The U.S. Senate’s failure to pass the energy bill supported by the Bush administration last week was a temporary victory for the environment and for common sense. Now one can only hope that the bill’s opponents manage to prevent its passage until the nation elects a new president next November.

The energy bill, which has been one of President Bush’s highest legislative priorities since he took office, was called “the most anti-environmental piece of legislation in modern history” by League of Conservation Voters President Deb Callahan. It would provide $31 billion in subsidies and tax breaks to the energy industry over the next 10 years, including more than $18 billion in perverse subsidies to the fossil fuel and nuclear industries — industries that a sensible energy policy would seek to discourage rather than promote.

The energy bill is a terrible measure for numerous reasons; one glaring example is the legal immunity it would grant to producers of MTBE, a toxic gasoline additive that has contaminated groundwater supplies and led to increased cancer rates around the country. But the chief reason the bill should never be signed into law is that it exacerbates one of the most serious deficiencies in our economy — the failure of market prices to reflect social and environmental costs.

Costs not borne by producers or consumers but by society at large are known as negative externalities. Externalities distort markets and lead to inefficient levels of consumption, and the energy sector is one of the areas of the economy with the most pronounced negative externalities.

Coal and oil-fired power plants, for example, impose significant costs on the environment and society that are not included in the price of the energy they produce. These costs are due primarily to the high levels of air pollution emitted from the combustion of fossil fuels, although there are also externalities associated with environmentally destructive extraction methods, such as strip mining for coal or drilling for oil in ecologically sensitive areas.

Air pollution inflicts a host of problems on human beings and the natural environment. Pollution causes serious health problems, including asthma, bronchitis and other respiratory diseases, which have become increasingly common in recent years, especially among children. In addition to reducing quality of life for people who suffer from these ailments, health problems generate economic costs to society through increased expenditures on health care and decreased productivity of workers.

In addition, air pollutants such as sulfur dioxide and nitrogen oxides cause acid rain, which kills and damages plants, animals and ecosystems. Some of these costs can be quantified in terms of lost revenue from agriculture, forestry, fishing and other activities. Particulate matter and ozone pollution also decrease aesthetic qualities, which reduces property values and the enjoyment of scenic vistas.

Furthermore, carbon dioxide emissions produced by fossil fuel combustion are largely responsible for global climate change, which could have devastating consequences for life on earth. Synergistic effects brought on by the combination of loss of biological diversity and rapid climate change could lead to the collapse of entire ecosystems if greenhouse gas emissions are not stabilized soon.

Instead of subsidizing the production of energy from coal, oil and gas, the government should correct the inefficiencies of the market and incorporate the social and environmental costs of fossil fuel combustion into the prices of energy derived from those resources. The most effective tools for internalizing negative externalities into prices are pollution taxes, which were first proposed by the economist Nicolas Pigou in the 1920s.

If the true costs associated with burning fossil fuels were incorporated into energy prices through appropriate taxes, energy produced from those sources would become much more expensive. This in turn would lead demand for oil and coal to fall to economically efficient levels, create incentives for energy conservation, and make clean, renewable resources such as wind, solar and geothermal energy more competitive. Pollution taxes need not increase the country’s overall tax burden, as they would enable the government to reduce income taxes or other taxes by a commensurate amount.

The Bush administration and its allies in the Senate are right about one thing — energy is a critical issue today and we clearly need a new policy to guide the development of our national energy resources. Unfortunately the administration and the Congress have produced a bill which is nearly the exact opposite of an optimal solution.

A sound energy policy would promote the development of clean, renewable energy resources that benefit society, and discourage dirty energy sources through pollution taxes. Those of us who understand this should keep up the pressure on our elected representatives to oppose this bad energy bill, and work to elect new national leaders who will promote thoughtful energy policies based on economic efficiency.

Justin Pollard is a third-year joint master’s degree student at the School of Forestry & Environmental Studies and the School of Management.