The economics of pollution -

Environmental subsidies are baked into our economic system

Business and industry in America and the rest of the world rely on environmental subsidies—they always have and still do. This common practice keeps prices low, so consumers don’t complain. But the system may be changing. There is growing awareness that the environmental consequences of this status quo are increasingly severe. However, change is always a double-edged sword, producing winners and losers, and powerful lobbies coalesce to fight any movement away from this system of subsidy.

Considering changes to eliminate our system of environmental subsidies first requires a clear understanding of what we mean by the word subsidy. The International Monetary Fund values worldwide fossil fuel subsidies at $5.2 trillion, with China ($1,400 billion) and the U.S. ($649 billion) being the two largest contributors. These are big numbers, but they don’t represent a physical transfer of taxpayer money to the fossil fuel industry. Instead, the subsidies represent money not paid to fully offset environmental damage. Subsidies may be in the form of tax breaks. Most of the time, though, we are talking about relief from covering the full ecological costs of ongoing activities.

It is unsurprising the U.S. Democratic Party dropped a provision in its party platform to end subsidies for the fossil fuel industry, given the strong lobby against it. But, let’s be clear; the fossil fuel industry is not alone in its historical reliance on environmental subsidies. Perhaps the focus should be on all environmental subsidies. The practice is widespread. Superfund cleanup sites provide a prime example of how the subsidy system works.

Cost deferral and transfer

Superfund sites showcase a process providing ways to maximize profits at the expense of the environment—a process where future taxpayers cover the costs for damages done.

During the last two decades, cleaning up superfund sites cost the American taxpayer over $21 billion. The economics of how we got to this point are quite simple. If you manufacture a widget that sells for $100, and it costs you $50 to produce it, you have a handsome profit of $50 per item. However, if producing that object creates toxic waste byproducts that require disposal, your profits suffer.

If your business chooses to neutralize and dispose of those wastes in an environmentally responsible way, then the cost per widget increases to $90, severely damaging profits. Option two is to buy a large plot of land beside your factory and bury the waste below the ground. This option costs $10 per widget, so you choose the second option to maximize your profits.

The $40 per widget cost to responsibly dispose of the toxic materials has not gone away; you have simply deferred it. Because the government doesn’t require you to cover the full cost of your operations, they provide you with an environmental subsidy. When site cleanup occurs, the taxpayer picks up that cost. For many years Congress has declined to adequately fund the needed cleanup of Superfund sites. So, the price is paid another way by the 53 million people who live within three miles of a Superfund site as they fight higher incidents of health issues, including cancer and birth defects.

The economics of environmental pollution rely on cost deferral-and-transfer to maximize present-day profits—hence a subsidy. Unfortunately, the transfer of these costs is usually to future taxpayers.

Pressure from the status quo

The Guardian’s Emily Holden writes, “In a nationwide blitz, gas companies and their allies fight climate efforts that they consider an existential threat to their business.” The status quo is big, wealthy, and connected. Seattle city council voted in favor of eliminating its climate pollution within a decade, and the knives came out. About a third of the city’s carbon footprint comes from burning natural gas for heating and cooking. Legislation to ban gas hookups in new buildings ran into immediate and fierce opposition—a coordinated effort masterminded by Puget Sound Energy, Seattle’s gas supplier.

The natural gas business is built around environmental subsidies. If I cook an egg for breakfast, it takes a certain amount of energy. Let’s call it one unit of energy for this conversation. The one unit can come from either gas or electricity, depending on my stovetop. If hydroelectric provides the heating power to my stove, then my one unit is carbon-free. But once I switch to natural gas, my one unit comes with a carbon cost. How much of a subsidy is this?

One method for putting a cost number on this subsidy is by understanding the cost of one unit of electricity produced by a natural gas power plant using 100 percent carbon capture technology. Yes, I know this technology is still nascent, but the added cost of converting gas to carbon-free electricity is the amount of the subsidy. But eliminating this type of natural gas subsidy is not without consumer pain. The price of natural gas would rise, affecting consumers everywhere and raising their cost of living.

This example brings out a fact about eliminating environmental subsidies—both corporate profits and consumer pocketbooks are affected. Therefore, these are the types of issues that will ultimately be decided at the ballot box on voting day.

Future pressure

The rise of electric vehicles and battery storage for solar and wind microgrids holds promise for cleaner energy. But modern batteries require a supply of rare metals. This need heralds in the emerging industry of seabed mining. These mining operations won’t involve digging tunnels or excavating deep pits. Instead, technologically advanced equipment will vacuum through the top six inches of sediment on the ocean floor. The mining vessels will suck up tons of sediments along with polymetallic nodules.

Polymetallic nodules are the economic prize. The rest of the sediments are simply disposable waste with some level of toxins, such as mercury and lead. Nodules can range in size from less than an inch up to five or six inches in diameter. However, despite their small size, they contain riches in the form of copper, manganese, nickel, and cobalt. These metals are all valuable commodities and under high demand due to their crucial role in manufacturing efficient modern batteries.

Waste Disposal

Currently, the waste disposal plans for these seabed mining operations focus on flushing waste sediments back into the ocean’s surface waters. A conservative estimate is that each mining ship will discharge two million cubic feet of sediment per day.

This process introduces two major problems. Toxins in the sediments will poison existing marine life in the sediment plume, and the sediments themselves will also drown or suffocate planktonic (floating) and benthic (sea bottom) ecosystems. The magnitude of the threat from this process is unknown since little detailed research exists on these open-ocean ecosystems.

Early indications are that waste disposal will be an area where environmental subsidies are applied. The argument for these subsidies is that complete treatment of waste materials is too expensive, and thus will render the operations unprofitable. This statement is probably true. But shouldn’t the response be to wait until demand raises commodity prices to a point where mining and proper disposal of waste become profitable? The economics of pollution using environmental subsidies is set to continue until voters demand a change.