By Brian Schimmoller, Contributing Editor
If you’ve not read the book or listened to the podcast Freakonomics, check it out some time. It provides a singularly unique way of looking at societal, technological and business trends. For example, one of the frequently cited stories from the book examines how Steven Levitt, the economist behind Freakonomics, used test data from the Chicago Public Schools to show that some teachers were likely helping their students cheat on standardized tests.
The Freakonomics book and podcast share a catchy tag line: “Freakonomics, the hidden side of everything.” Once you’ve read the book or listened to the podcast, you’ll quickly appreciate the meaning of that statement. Whether intentionally or not, the authors of a recent report from Synapse Energy Economics (www.synapse-energy.com) and the Civil Society Institute are playing off the Freakonomics motto. The report, titled “The Hidden Costs of Electricity: Comparing the Hidden Costs of Generation Fuels,” looks at the costs of a business-as-usual energy path in terms of human health and the safety and integrity of the environment.
The Synapse analysis compares the hidden costs of six generation sources – biomass, coal, nuclear, natural gas, solar, and wind – in six categories: planning and cost risk, subsidies and tax incentives, climate change impacts, air pollution impacts, water impacts, and land impacts. The comparisons are both qualitative and quantitative, drawing on the results of many other studies. For example, the air pollution impacts are described using qualitative terms like “significant,” “low,” and “largest,” and for certain resources, using quantitative terms such as NOx emissions in grams/kWh.
The impacts evaluated are real, and in making resource planning decisions, it’s clearly important to be fully informed about their significance. These impacts, however, don’t exist in a vacuum. Tradeoffs are involved. True, nuclear power uses large quantities of water and generates radioactive wastes that must be safely managed, but nuclear power also produces reliable and affordable power, and has little to no air pollution and climate change impacts.
The “hidden cost” issue is not a new one. The more precise economic term is “externality,” a term that has circled around the electricity sector for several decades, but has never gained a firm foothold in public discourse around energy issues.
Determining the value of an externality, which measures how much one would pay to avoid an impact, is not a simple exercise. Consider the iPad that you might be reading this on: How much would you be willing to pay to avoid the reduced living standard (at least compared to the developed Western world) experienced by the Chinese workers who assembled that iPad? That’s a decidedly “squishy” calculus.
In a review paper on the science and art of valuing externalities, Stephen Weil of the Lawrence Berkeley National Laboratory spoke to that squishiness after examining a range of U.S. efforts to monetize and characterize externalities: “Regulators have substantial discretion in specifying how much money electricity customers will pay for reducing or avoiding pollution. Exercising that discretion is a political judgment.”
To its credit, the Synapse report does not deny the existence of differential benefits among the resource options analyzed. However, by focusing on the differential impacts – the “hidden costs” – it paints only half the picture. It’s equally important to look at levelized cost of electricity, at reliability, even at jobs and tax base created to get a full appreciation of the tradeoffs.
An argument could be made that some hidden costs are already being realized. The shift away from coal-fired generation, for example, is as much a reaction to tighter environmental regulations as it is a market-based response to low natural gas prices. And while the “slowing” of the nuclear renaissance in the United States also can be attributed in part to low natural gas prices, the significant planning and cost risks associated with current nuclear plant development derive to some extent from the cost overruns of the 1970s and 1980s and from the heightened regulation and oversight of the nuclear power industry.
Let’s close with another story from Freakonomics. Wrestlers in the top sumo division face demotion if they don’t win at least eight matches in a 15-match tournament. Going into the 15th and final match, one would expect at least 50-50 odds for an 8-6 wrestler competing against a 7-7 wrestler. What Steven Levitt found, however, was that the 7-7 wrestler won greater than 80 percent of the time, and he concluded that, in the close-knit sumo community, the wrestlers were colluding so both could qualify for the following tournament.
Getting to the hidden information can provide an important perspective, therefore, but it’s critical that the hidden information be fully exposed and evaluated.