Energy and the Environment

Energy and the environment have always been and will continue to be closely linked. All energy is, at bottom, either derived or captured from the environment around us. Once used, it is eventually returned to the environment as a harmless byproduct or, more often than not, as harmful emissions or waste. As energy usage has increased around the world, so too have the stresses this usage imposes on the environment intensified. Globalization has accelerated the pace of these developments and ensured that the actions of one country are felt more acutely in many others.

The relationship between energy and the environment is largely defined by the economic concept of externalities. An externality is a hidden or indirect cost associated with an activity or the transaction of a good or service. Because the burden of this cost often falls on outside bystanders who had no part in the activity or transaction, it is not reflected in the market price encountered by the buyer or seller.

Thus, for example, the price an individual pays for a gallon of gasoline does not reflect the full costs that carbon emissions from the burning of that gasoline impose on the broader community (global warming, adverse health effects, etc.).

Beyond the market price set by supply and demand is a broader notion of cost that takes into account the “full social costs” paid by those directly involved in a transaction as well as any external parties affected by it.¹ This full social cost is particularly relevant when public goods such as clean air and clean water are concerned.

Conventional reasoning holds that because a communal resource belongs to everyone in theory, it belongs to no one in practice. The benefits of an action that exploits the environment, like burning coal or driving a car, are highly concentrated among those directly involved, e.g. the energy company or the driver.

But the real-life costs of such actions are widely distributed among the population at large, e.g. affecting people in neighboring countries who have to deal with acid rain or pedestrians who are forced to breathe in a car’s exhaust fumes. This distribution means that no individual feels responsible for the full social costs of his or her activities.

Governments can step in to help bring the market cost of an activity in line with the full social cost. They often do this by assessing the difference between the two and levying a tax that artificially raises the market cost. In economic terms this is known as “internalizing the externality.” As will become clear over the course of this section, externalities and the ways governments handle them are in many respects the central threads connecting energy and the environment.

More generally, it must always be remembered that the competing needs of energy users and environmental protection must be carefully balanced if economic growth is to be sustainable as well as robust.

For more information on sustainable development, refer to the Development issue brief (Sustainable Development) and the Environment issue brief (Is Sustainable Development the Way Forward?).

ANWR One of the fiercest debates in recent years about the need to balance energy demands with environmental protection has focused on a relatively obscure stretch of land in Alaska known as the Arctic National Wildlife Refuge (ANWR). ANWR comprises 19 million acres of pristine land that various legislative measures have brought under the control and protection of the U.S. Congress. Over the last decade, a steady chorus of lawmakers has urged that ANWR be opened up for oil exploration as a response to America’s declining oil production and increasing dependence on foreign oil. Advocates of this position cite projections that the Refuge’s coastal plain could contain up to 16 billion barrels of oil, but by the time production reached peak levels around 2027, conservative estimates hold that ANWR reserves could only supply one or two percent of U.S. daily oil consumption.2 Opponents of drilling make two counterarguments. First, they dispute optimistic projections about the region’s potential as an energy source. They point out that total ANWR reserves will likely represent less than a year’s supply based on current levels of American oil consumption and that it would take approximately 10 years for production to come fully online. Thus, the oil that could be extracted from ANWR would not measurably improve America's energy independence. More importantly, they say, exploration would destroy a unique ecosystem that is worthy of vigilant federal protection. ANWR’s coastal plain is home to a variety of rare species of animals, from polar and grizzly bears to Arctic wolves, caribou, and “the endangered shaggy musk ox, a mammoth-like survivor of the last Ice Age.” 3 The region is also an important transit area for thousands of migratory birds. In the minds of many, the potential gains from developing ANWR’s oil reserves are not worth the costs of jeopardizing this valuable part of the country’s natural inheritance. Several attempts to open ANWR to exploration were defeated in Congress in 2005 and 2006.  According to Anchorage Daily News, in March of 2008 the U.S. Senate “rejected a Republican energy plan that promised to open the Arctic National Wildlife Refuge to oil exploration, an option that was part of an overall package to increase domestic energy development.” The debate still remains unresolved. President Obama refuses to allow drilling there citing environmental degradation as his reasoning, and has left it out of his energy bill.

The impact of energy usage on the environment can be evaluated at three stages:

1. the preventative stage prior to consumption;
2. the act of consumption itself; and
3. the aftermath of consumption.

Grouping the first two together for convenience, this section will first cover conservation and energy efficiency. It will then proceed to consider the issues surrounding energy emissions and climate change, including the Kyoto Protocol.

For more information about globalization and the environment, see the “Environment” Issue Brief.