Regan Brown
Fossil fuels are an expensive and dwindling energy source with a plethora of hidden costs. The extraction and burning of fossil fuels have adverse environmental, climate, and public health impacts, which are estimated to have totaled $5.3 trillion globally in 2015 alone. Fossil fuel externalities, including societal costs, environmental costs, and health costs, are largely overlooked in the process of incentivizing fossil fuel production through policy mechanisms. The true price of carbon and other pollutants is not reflected in the actual cost of fossil fuels and fossil-derived products. Fossil fuels are subject to the volatile global fossil fuel markets, which have sent energy prices skyrocketing in recent years. The burning of fossil fuels releases particulate matter, nitrogen oxides, and other toxic emissions, which have serious health risks. The costs of continuing on our current energy path are steep, and it is time to invest in a new energy future.
| Characteristics | Values |
|---|---|
| Fossil fuel cost in the US electric power industry | $3.12 per million British thermal units (Btu) in 2023 |
| Cost range by source | From $2.36 per million Btu for coal to $16.53 per million Btu for petroleum |
| Fossil fuel externalities | Environmental costs, societal costs, health costs |
| Fossil fuel subsidies | $4.5 billion in 2009 |
| Global fossil fuel negative externalities in 2015 | $5.3 trillion |
| Fossil fuel cost per kWh | up to $0.22 |
| Renewable energy cost per kWh | as little as $0.04 |
| US spending on coal, oil, and natural gas | $700 billion to $1 trillion per year |
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What You'll Learn
Fossil fuel externalities: health, environmental, and societal costs
The cost of fossil fuels in the United States electric power industry is about 3.12 US dollars per million British thermal units (Btu) in 2023, with coal costing 2.36 dollars per million Btu and petroleum costing 16.53 dollars per million Btu. However, the true price of carbon and other pollutants is not reflected in these costs. These hidden costs, known as externalities, include societal, environmental, and health costs.
Health Costs
The use of fossil fuels has detrimental effects on public health. In the United States, nearly one in three people, or about 120 million people, are exposed to unhealthy levels of air pollution, which increases respiratory ailments like asthma and bronchitis, and the risk of death from cardiovascular and pulmonary diseases, as well as cancer. It also increases infant mortality, damages the nervous system and the brain, and contributes to psychiatric disorders and diabetes. Globally, fossil fuel pollution is responsible for one in five deaths, with 350,000 premature deaths in the US in 2018 attributed to fossil fuel-related pollution. The annual cost of the health impacts of fossil fuel-generated electricity in the US is estimated to be up to $886.5 billion, with hundreds of billions of dollars lost through premature mortality, workdays lost, and direct costs to the healthcare system.
Environmental Costs
Each stage of the fossil fuel supply chain, from extraction and transportation to refining and burning, generates environmental externalities. Burning fossil fuels emits greenhouse gases like carbon dioxide, which contribute to climate change and ocean acidification. Fossil fuels also produce hazardous air pollutants, including sulfur dioxide, nitrogen oxides, particulate matter, carbon monoxide, and mercury, which can cause acid rain, eutrophication, damage to crops and forests, and harm to wildlife. Oil spills during extraction, transportation, and refining can also destroy habitats, erode shorelines, and result in beach, park, and fishery closures.
Societal Costs
The societal costs of fossil fuels are largely borne by minority and low-income populations who live near facilities that produce high amounts of pollutants, such as ports, airports, highways, and petrochemical refineries. In the US, Black and Hispanic Americans are exposed to significantly more particulate matter pollution than they produce, with a predominantly Black and low-income area of Louisiana known as "Cancer Alley" having a cancer risk nearly 50 times the national average. Addressing fossil fuel externalities could save taxpayers billions of dollars and improve the health and quality of life for many people.
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Fossil fuel subsidies: tax breaks and intangible drilling costs
The cost of fossil fuels in the United States electric power industry varies depending on the source. In 2023, fossil fuels cost about $3.12 per million British thermal units (Btu), ranging from $2.36 per million Btu for coal to $16.53 per million Btu for petroleum. However, the true cost of fossil fuels goes beyond their market price and includes significant hidden costs in the form of negative externalities, such as air pollution and its associated impacts on public health.
To encourage domestic energy production, the United States provides various tax subsidies and benefits to the fossil fuel industry, including direct subsidies to corporations. These tax incentives, or subsidies, have a long history, with some dating back a century. While they were initially implemented to lower the cost of fossil fuel production and promote new domestic energy sources, many of these subsidies are now considered outdated and inconsistent with policy goals aimed at reducing fossil fuel consumption and mitigating climate change.
One notable subsidy is the Intangible Drilling Costs Deduction (26 U.S. Code § 263), which allows companies to deduct most of the expenses incurred from drilling new wells domestically. According to the Joint Committee on Taxation, eliminating this tax break alone could have generated $1.59 billion in revenue in 2017 or $13 billion over the next ten years. Another subsidy is the Percentage Depletion deduction (26 U.S. Code § 613), which enables businesses to deduct a certain amount from their taxable income to account for declining production from a reserve over time.
Other tax incentives include publicly traded partnerships, which allow pass-through oil and gas partnerships to publicly list their shares, accelerated depreciation of natural gas infrastructure, investment credits for clean coal facilities, and energy production credits for coal. These subsidies are estimated to cost the federal government $12.9 billion from 2022 to 2026. Additionally, oil and gas production benefit from preferential tax breaks that exceed $36 billion over the 2017-2026 budget window.
The continued provision of these subsidies has come under scrutiny due to their adverse environmental, climate, and public health impacts. The negative externalities associated with fossil fuel use are estimated to have totaled $5.3 trillion globally in 2015 alone. As renewable energy becomes increasingly cost-competitive, the justification for subsidizing an industry with such large negative impacts becomes increasingly difficult.
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The volatility of fossil fuel markets
Fossil fuels are a significant source of energy, accounting for about 88% of commercial energy sources used. The cost of fossil fuels in the United States' electric power industry varies depending on the source, with an average cost of 3.12 US dollars per million British thermal units (Btu) in 2023. For example, coal costs around 2.36 US dollars per million Btu, while petroleum costs 16.53 US dollars per million Btu.
The inherent volatility of fossil fuel prices poses a threat to macroeconomic price stability. To address this issue, a rapid transition to electrified, renewable energy sources is necessary. Government investment in renewable energy infrastructure is crucial for achieving long-term price stability and reducing the impact of climate change. However, building renewable energy sources alone is insufficient without a simultaneous divestment from the use and production of fossil fuels.
Financial regulators recognize climate change as a source of financial risk, and the energy transition is slow, with fossil fuels still dominating the global primary energy mix. Oil and gas companies are exposed to transition risk, and investors must consider carbon transition risk in their pricing to compensate for this exposure.
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The environmental damage of extraction and refining
Fossil fuels are essential to meeting energy needs, with oil, coal, and gas serving about 80% of energy requirements. However, the extraction and refining of fossil fuels have detrimental environmental consequences.
The extraction process, which includes drilling and mining, can lead to toxic runoff into water bodies, soil dumping, and oil spills that harm wildlife, destroy habitats, and contaminate drinking water sources. For instance, the BP Deepwater Horizon oil spill in 2010 released 134 million gallons of oil into the Gulf of Mexico, causing the deaths of numerous birds, turtles, fish, marine mammals, and plants.
Fracking, a technique used to extract unconventional gas, has been linked to drinking water contamination. The toxic fluids used in fracking, along with the wastewater generated during drilling, fracking, and mining operations, pose significant risks to waterways and aquifers. This wastewater can contain heavy metals, radioactive materials, and other pollutants, leading to health issues such as cancer, birth defects, and neurological damage.
Additionally, the infrastructure required for fossil fuel extraction and refining, such as wells, pipelines, and waste storage facilities, can have a significant impact on landscapes and ecosystems. The leasing of vast stretches of land for these purposes can disrupt natural habitats and contribute to environmental degradation.
The burning of fossil fuels further exacerbates the problem, releasing nitrogen oxides and ammonia, which contribute to smog and acid rain. Fossil fuel combustion also emits greenhouse gases, particularly carbon dioxide, which trap heat in the Earth's atmosphere, leading to climate change. Ocean acidification is another consequence, as the ocean absorbs a significant portion of the emitted carbon dioxide, altering its chemistry.
The environmental damage caused by fossil fuel extraction and refining disproportionately affects communities of color and low-income communities. For example, in "Cancer Alley," a predominantly Black and low-income area in Louisiana, the cancer risk is nearly 50 times higher than the national average due to the proximity of numerous chemical plants and oil refineries.
The hidden costs of fossil fuels extend beyond the monetary, emphasizing the urgency of transitioning to cleaner energy sources and implementing policies to reduce the environmental and health impacts of fossil fuel extraction and refining.
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The rising cost of fossil fuels vs. the falling cost of renewables
The cost of fossil fuels in the United States electric power industry varies depending on the source. In 2023, fossil fuels cost about $3.12 per million British thermal units (Btu), ranging from $2.36 per million Btu for coal to $16.53 per million Btu for petroleum. Petroleum costs have been the most volatile, while coal costs have remained relatively stable.
In contrast, the cost of renewable energy has been falling over the years. The price of electricity from fossil fuel sources does not follow learning curves, so we can expect the price difference between fossil fuels and renewables to increase. The more renewable energy technologies are deployed, the more their costs will fall. This is because renewable energy technologies follow learning curves, meaning that with each doubling of cumulative installed capacity, their price declines by the same fraction.
In the last few years, solar photovoltaic prices have declined by 88% since 2009, and the relative price has flipped. The electricity price needed to break even with a new average coal plant is now much higher than the price of electricity from a wind or solar plant. The cost of new solar photovoltaic projects has fallen by 82% since 2010. The cost of electricity from onshore wind fell by 15% in 2021, offshore wind by 13%, and solar PV by 13% compared to 2020.
Renewable energy is now the cheapest form of power, and it frees economies from volatile fossil fuel prices and imports. Falling energy prices also mean that people's real incomes rise. Investments in renewable energy technologies continue to pay huge dividends, and they are vital in countries' efforts to reduce and eventually phase out fossil fuels.
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Frequently asked questions
In 2023, fossil fuels cost about $3.12 per million British thermal units (Btu), with coal costing $2.36 per million Btu and petroleum costing $16.53 per million Btu.
Fossil fuels impose massive environmental, economic, and health costs. The negative externalities of fossil fuels, including societal, environmental, and health costs, are estimated to have totaled $5.3 trillion globally in 2015 alone. These costs include the impacts of greenhouse gas emissions and other pollution resulting from the extraction and burning of fossil fuels, such as respiratory problems, heart disease, and premature births.
Fossil fuels are generally considered to be cheaper than renewable energy sources, but this is not always the case. Onshore wind and solar with storage can cost as little as $0.04 per kilowatt-hour (kWh), while fossil fuels can cost up to $0.22 per kWh.
There are various hidden costs associated with fossil fuels, such as the intangible drilling costs deducted by companies when drilling new wells domestically. Additionally, the true price of carbon and other pollutants is often not reflected in the actual cost of fossil fuels, and the costs of fossil fuel subsidies can be high.
