The Economics of Extraction Debt

Extraction Debt. It’s why WV is so poor, even with all our wealth of resources.

Extraction Debt, modeled on Climate Debt, is a term that expresses the economic concept that extraction externalities are imposed disproportionately on those in Sacrifice Zones. Econ nerds are already familiar with the ideas of negative externalities and socialized costs, but the concept of Extraction Debt emphasizes the fact that with extraction, social costs are not spread out equally over everyone. They are localized.

In fact, studies show that when you live in a poor, rural community, you’re far more likely to bear the burden of these corporate assaults. Worse, a political system influenced by corporate campaign contributions—a political system like the one we have in this country—encourages our representatives to work for industry rather than stand up to protect the property rights and property values of those least able to defend themselves.

Even though we must continue to use fossil fuels during the transition to renewables, we cannot continue to shift costs of the extraction to small, impoverished communities like those in West Virginia, while allowing Resource Barons to pocket a disproportionate amount of the profits. It’s not just.

Extraction Debt

Extraction Debt is the portion of the costs of extraction that Resource Barons receive as forced subsidies from those who live in Sacrifice Zones.

The subsidies are forced on us because we can’t decline to breathe polluted air that negatively impacts our health, for example, nor can we decline to participate in the risk of spills, explosions, other catastrophes, or the costs associated with the fallout. In fact, in West Virginia, whole towns are begging to be relocated due to contamination, but so far, to no avail. Relocating citizens would mean admitting to the problem, and thus would result in forgoing campaign donations or profits—or both, for some politicians.

Extraction Debt quantifies the cost of negative externalities that industry socializes on a local population in order to get more than they’re entitled to. 

When you’re counting your pennies and responsibly order the simple side salad you can afford, it’s not fair to require you to pay half the bill, not when your wealthy dining companion enjoyed a five course meal, sent appetizers and several rounds of drinks to all his friends, and ordered bottles of wine and extra desserts to take home.

The costs of someone else’s extravagance and greed should not be socialized on you.

Negative externalities

In an unregulated market, these “negative externalities” occur when costs are not paid by the producer, but by everyone else. In the case of coal, oil, and gas, Resource Barons have lower marginal costs of extraction when they shift their costs onto local populations. Instead of costs that the company pays to prevent spills, do proper clean up, protect clean air and water, avoid reducing the property values of residents, maintain worker safety, and so on… those costs are placed onto folks outside or external to the company. It’s placed on us.

But we deserve good neighbors, not corporate invaders.

So here are the big words: In the classic econ graph showing negative externalities, the industry supply curve shifts rightward, with the effect that industrial equilibrium occurs at a lower cost than social equilibrium. There is a market inefficiency—in this case a loss of social welfare—because marginal social cost is higher than marginal social benefit.

What that means in plain English is that what small communities pay to host the extraction industry outweighs the benefits we get. It’s making us poorer. And the profits these companies make to be here are a great bargain, because they don’t have to pay their way.

We do. We pay their way. It is a transfer of wealth from the poor to the rich. And it’s why our state struggles. But we pay in more than just money. We also pay in years from our lives.

This is nothing new, so far. It’s Econ 101.

But here’s the rub. The negative externalities we’re calling “Extraction Debt” are quantifiable. We can calculate the total Extraction Debt and make sure extraction-impacted areas are getting a fair amount in return for what we’re losing.

Extraction Debt Graph

Local costs, distant profits

To calculate the Extraction Debt, we’ll need to determine what costs are being socialized, and what geographical areas are being targeted. The key to understanding Extraction Debt is that it targets local areas disproportionately.

So, where regulation typically aims at getting industry to “internalize” the negative externalities— “carbon tax,” for instance, is an effort to get industry to pay production costs equivalent to the social marginal cost—government must return the revenue to the areas bearing those costs, or it’s complicit in the impoverishment and abuse of extraction targets.

The idea of abandoning the Clean Power Plan is monstrous and backward-thinking. For our long term economic good, we should adopt policies that encourage elasticity in the demand curve as our supply curve shifts left. Economic forces are moving us that way already; the cost of renewable alternatives have dropped significantly.

That’s what a smooth transition to renewables will look like in economic terms.

Plus, when extraction industries are required to pay their Extraction Debt to the communities they’ve victimized, we’ll increase overall social welfare by addressing the negative externalities of the extraction activities. In other words, when targeted communities are fairly compensated, it will baffle the redistribution of wealth that is right now shifting prosperity from the poor to the rich.

Splitting the bill fairly, not equally

Those who live nearest the Sacrifice Zones are bearing the balance of the external costs, thus extraction-impacted areas are being forcibly impoverished because that’s where the loss of social welfare is centered. And when we don’t recognize Extraction Debt, there is also a perverse incentive to shift as much of those costs on local populations as possible.

For example, Antero wishes to locate a frackwaste disposal project within the peripheral zone of concern for the ONLY public drinking water intake in Ritchie County. They’re jeopardizing the water supply, they’ve said, because the location will save them money. In doing so, they’re shifting the costs onto us.

By contrast, if they were legally responsible for paying Extraction Debt, they’d be incentivized to put their facility in a place that’s safer for the people who live here, because reducing their impact on us would reduce their total costs. Since they are currently being permitted to socialize their costs on others, and pocket the profits, they actually have a financial incentive to behave unethically.

And politicians have a financial incentive to allow it.

Having a small carbon footprint for extraction is great, but when making fiscal policy, we must remember that when the the industrial jackboot is reduced and concentrated over a small area, those few people beneath it are bearing the vast majority of the external costs of extraction. It’s a deeply unfair burden. And even if environmental and regulatory action eventually achieves success in transferring the costs of production back onto Extraction Barons, if we don’t use those revenues to restore the balance with the impacted communities specifically, they’ll still be suffering from a Resource Curse.

Data shows us that areas with an abundance of resources don’t actually benefit from them: that’s the Resource Curse. For example, extraction zones are more prone to price shocks from market volatility, especially where the economy lacks diversity, as is often the case for areas rich in resources. The “tiered severance taxes” our Coal Baron-in-Chief Governor wants to push are simply a sleight-of-hand meant to shift the price shocks further onto impoverished extraction communities: they pay us less while doing the same amount of damage to our infrastructure. And the taxes raised to fund the recent road bond hit rural workers hardest, while none of that money actually goes into our communities. We’re paying for the improvement of infrastructure elsewhere, while driving on frack-destroyed roads.

But we don’t just pay in money; we also pay in years. Poverty, stress, and exposure to extraction pollutants literally shorten the lives of impacted communities. Cancer rates are higher. Cardiovascular disease, asthma: all occur at elevated rates. Extraction Debt is siphoning away our friends, our family, our quality of life, and even our own retirement years.  In McDowell County, they pay an average of 10 years per person. Surrounding counties are also paying.

Resource Barons, with government help, are feeding their monstrous craws with the years and wealth they’ve stolen from us.

Extraction is the economic weapon of the new century—and an effective one at that. It kills people slowly and lays waste with generational poverty and environmental destruction. This is why we need to recognize that there is an Extraction Debt owed to these communities. Because otherwise, we’ll also continue to sacrifice our citizens to satisfy the ravening Barons.

No longer do Robber Barons need to plunder villages with swords and arms. With regulatory and/or judicial complicity, the extraction industry can jab a siphon into our veins and drain our lives away. They simply appropriate our air and water, and transform them into wealth for themselves.

In essence, Extraction Debt is the modern weapon of corporate pillage. Launch it at a community, and watch the fiscal destruction that follows.

Saint George and the Dragon

It reminds me of the tale of Saint George and the dragon.

In the classic story, when a dragon begins making its nest at the source of a town’s water—either a lake, fountain, or spring, depending on the version of the tale—in order to distract the dragon long enough to retrieve water, the town begins offering sacrifices to the beast.

First they offer sheep.

And when they run out of sheep, they begin offering their children.

Eventually the heroic Saint George arrives. He defeats the dragon just as a young princess is about to be sacrificed. The maiden is saved, and the water source is restored—hooray! (So very sorry about all those kids who were eaten, but at least the princess is okay.)

Well, it’s now 2017. Do we really need to wait for there to be a literal royal damsel in distress for someone powerful to intervene on our behalf? Can we agree that this energy transition period, where our society offers a sacrifice of children, is something we can do without, something we abhor?

And can we recognize that maybe princesses are not the only ones worth making the effort to save?

Policy impacts of Extraction Debt

Even those of us here in the Sacrifice Zones realize that this world is not going to simply stop using fossil fuels tomorrow. But until we are able to shift to a sustainable level of production, we need make sure Extraction Debt is paid, so the communities that have sacrificed so much can be repaid and renewed. Let’s stop sacrificing children to the dragon. Let’s not wait until it’s the turn of the princess to die before Saint George arrives to put the monster down.

This isn’t just “Aarne-Thompson folktale, type 300.” Much of the costs we must bear, such as environmental impacts cannot be reversed. People in sacrifice zones are dying, losing years of their lives. But we can stem the tide.

Calculating Extraction Debt

With regard to coalfield areas we know “The heaviest coal mining areas of Appalachia had the poorest socioeconomic conditions… the number of excess annual age-adjusted deaths in coal mining areas ranged from 3,975 to 10,923, depending on years studied and comparison group. Corresponding VSL estimates ranged from $18.563 billion to $84.544 billion, with a point estimate of $50.010 billion, greater than the $8.088 billion economic contribution of coal mining… [T]he number of excess annual deaths in mining areas ranged from 1,736 to 2,889, and VSL costs continued to exceed the benefits of mining. Discounting VSL costs into the future resulted in excess costs relative to benefits in seven of eight conditions, with a point estimate of $41.846 billion.”

We’ve had far less time to study fracking—and there are severe gaps with regard to policy response on this issue. But what we do know is that people who live in extraction areas shoulder the risks of explosions, spills, and catastrophe, and we do have some ability to quantify it. We know that proximity to extraction activities increases the likelihood of illness, including the likelihood of respiratory distress and even the likelihood of cancer.  Children are particularly vulnerable, but even so, in WV nearly 25% of our schools are located within two miles of a fracked well. We can certainly argue about whether these health impacts are caused by to toxic fracking chemicals, inert particulate inhalation, diesel exhaust exposure, the stress of the loss of the things we value, or some combination, but the fact remains that they are socialized extraction costs that our communities are paying.

The Extraction Debt is adding up. Public policy must take this debt seriously.

It’s time for Resource Barons and the nation to pay up so our hard-working miners and those in impacted communities—those who have paid so much more than our share for so long—don’t continue to suffer.