Letter to the Editor: The Externality Question of Coal to Diesel

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Reader's note: This is a letter I wrote to the editor of an online newspaper near where I grew up in Indiana where I argue against a proposed Coal to Diesel manufacturing facility being built. It is still being debated today. The Indiana Department of Environmental Management has approved the permit for the facility. 

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In the field of economics, there is a term rarely understood by those outside of academia or policy debates. Its lack of comprehension is probably not by accident, for, if it were understood, the public would cause an uproar. Regarding the proposed Coal to Diesel plant in Dale, though, the concept is critical for the public to grasp, to comprehend, and to consider the implications of it relating to the factory, regardless of the stance of the individual. 

    To begin, one must understand a related but often misinterpreted concept within economics: cost. When we hustle down to Holiday Foods, we very closely consider cost, but when it comes to the air we breathe, we consider it free. In economics, a cost is anything paid by a consumer or a producer for a product or the means to produce that product to be sold on a market. In the US, this is relatively straightforward: if I own a piece of property and want a lawnmower, I simply drive to the store and purchase it, given that I have the money for the purchase. Without much fuss, I obtain my item and continue home to finish my work. The complications of cost in a market occur when something additional happens, something outside of the consumer-producer relationship. One of these is the externality. 

    An externality involves a cost that is neither paid by the consumer nor the producer directly but which is paid by some third party at their own expense, though not often with their consent. To complicate the story further, the party is often unaware of the cause of the cost, mostly because it comes from an entity with which they do not engage. Sometimes the producer or consumer of this additional cost is unaware as well. Let’s break this down with an example. 

    If I build a new business near Walmart in Jasper that creates the need for an additional stop light, my business inadvertently creates slower traffic and wait time. Though I did not intend this originally, my business has created a cost that neither myself nor my clients (although in this case, it may actually be some of them, though not nearly all of them considering it is workers leaving Jasper) have paid for in our operations. Of course, the cost in this scenario is simple: it’s time, a minute at most. Most people are okay with waiting a few seconds at a stop light or a stop sign if it guarantees them safety when crossing the road. For many, this externality is simple and doesn’t require solving, although it is a tiny nuisance that creates a benefit: safety when crossing the road. This demonstrates how externalities can unintentionally create both positive and negative events. So how does all of this relate to Coal to Diesel? 

    It’s simple, really. Mr. Merle’s factory will produce a new fossil fuel to be sold on markets, which satisfies a demand, in the process creating jobs and paying for coal miners, contractors, and so on. Unlike a traditional market, though, the prices don’t stop there. Why? Because of the pollutants that the factory produces--think of the 1 million tons of CO2 emissions per year, the wastewater drained to Evansville, and the toxic emissions--there will be some who do not directly benefit, such as nearly everyone indirectly related to the business, who will be forced to pay those costs, regardless of their desire for the factory. Thus begins the work of dismantling externalities because it forces us to ask the question: Is it right for someone who does not benefit from this plant to have to pay the costs directly related to its operation, even though they never see the benefit of it? 

    This is a moral question, not an economic one, although it can have economic solutions, most of which are absent in Mr. Merle’s plant. First, his plant is incorporated in Delaware. Why Delaware when he lives in Connecticut and the company operates in Indiana? Delaware has no income tax, so this one is obvious. Also, in Connecticut, he doesn’t have to breathe the air. Why Indiana? Because it is “good for business” as Merle says, neatly quoting the new Senator. Why is Indiana seen as “good for business” but only for certain types of business? Due to a lack of regulation and monitoring. Why this lack of regulation? Well, we could continue forever, but it essentially boils down to the health of the community and externalities, which brings us back around. 

    In a market-based system, there are a number of ways one could approach solving externalities. These already exist in some form within the state of Indiana and within the US, although in many places they do not consider the whole problem. If they did, coal in many states would prove less competitive, especially when stacked up against the full price of operation of its opponents, such as wind and solar and even nuclear. The point here is that Indiana does regulate air, water, and other systems, but differently than other states and countries, which is why it is so “business friendly.” This has public consequences, though. To address this with market solutions, the government and the public could require pollution permits, charging businesses fees for polluting the the water and air, charged at a per-ton rate. A carbon tax could be implemented to do something similar, which would incentivize companies to not pollute, as they would be charged by each ton of carbon. Another way to pay for the externality could be through higher corporate taxes, though Merle’s plant will likely not pay any state income taxes so this could be challenging. If any of these are successfully implemented, the benefits could then be given back to the community to pay for the damaged lungs, poisoned water, and babies with developmental disabilities that are all a result of toxic pollutants and environmental degradation. In doing this, it would redirect the cost from a third party to the party either buying or selling the product, in this case, diesel fuel. 

However, this assertion that a business (or indirectly, the consumer) should pay for the full cost of operation when there are negative consequences is seen as a farcical joke, laughed off as easily as the reality of a changing climate. So in reality, not only will the business not pay for the externality, but it will also exacerbate the extractivist business model. Extractivism defines a system that allows a company outside of a region to extract the full value of the resource of a geographical area while usually causing damage to the region in the process without returning to it the value which it harvested from its resources. This is evident not only in Nigeria, the Democratic Republic of the Congo, and India historically, but it was also a defining feature of Appalachia for half a century, too, in the form of the company town. This coal to diesel plant seeks to do something similar, farming Indiana's coal reserves for a few hundred jobs and one business chartered in Delaware, all while not paying for the externalities present in the operation of the facility. 

Not only does this exploration and understanding of externalities force us into moral and ethical questions, but it also allows us to confront, with vigor, the idea of additional pollutants to an area of the country that already suffers from some of the worst pollution in the US. If Duke Energy’s Gibson Power Plant, the third largest coal-fired plant in the world, is not charged per-ton of pollution, why would we expect Riverview to pay for its pollution? Merle has already stated that he “will operate fully within IDEM limits” though this falls short. Sadly, Gibson also operates within these guidelines, and it is not only one of the largest contributors in the US to a changing climate but also releases tons of toxic chemicals and pollution. If this plant falls under these regulations and the result of those regulations is still a decrease in the quality of life, we might bid well to reconsider the IDEM’s standards. Indeed, they do not fully consider external costs, amounting in my opinion to something environmentalist Rob Nixon calls slow violence: “violence that occurs gradually and out of sight; a delayed destruction often dispersed across time and space.” It is violence because it kills and disables; it is destructive because the damage is done to the community, slowly, even invisibly in the air you breathe. 

It is this destructive devaluing of life that has wrought some serious damage to the area, myself not immune. My father mined coal for over 25 years and is disabled because of it. His mother died of lung cancer having never smoked a day in her life. Hundreds of others have similar or worse stories. Calculating the operational cost in terms of human life and wellbeing challenges us to consider the price tag we place on human relationships and happiness, a battle I will let the reader resolve. 

Notwithstanding, none of this considers the larger externality: the social cost of carbon. The social cost of carbon is a cost calculated yearly by an offshoot of the EPA that determines the impact of carbon emissions on the entirety of the US economy. It factors into the equation the cost of adding carbon to the atmosphere and the negative externality of inadvertently warming the Earth in the process, thus creating additional costs for farmers, workers, and citizens whose jobs depend on aspects of the climate remaining stable, such as precipitation and temperature. Conservatively estimated, the Environmental Defense Fund places its value at 40 dollars per ton of carbon. If you flew across the Atlantic and back, that would be an additional 80 dollars for your flight. 

Factoring in the cost of carbon and pollution not only to the Earth but to those downwind and downstream, it is critical that we examine this proposed plant with scrutiny and weigh the costs and benefits. For a region that already suffers from a lack of environmental justice, this added cost would be expensive and unnecessary, not to mention unjust. If Mr. Merle can provide evidence of paying for not only the social cost of carbon but also the externalities of the production, perhaps we can come to the table. But for a business that utilizes a state without income taxes and another with lax regulation for its business, we shouldn’t expect a positive reply. A few well-paying jobs at the expense of the community’s health and wellbeing--a cost that we cannot even begin to define in dollars--is something that Southern Indiana should not be willing to pay. Hoosiers deserve the justice that is owed to them, and another polluting plant that produces negative externalities for the majority should not be built, especially if there is no reasoned attempt to address the external costs to society. Instead, let us come together as a community and build a resilient energy system not wholly dependent on the degradation of human life and extractivism for its existence. To do otherwise would be a further injustice. 


-Ethan C Smith, Formerly of Ferdinand