Impacts of Price on Environment & Society

Energy prices impact the ability of countries to harness energy for economic growth and development. Relatively low energy prices can be beneficial for developing economies, allowing for increased access to energy services such as electricity, modern cooking and heating fuels and transportation. Energy prices also have implications for the environment through the connection with energy demand; low energy prices encourage more energy use – for instance, greater use of transport fuels – creating more emissions which are linked to climate change. (See Energy & the Environment). At the same time, low energy prices may discourage exploration, development or technology investments in the energy sector. This in turn could have a negative impact on the macro-economies of nations that have significant energy exploration and production activities. The relationship between energy prices and economic development is clearly complex yet certainly intertwined. (See Energy & Development).

Lower commodity prices are typically good for energy consumers – industrial consumers, electric power generators and other "customers" – who use them for power generation or for other industrial purposes. As the following figures illustrate, coal has historically offered a substantially lower cost fuel for electric power generation in the United States. However, an implication of expanded coal use is that, without investments in clean coal technology, coal will continue to be a key contributing factor to emissions of gases that contribute to global climate change. Energy prices also influence choices individuals make about transportation; higher prices generally lead consumers to reduce gasoline consumption, which has implications for carbon emissions.1 (See Energy & the Environment).

Energy prices also influence the types of energy sources we use and the viability of new technologies; high energy prices can encourage investment in alternative resources and the technology needed to make those resources available for use. Low prices may discourage such investment and research activities. (See The Energy Portfolio). Since energy prices are a key driver of economic growth and development, we must assess our choices about energy supplies carefully and consider both the direct and indirect implications of the energy supply tactics chosen to address climate change.

Energy Prices and Actual Costs

While energy prices reflect the economics of supply and demand, they do not capture the environmental costs of energy consumption, known as externalities. For this reason, there are various proposals and mechanisms in different parts of the world that are attempting to place a price on carbon via carbon taxes or markets for trading carbon credits. If externalities were factored into prices, consumer choices among energy options would likely change.

Taxes and Regulation

The figure shown previously (Costs That Factor into a Gallon of Regular Gasoline in the section What Factors Impact Prices?), which shows the factors that go into oil and gas prices, indicates that federal and state taxes also play a large role in determining end customer fuel prices. In fact, these taxes – along with distribution costs – are one of the most significant factors in determining regional differences in prices in the United States. Similarly, prices consumers pay differ substantially around the world due largely to differences in taxes and in currency values.2

Price disparities between countries are caused by government policies, subsidies and taxes, as well as by other factors such as local access to supplies, location and distribution costs. In some countries, governments subsidize fuel prices to make energy more affordable to their populations; other countries do the opposite. The figure below demonstrates the average price of gasoline in the United States versus the average price in several European countries. The price differential is attributable to many factors, including location, access to supply, foreign exchange conditions and tax structures. In addition to simply using gasoline taxes to raise revenue, many European countries attach higher taxes to gasoline as a direct incentive to reduce greenhouse gas emissions.3

Price Stability

Since consumers, investors, and industries rely on energy as inputs into their activities, abrupt changes in energy pricing create difficulties for planning. But, price volatility is part of the price “discovery” process, and sends important “early warning” signals to both energy producers and consumers.

1. 1 "Short-Term Energy Outlook," EIA. http://www.eia.doe.gov/steo
2. 2 "The Price of Fuel: How Countries Compare," http://www.thepriceoffuel.com/howcountriescompare/
3. 3 Ibid.