Externalities Concept

The wholesale price of coal electricity is roughly $30-40/MWh. But burning coal also causes asthma, lung cancer, mercury contamination, and climate change. Those costs are real, they fall on real people, and they are not in the price. Economists call them externalities.

An externality is a cost (or benefit) imposed on a third party who did not choose to incur it and is not compensated for it. Energy externalities include five main categories: air pollution (particulate matter, SO2, NOx causing respiratory disease and premature death), climate damage (CO2 and methane driving warming, sea level rise, and extreme weather), water pollution (acid mine drainage, thermal discharge, fracking fluid contamination), land use impacts (habitat destruction, displacement), and energy security costs (military protection of supply routes, economic disruption from price shocks). When these costs are excluded from the price, the market overproduces the harmful activity because the polluter does not pay.

Estimate the external cost of coal. Health damages from air pollution: roughly $30-50/MWh. Climate damages (social cost of carbon at $50/tonne CO2): roughly $40-50/MWh. Total: $70-100/MWh on top of the $30-40/MWh market price.

Calculate the "true cost." Market price + externalities = $100-140/MWh. At this price, coal is uncompetitive with every major alternative.

If the true cost of coal is twice its market price, why is it still burned?

Externalities are not priced. The market price reflects only private costs (fuel, labor, capital). External costs are borne by society (health systems, climate adaptation, affected communities) rather than the generator. Until externalities are internalized through carbon pricing, pollution taxes, or regulation, the polluter has no financial incentive to stop.

Externalities are the core market failure that justifies environmental regulation and carbon pricing in energy policy.

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