Ecological Economics 36 2001 443 – 460
ANALYSIS
Energy price disparity and public welfare
Paul H. Templet
Institute for En6ironmental Studies, Louisiana State Uni6ersity,
42
Atkinson Hall, Baton Rouge, LA
70803
, USA Received 2 June 2000; received in revised form 28 August 2000; accepted 28 August 2000
Abstract
The differences in the price of energy to economic sectors are linked to a number of system parameters and to public welfare. There are large disparities in energy prices within states when comparing residential and industrial
prices although neoclassical economics predicts one price in markets. The large disparities between the two sectors across states negatively affects the efficiency of resource allocation, creates subsidies for those getting the cheap energy
and results in unequal access to energy. These in turn lead to inefficient partitioning of energy between products and waste, higher pollution, leakage of wealth and poorer energy use efficiency, i.e. high energy intensity. States with large
energy price disparities between sectors have statistically higher poverty, lower incomes, more pollution and use more energy but with less efficiency. Higher energy price disparities also result in higher throughput per unit of output thus
reducing the chances for sustainability and lower public welfare. © 2001 Elsevier Science B.V. All rights reserved.
Keywords
:
Energy; Welfare; Price disparity; Sustainability; Diversity; Energy intensity www.elsevier.comlocateecolecon
1. Introduction
Energy is the prime mover, essential to life, health and economic welfare. Without it no work
can be done, no products can be produced and no economy can exist. For these reasons, and others,
the price of energy paid by an economic sector assumes importance. Price determines allocation
and availability, i.e. when price is lower for a sector then more energy ‘goods’ are available for
use per dollar spent on energy. Secondly, because there are no substitutes for energy it is critical to
economic processes and its price assumes unsus- pected importance. There are different forms of
energy and it can be used more or less efficiently but energy is necessary for all economic activity.
Finally, if price is an intensive state function ‘thermodynamic-like potentials’, Amir, 1994,
then price differences may affect economic system behavior in ways not understood by conventional
economics. For these reasons, and possibly oth- ers, energy price distortions can be expected to
have serious ramifications.
There are large energy price disparities between economic sectors within states US Energy Infor-
Tel.: + 1-225-3886428; fax: + 1-225-3884286. E-mail address
:
ptemplelsu.edu P.H. Templet. 0921-800901 - see front matter © 2001 Elsevier Science B.V. All rights reserved.
PII: S 0 9 2 1 - 8 0 0 9 0 0 0 0 2 4 3 - 3
mation Administration, 1998. For example, in 1995 the average US resident paid 2.4 times as
much as firms in the industrial sector for an equal amount of energy while Louisiana residents pay
over four times as much as their industry pays Table 1. Although economic theory posits one
market price for goods, i.e. the market clearing price, the energy price differential persists, and
widens, across sectors over time Fig. 1 suggest- ing an imperfect market structure. In many states
energy is currently supplied by a few large firms, which function as oligopolies, although this is
changing with deregulation. Because some energy markets in many states are still partially regulated
by State Public Utility Commissions the price differences might also be attributed to political
interference in markets. If industry is successful in having their energy price lowered through politi-
cal means then they are externalizing part of their production costs to other sectors that, conse-
quently, are paying higher prices, a kind of back- door tax.
Imperfect markets and externalities mean that market failure occurs because prices do not in-
clude all costs, price signals are misleading and Pareto optimality cannot be achieved. The differ-
ence in prices between sectors means the marginal product of energy is not equalized among sectors,
and consequently, total product and utility are not maximized. In addition, the purchasing power
of citizens declines as prices rise so public utility is negatively affected and public welfare should de-
cline Gowdy and O’Hara, 1995. A final consid- eration is that the allocation of resources between
sectors may no longer be efficient or optimal because of market failure, and that may also
affect public welfare. Economic theory recognizes that market failure occurs, but does not tell us
Fig. 1. Louisiana and US energy prices; residential and industrial sectors.
P .H
. Templet
Ecological Economics
36 2001
443 –
460
445 Table 1
1995 State data GSP leaked
Leakage 1997
Diversity of energy to
Energy price State
Energy Energy
Natural gas Manufacturing
price disparity GSP
disparity intensity
subsidy GSP per
Residential Releases lb per
MJ capita
per capita job
industry 204
27.4 Alabama
113 3.14
2.31 1.23
23.07 13.9
2897 308
59.2 92
2.51 15 257
31.90 40.5
Alaska 2.93
1.08 3763
2.32 150
51.6 −
19 2.05
1.36 11.48
16.6 Arizona
3300 2.76
128 37.7
63 1.97
1.28 21.10
16.4 Arkansas
19 89.0
− 49
1.74 4638
California 17.1
9.35 1.33
2.13 22
89.9 Colorado
− 172
1.67 1.68
1.38 11.16
16.3 4429
22 82.9
− 336
2.28 3516
1.62 Connecticut
10.4 7.53
1.37 13 529
2.63 58
68.9 48
2.24 1.33
10.28 35.8
Delaware 719
3.93 180
63.7 192
3.01 1.34
11.81 3.2
Florida 99
59.1 4
1.74 5701
Georgia 21.9
14.14 1.34
2.44 26
96.9 31
NA Hawaii
2.69 1.16
7.70 21.5
6361 236
41.0 −
33 1.53
4117 18.87
18.8 Idaho
2.23 1.32
4597 1.63
97 58.8
− 266
1.31 1.35
12.02 16.2
Illinois 3985
1.79 115
41.8 −
175 1.58
1.25 19.59
16.5 Indiana
114 45.1
− 112
1.58 4467
Iowa 18.8
16.68 1.31
2.00 110
53.4 Kansas
− 73
2.10 2.20
1.33 18.21
13.6 3198
123 47.3
− 111
1.55 4926
21.62 22.0
Kentucky 1.92
1.26 7215
4.37 967
20.9 216
3.31 0.95
37.43 29.1
Louisiana 1856
2.52 90
53.3 26
1.64 1.21
21.32 9.1
Maine 71
80.8 2.06
754 Maryland
3.0 10.85
1.38 2.42
13 90.5
− 366
2.04 Massachusetts
1.50 1.38
8.61 12.8
3871 55
58.9 −
295 1.31
2328 14.18
9.5 Michigan
1.51 1.36
4139 1.54
41 70.1
− 264
1.96 1.32
14.03 15.7
Minnesota 3116
2.59 268
26.9 30
1.95 1.30
22.25 16.7
Mississippl 137
49.5 −
197 1.48
3817 Missouri
15.8 13.65
1.36 1.74
1,755 14.2
− 176
1.06 Montana
1.68 1.32
24.08 9.6
1839 73
61.6 −
159 1.73
5369 1.79
Nebraska 21.3
14.82 1.37
6262 1.72
108 83.6
− 173
1.27 1.34
12.65 21.4
Nevada 2352
1.70 23
82.5 −
270 1.89
1.37 10.00
9.0 New Hampshire
34 87.3
− 84
2.34 3245
New Jersey 10.4
10.87 1.37
2.12 741
27.8 −
104 1.78
New Mexico 1.83
1.31 15.32
28.0 6568
33 86.4
− 56
1.80 4464
7.51 14.8
New York 2.20
1.38 5901
2.46 92
46.5 10
1.94 1.36
13.36 23.1
North Carolina 4206
2.63 104
67.3 39
1.61 1.23
26.96 19.7
North Dakota 104
48.8 −
218 1.39
3664 Ohio
14.9 15.57
1.32 1.73
P .H
. Templet
Ecological Economics
36 2001
443 –
460
Table 1 Continued GSP leaked
Leakage 1997
Diversity of energy
Energy price State
Energy Energy
Natural gas GSP per
subsidy price disparity
to GSP Manufacturing
intensity disparity
capita Releases lb
per capita MJ
Residential industry
per job 120
51.8 88
2.45 12.6
2504 22.07
1.32 2.98
Oklahoma 14.9
3557 100
58.5 −
62 1.97
1.34 Oregon
14.74 2.07
85 64.3
− 57
1.84 2181
14.11 9.1
Pennsylvania 2.21
1.34 1512
1.88 22
78.1 −
169 1.96
1.37 10.65
6.4 Rhode Island
4091 2.89
136 38.9
86 2.42
1.28 18.45
18.7 South Carolina
84 65.2
− 126
3.15 6164
South Dakota 25.7
14.22 1.36
1.92 1.89
4231 189
34.6 −
123 1.73
1.34 16.56
Tennessee 17.6
222 42.2
168 3.14
6106 3.84
Texas 23.6
22.81 1.13
4545 2.06
706 19.0
− 53
2.03 1.33
15.88 21.0
Utah 3
89.9 −
505 2.01
Vermont 1.36
1.37 12.16
10.0 2222
130 57.4
101 2.14
4293 2.99
Virginia 16.0
12.25 1.38
3286 2.05
66 68.4
− 65
2.15 1.33
16.42 12.9
Washington 13.4
2521 254
34.3 45
2.71 West Virginia
2.66 1.25
25.19 49
61.8 −
120 1.97
3592 14.8
14.81 Wisconsin
1.93 1.31
13 361 2.08
850 37.7
− 68
1.52 1.11
27.23 40.8
Wyoming 15.2
3883 113
55.8 2.08
United States 2.42
1.33 14.24
how it relates to public welfare, and its ramifica- tions are rarely discussed.
One biophysical measure of economic systems, energy flow diversity, provides one means of
viewing the effects of market failure and the misallocation of resources. In an earlier paper
Templet, 1996, the author presented an empiri- cal means of estimating diversity in economic
systems using the broad economic sectors as en- ergy nodes analogous to species in the Shan-
non and Weaver 1949 diversity equation. The relationship of diversity H to GNP per capita,
a measure of development, was found to be pos- itive, logarithmic and significant in a cross-sec-
tional analysis across countries. As a country’s economy evolves it appears to become more di-
verse, rapidly at first relative to GNP per capita, and then more slowly as GNP per capita in-
creases. As one might expect, those countries with the highest diversity are the most highly
developed and have the highest GNP per capita. More recently, the author related increased di-
versity to increased energy efficiency and a low- ered energy intensity and to increases in the
capacity of economic systems to produce goods and services Templet, 1999. Darwin 1859 first
suggested that an increase in productivity was related to diversity in ecological systems. Tilman
et al. 1996 investigated Darwin’s suggestion for grassland ecosystems and found the relationship
of diversity to productivity to be positive and significant. Ulanowicz 1986 finds that diversity
and the capacity to produce are related in eco- logical systems, and provides a mathematical
formulation.
Misleading price signals and poor allocation also affect the sustainability of a system by in-
creasing throughput per unit of output. Sustain- ability requires that economic throughput be
within the source and sink capacities of the en- vironment Daly, 1990. The environment is the
source of the natural resources that are used in the economic system to produce goods and ser-
vices and is where wastes go. These are the ‘source’ and ‘sink’ functions that constitute nat-
ural capital, which is essential to the develop- ment
of economic
capital. All
production processes require inputs of materials and energy
and create outputs of goods and services along with waste. In addition, all products must either
be recycled at the end of their useful life or become waste. For these reasons, the economy
is dependent on the environment although con- ventional economic wisdom generally discounts
the value of natural capital because the market captures its value only partially. If disparity in
energy prices increases throughput in an econ- omy then system throughput is higher and is
less sustainable. Misallocation of resources also negatively affects natural capital by consuming
more of it and by imposing higher waste loads. Our life support system, which provides essential
goods and services such as clean air and water and numerous other services, is dependent on
maintaining natural capital. One measure of nat- ural capital puts its value considerably above
that of man made capital Costanza et al., 1997. It is apparent that most developed coun-
tries have exceeded their source and sink capac- ities Templet, 1995a; Wackernagel and Rees,
1996; global climate change is only one of the many manifestations of excessive consumption
and waste creation, i.e. of economic throughput exceeding sink capacities.
The question this paper seeks to answer is whether energy price disparities affect public
welfare and how. Investigating the linkages be- tween energy price disparities, public welfare,
sustainability, diversity and other system mea- sures should provide some answers.
2. Methods
