This week, Congress and the Obama Administration are discussing the future of American energy policy. The outcome of these efforts is unknown, but forward-thinking investors already expect big changes in the energy sector. The markets’ preparation for a less-polluting future includes the October announcement that First Solar, a solar-power technology firm, will soon join the benchmark Standard & Poor’s 500 index.

Investors expect a bright future for First Solar, a FTSE KLD Index constituent since 2007, partly because they assume that governments will eventually tax carbon emissions. If the carbon output of producers and consumers is taxed, then the relative cost-efficiency of solar and other renewable energy sources will increase.

Dirty Fuels Are Expensive, Even Without a Carbon Tax

To tax carbon, or not to tax? Is that the question?

It’s not the only question to ask about our fuel mix. The status quo may be economically unsustainable even before we put a price on carbon: New government research finds that non-carbon emissions annually impose over $100 billion in unaccounted-for costs on our economy.

Keith Johnson of the Wall Street Journal has written about a massive federal study of the unpriced costs, or externalities, of American energy. “Hidden Costs of Energy: Unpriced Consequences of Energy Production and Use” is a 374-page inquiry into this issue by the National Academy of Sciences.

Mr. Johnson writes that while the Academy quantified the impact of particulate and other emissions, they declined to assign a price to carbon. Investors and policymakers should note that, even if we assume that carbon emissions are “free,” fossil fuel consumption is not:

“America’s current energy mix carries a ‘hidden cost’ of about $120 billion a year, the report found. And that number doesn’t include any tally for the cost of greenhouse-gas emissions or climate change—estimates for climate costs range from $1 to $100 a ton of carbon dioxide emissions, but are so variable the report didn’t quantify them. …

“The $120 billion figure boils down to coal and cars. Transport costs the country $56 billion. Coal-fired electricity costs the country $62 billion per year, largely in health impacts from particulate matter. Natural gas for power generation, in contrast, adds about $740 million a year in hidden costs.

“Looked at another way, coal’s hidden price tag adds up to 3.2 cents per kilowatt hour. Compare that to the 2 cents per kilowatt hour that wind power gets from the government—that’s less a subsidy than a partial attempt to level the playing field.”

The Price of Particulates, SO2, and NOx

“Hidden Costs” lists the pollutants accounted for by the 3.2 cents per kilowatt hour price:

“Regarding Comparisons Among Fuels for Electricity Generation:
In 2005 damages per kWh from SO2, NOx, and PM (particulate) emissions were an order of magnitude higher for coal than for natural gas plants: on average, approximately 3.2 cents per kWh for coal and 0.16 cents per kWh for natural gas (2007 USD). SO2, NOx, and PM emissions per kWh were virtually nil for electricity generation from nuclear, wind, and solar plants and not calculated for plants using biomass for fuel.”

The Academy also admits that current research does not sufficiently account for environmental impacts beyond combustion emissions:

“Continued improvement is necessary of methods to quantify and monetize ecological impacts of all stages of the life cycle of electricity generation, especially of fuel extraction, emission of pollutants, and land-use changes. Similar needs exist for other types of energy production and use.

“For fossil fuel options, more research is needed to quantify and monetize the ecological and socio-economic impacts of fuel extraction, e.g., of mountaintop mining/valley fill.”

Coal is Costly, Believe in Climate Change or Not

The Academy concedes that the study hasn’t revealed all the “Hidden Costs” of the American energy sector. Still, their work is a valuable policy tool. By reaffirming that carbon isn’t the only costly externality of fossil fuels, “Hidden Costs” could support a more productive discussion of our energy future. Even those who don’t believe in man-made climate change would concede that $120 billion is a lot of money to send up in smoke every year.

As KLD President Peter Kinder told an investors’ forum on energy last spring, “We should be careful not to let ‘carbon’ become a proxy for ‘environment.’ Carbon is only one part of the case for change.”