either they have to sell their power for more than their competitors OR, they have to eat the extra costs of the scrubbers and lower profitability. In a free market, if the cost of one supplier goes up, it is an entirely rational decision to find another supplier who charges less!
Similarly, if I’m an investor interested only in return on my dollar, am I going to invest in the new, improved, power plant? Yes, it’s healthier, but since investments are based on perceived potential profit, there will be a disincentive to invest in the improved power plant. By doing the right thing, the owner of the improved power plant has made his/her business less desirable to investments. Either scenario might lead to the end of the business. Not only does the Tragedy of the Common show that there are incentives for doing the ‘wrong’ thing, it also points out the disincentives for doing the right thing.
The effect of Tragedy of the Common kind of occurrences can be limited by government regulations. The true tragedy is that there are no natural mechanisms in our economic system to include the hidden costs of increased energy use.
What are Externalities in terms of Economics?
The negative aspects which are not taken into economic account by a transaction are called by economists’ externalities. ” Externalities arise when an economic agent enjoys benefits or imposes costs without having to make a payment for doing so.”
Some examples of externalities include:
Degradation of water sources associated with pollution that comes along with coal mining
The prevalence of asthma, now the leading cause of school absenteeism in
the United States has been shown to be directly linked to atmospheric pollution
The economic impact from more powerful storms associated with changes in weather patterns due to climate change
cost of keeping troops in over 100 countries to protect our strategic energy resource interests, which isn’t included in the discussion often
None of these factors are accounted for economically when a transaction to use fossil fuels is consummated.
When we purchase something, paying money for an item (or service), it is tacitly assumed that the transaction we make is a complete representation of the item for its value. For example, I put gas in my car and get the full benefit from my transaction.
However, you and I and the other almost 7 billion people on the planet share in the negative effects of the transaction.
We are a world which is used to the idea that we can use commons (atmosphere, land, water) as a free ‘waste’ dump. In other words, out of sight, out of mind. It seemed to work fine for a while, but these actions are clearly catching up with us now.
It is not easy to put an economic cost on an item, or limit something so ubiquitous as the common areas we’ve used to dump our waste, and even harder to demand limitations on those once-free services. A European study made an effort to do just that. The following is a chart summarizing its findings. The costs have been converted from Euros to Dollars. Each vertical line represents a source of electricity generation.
Figure 6-1: Average estimated external costs for electricity generation the European Union (EU27) in 2005-2010, in US$2005 per MWh (converted from 2005 Euros with an exchange rate of 1.24 $/Euro). Primary Source Grubler, Energy Primer, Data source: EU CASES Project (Markandya et al, 2010).
According to his discussion of externalities in the Energy Primer, Grubler cites similar studies as finding similar orders of magnitude for externalities in the U.S. On the subject of real costs for coal, he states:
Externality costs of US coal electricity generation are estimated to total some 53 billion US $ annually due to human health impacts alone, which is more than twice as large as the entire value-added of that industry. This translates into some 28 $/MWh external cost from human health impacts from US coal electricity generation, a number that would increase to some 47 $/MWh when the social costs of carbon would be included as well (Muller, Mendelsohn, and Nordhaus, 2011). Thus, for fossil-based electricity generation, internalization of externalities would at least double electricity prices……..
If the price of electricity reflected the real cost of generating it, including what we have been calling externalities, the price would be somewhere around double what we pay now. (That analysis does not include military and defense budgets.)
Next week we’ll talk more about how the U.S. government influences energy in society.
What did you learn from this week’s post?
Photo by Wes Golomb