The High Cost of Fossil Fuels

Released by: Environment America

Executive Summary

America is at an energy crossroad. As a nation, we are dependent on fossil fuels at a time of growing demand and dwindling supply. Meanwhile, fossil fuel use continues to impose massive environmental and economic costs. Now our country must choose between paying to continue the status quo and investing in a new energy future.

The costs of continuing on our current energy path are steep. American consumers and businesses already spend roughly $700 billion to $1 trillion each year on coal, oil and natural gas, and suffer the incalculable costs of pollution from fossil fuels through damage to our health and environment. If America continues along a business-as-usual energy path, U.S. fossil fuel spending is likely to grow, totaling an estimated $23 trillion between 2010 and 2030.

Policymakers in Washington, D.C., and many states have recently taken the first small steps toward a clean energy future, adopting policies to encourage energy efficiency, ramp up the use of solar and wind power, and curb global warming pollution. Now, with even bolder steps – such as a national cap on global warming pollution and more ambitious targets for renewable energy and energy efficiency – on the public agenda, powerful interests with a stake in preserving the status quo have criticized strong clean energy policies as being too expensive for the American public.

In fact, the reverse is true. The United States cannot afford to wait to break our dependence on fossil fuels. The cost of fossil fuels to our economy and our environment will continue to mount in the years to come unless the nation takes bold steps now to embrace the benefits of a clean energy future.

America is overly reliant on fossil fuels such as coal, natural gas and oil. This dependence is costly to everyday citizens, and sends valuable dollars overseas and out of the domestic economy.

  • The United States depends on fossil fuels for 85 percent of our energy supply.
  • In 2006, American consumers and businesses spent $921 billion – or close to 7 percent of America’s gross domestic product – on fossil fuels, more than the nation spent on education or the military. In 2008, national expenditures on fossil fuels likely topped $1 trillion for the first time ever. Each year, more than 70 percent of this money is spent on oil.
  • In 2007, America spent more than $360 billion importing fossil fuels, with the vast majority of that money spent on crude oil. That money is a direct transfer of wealth from American consumers to oil companies and foreign governments.
  • For every dollar that an American household spends each year, about 10 cents is likely to go toward the purchase of energy, with most of that money spent on fossil fuels.

Fossil fuel production and use damage our environment and our health – inflicting even greater damage on the American economy and our quality of life.

Fossil fuel combustion is the leading contributor to global warming, which, in addition to being a looming environmental and human catastrophe, could inflict massive economic damage as well:

  • Sea level rise and an increase in the severity of storms could put key cities such as New York, Miami and New Orleans at greater risk of costly storm damage. A 2008 Natural Resources Defense Council study estimated that high-intensity hurricanes could cause as much as $422 billion in damages in Atlantic and Gulf Coast states between 2025 and 2100.
  • A 2007 study by researchers at the Lawrence Livermore National Laboratory and the Carnegie Institution at Stanford University found that global production of three of the six largest global crops experienced significant losses due to global warming between 1981 and 2002. The study concluded that global wheat growers, for example, lost $2.6 billion and global corn growers lost $1.2 billion in 2002. 
  • Global warming is forecast to inflict a variety of other costs, including declining rainfalls and rising temperatures that will combine to cause large and extended drought conditions in regions like the Southwest, and impacts on public health due to heat-related illnesses, greater formation of ozone smog, and increases in vector-borne disease.
  • An assessment by former World Bank Chief Economist Sir Nicholas Stern indicates that global warming has the potential to reduce global per-capita consumption by as much as 20 percent.

Fossil fuel production and use also imposes other environmental and social costs besides those related to global warming.

  • Fossil fuels are a leading source of air and water pollution. The economic cost of air pollution in sectors regulated under the Clean Air Act has been estimated at $9 trillion between 1970 and 2000, with costs resulting from pollution-induced early mortality, illness, health care costs and lost productivity.
  • The production and transport of fossil fuels results in routine pollution of the environment and occasional catastrophic accidents. The December 2008 collapse of a coal ash pond outside a Tennessee Valley Authority power plant covered 300 acres in sludge and will cost an estimated $825 million to clean up. Between 1990 and 2006, 51 large oil spills in the United States resulted in the expenditure of between $860 million and $1.1 billion in removal costs and compensation for damages.

The economic and environmental burden of fossil fuel dependence will only worsen in the years to come.

  • The United States will spend an estimated $23 trillion on fossil fuels between 2010 and 2030 should energy consumption and fossil fuel prices follow U.S. government projections – an amount equivalent to three years’ worth of income for the entire American workforce at current earning rates.
  • Fossil fuel expenditures will decline in the next several years due to the lingering effects of the economic recession, but annual expenditures of more than $1 trillion per year – which proved devastating to the economy during early 2008 – will become the “new normal” by the middle of the next decade. By 2030, the United States can expect to spend approximately $360 billion more per year on fossil fuels than we did in 2006.
  • If fossil fuel prices are driven higher, faster, the United States could expect to spend more than $30 trillion on fossil fuels between 2010 and 2030. Fossil fuel expenditures would again surpass $1 trillion in 2011 and by 2030 we will be spending $750 billion more per year on fossil fuels than the nation did in 2006.
  • Oil prices are a main driver of higher expenditures. If oil prices reach $200 per barrel by 2030 – an event more likely to happen as world oil supplies become increasingly strained – the United States will be spending $1.3 trillion out of $1.6 trillion total fossil fuel costs on oil alone.
  • Rising fossil fuel expenditures will affect all 50 states, but states with a greater reliance on fossil fuels, particularly oil, will experience greater increases. (See Appendix A for projected fossil fuel expenditures for all 50 states.)

Investing in clean energy that never runs out can reap economic savings. The United States has the ability today to produce this energy, and to help Americans use energy more efficiently in their homes, businesses and vehicles.

  • A 2007 analysis by McKinsey & Company estimated that the United States could reduce its emissions of global warming pollution by approximately 1.2 billion metric tons of carbon dioxide per year (equal to about 20 percent of today’s fossil fuel emissions) with net dollars savings. In other words, these investments are economic winners on their own terms – even excluding benefits for the environment, public health and America’s security.
  • A recent Energy Information Administration analysis of the American Recovery and Reinvestment Act (ARRA) found that the Act’s provisions for residential and commercial energy efficiency improvements will yield significant savings. The EIA projects that the law will reduce residential and commercial energy bills by $13 billion in 2020 and $21 billion in 2030.
  • The recent move by President Obama to increase federal vehicle fuel economy standards to 35 miles per gallon by 2016 will deliver $20 billion in net savings to consumers in 2020 at gasoline prices of $2.25 per gallon. If gasoline prices hit $4 per gallon, the net benefits would balloon to $70 billion.
  • According to the Union of Concerned Scientists, transitioning to a clean energy economy could cut global warming emissions while saving consumers and businesses $465 billion each year by 2030, with $1.7 trillion in net cumulative savings between 2010 and 2030.

The federal government, along with the states, should take actions to reduce our dependence on fossil fuels. They should:

  • Reduce the nation’s emissions of global warming pollutants deeply enough to prevent dangerous impacts from global warming, guided by the latest scientific understanding. The United States should adopt an emissions cap and other policies that will reduce global warming pollution by 35 percent below 2005 levels by 2020 and by 80 percent below 2005 levels by 2050, and implement strict rules for carbon “offsets” to ensure that efforts to reduce emissions are successful.
  • Ensure that a cap-and-trade program used to achieve those targets directs the revenues gained through the sale of allowances for public purposes. One hundred percent of emission allowances should be auctioned, with the revenues used for investments in clean energy and to benefit consumers.
  • Ensure that America generates at least 25 percent of its electricity from renewable sources of energy such as wind and solar power by 2025.
  • Strengthen energy efficiency standards and codes for appliances and buildings, with the goal of reducing energy consumption in new buildings by 50 percent by 2020 and ensuring that all new buildings use zero net energy by 2030.
  • Promote the development and implementation of clean transportation infrastructure, including improving the fuel economy of light- and heavy-duty vehicles, reducing the carbon intensity of transportation fuels, and promoting plug-in vehicles, public transportation and high-speed intercity rail.
  • Ramp up investment in solar power through tax credits, specific targets in state renewable electricity standards, requirements for “solar ready homes,” rebate programs, and other measures.
  • End subsidies to fossil fuel industries.