Carbon: Cost vs. Price

Given the increasing discussion around cap-and-trade in the United States (U.S.) in the lead up to COP15, many members of the media have been asking for Applied’s perspective on the impact of a "price" for carbon on business. Politics aside, it's important to recognize that while carbon may not currently have a "price" it does have a cost — we're just not accounting for it.

The reality is that we pay for our continued use of carbon-based fossil fuels through health costs, environmental impacts and national security costs. And these costs amount to hundreds of billions, if not trillions of dollars each year.

The findings of a study on the health costs resulting from our use of fossil fuels that was commissioned from the National Academy of Sciences by the U.S. Congress was released last month. The study found that the annual health costs are about $120 billion. The majority of these costs are related to premature deaths as a result of pollution as well as preventable diseases like asthma. None of these costs can be found in the price we pay for a gallon of gas or a kilowatt-hour of electricity.

Studies of the environmental costs of fossil fuels have ranged from the cost of damage to buildings by acid rain to the costs of increased frequency of hurricanes to the impact of climate change on crops. One such study by the Lawrence Livermore National Laboratory and the Carnegie Institution at Stanford University found that global production of the six largest crops suffered significant losses due to global warming between 1981 and 2002. The study also found that global wheat growers lost $2.6 billion in 2002. Again, none of these costs end up on our monthly utility bill.

Then there are the national security costs. A RAND Corporation study released earlier this year looked at the cost to the U.S. taxpayer of protecting the supply and transit of oil from the Persian Gulf. The study found that the annual cost to U.S. taxpayers is more than $90 billion — about 12% to 15%of the current U.S. defense budget. Once again, these costs are not included in the price we pay for gas or electricity.

So, the debate on cap-and-trade goes on but let's not confuse the issue of "pricing carbon" with the idea of the cost of our dependence of fossil fuels. We pay that price every day.

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