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site last updated: 6/26/2010

C a l i f o r n i a   P H O T O N

Externalities

Externalities are costs associated with an activity that are not reflected in prices, and therefore tend to be ignored in decisions about that activity.

In the energy economy there are massive externalities that favor the continued reliance on non-renewable centralized energy production. One study by the National Academies of Science estimated the externalized costs of the US energy economy in 2005 at $120 billion, not counting climate change. 1  

The examination of market externalities is important in the development of a new products and services, even apart from ethical implications, because externalities have a way of becomming a part of the economic fabric. For example, the release of carbon dioxide into the atmosphere, long a market externalitiy, is now affected by carbon trading credits.

Advocates of "natural capitalism" like Paul Hawken and Amory Lovins maintain that it can be very profitable to take into account externalities because it leads to more efficient economic activity. They describe four interlinked principles:

  • Radically increasing resource productivity
  • Redesigning industry on biological models with closed loops and zero waste
  • Shifting from the sale of goods (for example, light bulbs) to the provision of services (illumination)
  • Reinvesting in the natural capital that is the basis of future prosperity
Natural Capitalism shows how these four changes will enable businesses to act as if natural capital were being properly valued, without waiting for consensus on what that value should be. Even today, when natural capital is hardly accounted for on corporate balance sheets, these four principles are so profitable that firms adopting them can gain striking competitive advantage- as early adopters are already doing. 2  

Externalities in Renewable Energy Sources

Renewable energy sources have externalites, though generally far less extensive that those of fossil fuels. These externalities may not be obvious. For example, biofuels are often assumed to be carbon-neutral because the plants grown to produce the feedstocks for biofuels capture carbon dioxide from the atmosphere, forming a closed loop. However, side effects of biofuels conversion, such as changes in ecosystems, can have effects on carbon cycles far beyond those involved in the biofuel crops themselves. 3  


References

1. Counting the hidden ($120 billion) cost of US energy economy, arstechnica.com,
2. NATURAL CAPITALISM: CREATING THE NEXT INDUSTRIAL REVOLUTION, [cached]
3. Biofuels Deemed a Greenhouse Threat, 02/08/2008 [cached]