Tuesday, January 10, 2012

Mercury Rules Will Lower the Cost of Generating Electricity from Coal

Last month, when the EPA announced new, tougher rules restricting mercury and particulate emissions from coal fired power plants, the power industry and Republican politicians responded with the usual dire warnings that the  costs of complying with the new rules would be disastrous for the industry, shuttering plants and killing jobs. What should we make of these claims?

For one thing, as my former colleague and UM economist Tom Power has pointed out over and over again, industry always responds to environmental regulations with these warnings of impending doom, and it doesn't happen. In this particular case it's true that the immediate future of coal  fired power generation is not particularly rosy, but as Tom made clear in a recent KUFM commentary, other factors, and not the EPA rules, are to blame for that (you can read the text of Tom's commentary here).

Another thing to bear in mind about these costs is that they represent jobs. People have to go to work to manufacture, install and operate the equipment that is going to bring plants into compliance with the new rules - or replace plants that cannot comply. Nobody should be surprised about this; environmentalists have been saying for years that cleaning up the environment, conserving energy and addressing climate change means "green jobs," and that's what we're seeing here. It's a lesson well worth remembering: more jobs means higher costs and higher costs mean more jobs. And the reason for incurring costs and putting people to work is the same - namely, that something of value is getting produced.

A significant feature of the costs of complying with the new EPA rules is that even though somebody - rate payers or coal haulers or coal owners or power company workers or, well, somebody - is going to have to cover those costs, from the point of view of the economy as a whole, the costs are minimal. That's because under current economic conditions, the resources that will be used to bring generating plants into compliance would otherwise be unemployed; putting them to work will not mean that production in some other part of the economy will have to be curtailed. Economists would say that the opportunity cost of complying with the rules is very small, and it's opportunity cost that counts.

But really, the most important thing to keep in mind about the question of costs is that it is already very costly to generate electricity with coal. It's just that much of this cost is hidden. It's the cost born by the people who suffer the adverse health effects of emissions from coal fired plants. These costs are every bit as real as, and a lot bigger than, the costs of complying with the new rules. So by eliminating these adverse health effects, the new rules will actually reduce the full net costs of generating electricity with coal. True, somebody benefiting from that process is going to have pick up the tab, but that's fair, isn't it? Surely we don't want to continue to expose children to mercury contamination just to keep a kilowatt hour of electricity a few cents cheaper.


  1. Good article, Dick. Is there a generally accepted way to add all the externalities back into the price per kwh so we can see what the real costs are now vs what the realized benefits would do to the total cost structure? How could these pollution mitigation costs be equitably allocated among those who are downwind beneficiaries as well as the ratepayers?

    1. Well, there are lots of techniques for measuring the economic magnitude of externalities, but I don't know how generally accepted they are! In the case of air pollution, the cost is often measured by adverse health effects (earnings loss, treatment costs, and even premature death). The costs of these are relatively easy to measure (except for premature death, of course), but there are other air pollution effects - such as impacts on visibility, recreation or other amenity values -that are less easily measured. In the case of the mercury rules, EPA estimates that the reduced cost of the health effects alone will easily outweigh the cost of compliance.

      Charging the downstream beneficiaries raises two questions. One is that it is close to impossible to figure out who is a beneficiary and how much they benefit. Potentially there are millions of people, each receiving a small benefit, adding up to a large total. But figuring out how much to charge each person and actually charging them may outweigh the benefit they receive.

      The other question about charging beneficiaries concerns rights. Do I have a right to clean air or does the polluter have the right to use the air shed to dispose of waste? It's a question of law more than of economics.