EnergyWhy Rick Perry’s proposed subsidies for coal fail Economics 101

By Meredith Fowlie and Maximilian Auffhammer

Published 11 October 2017

In a controversial proposal, Energy Secretary Rick Perry has asked federal regulators to effectively subsidize coal and nuclear power plants at ratepayers’ expense. Subsidizing utilities to burn more coal would worsen coal’s major negative externalities in the name of some dubious positive externalities. Deregulated power markets already have measures in place to support efficient levels of investment in reliability and resilience. There is surely room for refinement, but Perry’s proposal is the opposite of refined. It asks government to interfere in well-functioning markets, which is not something Republicans usually support – especially since it will come at great expense to ratepayers. Subsidizing coal for its reliability attributes is like subsidizing bacon for its nutritional content. There are better ways to get your vitamins, and better ways to keep the lights on.

In a controversial proposal, Energy Secretary Rick Perry has asked federal regulators to effectively subsidize coal and nuclear power plants at ratepayers’ expense. Under Perry’s proposal, plants that operate in deregulated electricity markets – where generators normally compete to provide power at the lowest cost – would be guaranteed positive profits so long as they stockpile 90 days’ worth of fuel on site.

To rationalize this proposal, which a former Republican member of the Federal Energy Regulatory Commission has dubbed “the antithesis of good economics,” Secretary Perry points to uncompensated benefits generated by coal and nuclear plants.

As energy economists, when we think about coal-fired electricity generation, what usually comes to mind are unaccounted-for costs – not benefits. This emerging pro-coal narrative is worth unpacking.

Coal’s hidden costs
When we teach the concept of externalities – the idea that economic activities can generate costs or benefits that are not reflected in their prices – we often use coal markets as a textbook example of negative externalities. It is true that burning coal fueled the Industrial Revolution and has helped propel emerging economies to modern-day heights. However, mining, transporting, storing and burning coal also have all kinds of negative health and environmental consequences that are not reflected in coal market prices.

For example, burning coal produces local and regional pollutants, including mercury, nitrogen oxides, sulfur dioxide and fine particulates. These pollutants cause thousands of premature deaths and illnesses in the United States annually. They also help form acid rain and ozone that damage crops and ecosystems. Even more significant from an economic perspective, burning coal is the source for almost a quarter of U.S. greenhouse gas emissions, which lead to rising temperatures and sea levels, not just here but worldwide.

The nonpartisan National Academies of Sciences estimate the health and environmental damages per million Btu, or British thermal units, of coal at $6.60. (British thermal units are a measure of the energy content of fuels.) For perspective, the delivered coal price in 2016 averaged $2.15 per MMBtu. Coal looks cheap, but we’re paying a hefty hidden cost.

The coal industry has historically fought regulations that aim to internalize these significant negative impacts. Now, however, Perry and other proponents are clamoring to account for alleged positive externalities from coal, such as reliability and resilience. In our view, this is like subsidizing bacon because it contains vitamins.