The free market doesn't account for sustainability: Forecast Earth
The free market doesn't account for sustainability
Posted on December 26, 2008 at 4:58 pm ET

Don Willmott , Forecast Earth Correspondent

Ready for a deep think as the year comes to an end. Head to Grist for a crash course on environmental economics that makes one very important point: "The difference between the market prices for fossil fuels and the prices that also incorporate their environmental costs to society are huge." That's the conclusion of Lester R. Brown, who is concerned that the free market continues to operate on 19th-century assumptions that resources are limitless and consuming them has no environmental effect.

"The roots of our current dilemma lie in the enormous growth of the human enterprise over the last century. Since 1900, the world economy has expanded 20-fold, and world population has increased fourfold. Although there were places in 1900 where local demand exceeded the capacity of natural systems, this was not a global issue. There was some deforestation, but overpumping of water was virtually unheard of, overfishing was rare, and carbon emissions were so low that there was no serious effect on climate. The indirect costs of these early excesses were negligible. Now with the economy as large as it is, the indirect costs of burning coal -- the costs of air pollution, acid rain, devastated ecosystems, and climate change -- can exceed the direct costs, those of mining the coal and transporting it to the power plant. As a result of neglecting to account for these indirect costs, the market is undervaluing many goods and services, creating economic distortions."

And economic distortions are a problem. Says Brown, "One of the best examples of this massive market failure can be seen in the United States, where the gasoline pump price in mid 2007 was $3 per gallon. But this price reflects only the cost of discovering the oil, pumping it to the surface, refining it into gasoline, and delivering the gas to service stations. It overlooks the costs of climate change as well as the costs of tax subsidies to the oil industry (such as the oil depletion allowance), the burgeoning military costs of protecting access to oil in the politically unstable Middle East, and the health care costs for treating respiratory illnesses from breathing polluted air. Based on a study by the International Center for Technology Assessment, these costs now total nearly $12 per gallon ($3.17 per liter) of gasoline burned in the United States. If these were added to the $3 cost of the gasoline itself, motorists would pay $15 a gallon for gas at the pump."

See the problem? "In reality, burning gasoline is very costly, but the market tells us it is cheap, thus grossly distorting the structure of the economy. So the challenge facing governments is to restructure tax systems by systematically incorporating indirect costs as a tax to make sure the price of products reflects their full costs to society and by offsetting this with a reduction in income taxes." Perhaps. President-elect Obama, it's your move!

Posted on December 26, 2008 at 4:58 pm ET

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anonymous, Jan.4th, how will that help anyone-forget global warming? If you're worth a lot of money, I guess there's no law against a big "carbon foot print" so whatever makes you happy, I suppose. For me, I'll stick to using less and less.
bobarl | January 8, 2009
I'm willing to bet Hummer Pilot that he will never see $1 gas again without the world economy going into a depression. In which case many of us won't even have a $1 for a gallon.
cek11 | January 8, 2009
Mr. Brown (and you) present a one-sided analysis and neglected the positive benefits of burning gasoline. How about positive effects on the economy such as cheaply delivering products to market and cheaply allowing buyers to get to those products. How about people being employed rather than out of work because the price of goods has shut down the economy. How about reasonable costs of construction using gas-powered equipment. You folks on the green side want to increase taxes on gasoline to the point where it's not used, but you just don't have a clue about the negative effects of high gas costs on the economy.
Bill K | January 7, 2009
This is why Capitalistic countries have never accomplished anything. Communism is the only logical and rational system. Communism works. All technological advances have been as a result of Communism.
V Lenin | January 7, 2009
Everyone is quick to lay out the problems but no one is ready with any solutions. Let's get some of that bail out money to the Universities to come up with alternatives to oil. GM and the boys sure aren't going to.
Anonymous | January 6, 2009
If Obama decides to tax energy any further, I will feel compelled to leave the largest "carbon foot print" that I possibly can! I'll offset all of your offsets.
Anonymous | January 4, 2009
I love burning cheap gas! I drive three times as many miles now. Come on $1 a gallon in 2009!
Hummer Pilot | December 26, 2008