Contents

Introduction

Examples of Externalities

The Role Of Externalities

Estimating The Cost Of Externalities

Estimating the Value of Emission Reductions

Estimating Pollution Coefficients

Resources

Links

Externalities are costs and benefits that are external, or outside, the price you pay for something. Energy externalities can be environmental or non-environmental.

"Externality is a general term for a wide variey of costs and benefits which are not included in prices."

These costs are important to planning our energy use over the long term, because ignoring them leaves society open to the full range of "side-effects" associated with fossil fuel useage, the impacts of which we are just beginning to understand.

Long term energy solutions such as solar water heating must compete in a world where, presently at least, the consumer sees only the price and not the real cost of the energy choices they make. We must better understand the role externalities play in our energy choices so that we may educate others and act pro-actively to assure a sustainable future.

* * Consider This * *

Estimated Number Of Deaths In The USA Annually Due To:
Outdoor Air Pollution (total) = 335,000 deaths
Indoor Secondhand Cigarette Smoke = 40,000 deaths

Is it fair to ask - "Given that ten times more people die from air pollution than secondhand smoke, and transportation is responsible for about half of all air pollution, when can we expect to see ads depicting a small, innocent, sad child looking hopefully into the camera asking parents not to buy a sport utility vehicle?"

References:
American Lung Association Fact Sheets

Outdoor Air Pollution
Secondhand Smoke

Examples of Externalities

Environmental

Cost: Environmental damage associated with production and transportation activities (species die-off or poisonings, destruction of natural fertility, oil spills).

Cost: Flooding of low elevation areas and an increase in home and property damage from extreme weather associated with climate change.

Cost: Damage to other industries or human activities (agriculture, forestry, fisheries, materials damages, impaired visibility).


Non-Environmental

Cost: Defense of foriegn fossil fuel resources.

Cost: Health costs associated with pollution (cancer and non-cancer, acute poisonings and chronic conditions).

Cost: Loss of jobs (renewable and efficiency technologies create more jobs per unit of energy than generation technologies).

The Role Of Externalities

The quality of the environment, both now and in the future, is an important issue worldwide. For this reason, externalities are beginning to show up in the decision making process, but in limited ways. In general, the "social cost" of gas and electricity generation can apply to environmental impacts, impacts on production, trade balances, depletion of nonrenewable resources, defense of foriegn fossil fuel resources, and many other impacts.

For example, Public Utility Commissions (referred to as "P-U-C's") are mandated to ensure utilities act in the public interest. One way they accomplish the public interest is to help ensure utilities minimize the social costs associated with utility generation. The value of "social costs" from a PUC perspective, however, is limited to environmental impacts. Another example is the U.S. Forest Service, which also includes environmental impacts in their decision making process for facilities.

Estimating the Value Of Externalities

State and Federal Agencies, Local Governments, and other decision makers are currently making economic decisions that include the cost of externalities. With concern about Global Warming rising, it is likely that the inclusion of externalities in economic decisions will continue to become more popular. The cost of externalities can be calculated using the equation:

Although the equation is straightforward, estimating the dollar value of emission reductions and the pollution coefficients can be very difficult. The purpose of this section is to introduce decision makers to the issues involved and provide examples of how these values have been addressed by others.

Estimating the Value of Emission Reductions
The value of emission reduction is a very contentious subject, as the basis for the value of "social costs" depends on the point of view of those who set the underlying assumptions involved. Table #1 contains examples of emmission reduction value estimates extracted from a 1990 NARUC (National Association Of Regulatory Utility Commissioner) "Conference On Externalities" report (3).

Although much of the data from the NARUC report is based on research conducted between 1988 and 1990, it provides an overview of the thinking at that time. Most experts believe the value of emission reductions will continue to rise into the future given projected world population growth, economic growth, and the subsequent difficulties in meeting Global Climate Change agreements.

SOURCE OF DATA
	NOx	ROG (e)	CO2 (f)	CH4	N2O	SOx
SCAQMD (a,g)	$24,500	$17,500				$18,300
Beach (h)	$19,000
Hertel (i)	$40,000
Marcus (j)	$18,800					$1,800 (j)
						$590 (p)
New York (k)
ACT (b)	$3,417		$44.00			$669
MCT (c)	$2,700		$18.00			$486
Chernick (l)	$3,000		$21.80			$700 to
						$1,560
Nordhaus (h)			$18.35
Steinberg
And Cheng (o)			$56.00
IEP (d) Recommendation (m)
SCAQMD	$24,500	$17,500	$14.70	$375	$3,700	$18,300
California	$18,800	$1,130	$14.70	$375	$3,700	$1,800
Out-of-state	$2,700	$665	$14.70	$375	$3,700	$1,000

Notes:

a	SCAQMD = South Coast Air Quality Management District (California)
b	ACT = Advanced Control Technologies
c	MCT = Mixed Control Technologies
d	IEP = Independent Electrical Producers (California)
e	Minimum value based on vapor recovery devices. Subject to upward revision if local air quality management districts prescibe more costly regulations to control reactive organic gases (ROG).
f	Values for SOx and CO2 are developed in dollars per ton of pollutant. For dollars per ton of elemental carbon, multiply by 3.67. For dollars per ton of elemental sulfur, multiply by 2.0.
g	South Coast Air Quality Management District, "Draft Best Available Control Technology Guidelines," October 7, 1988.
h	R. THomas Beach, prepared testimony on behalf of Pacific Gas Transmission Company, CPUC 011, 88-12-027, June 1989.
i	Dennis Hertel, testimony for Southern California Edison Company. Hearing on SCAQMD Rules 1134 and 1135, June 14, 1989.
j	W.B. Marcus, prepared testimony on Marginal Cost and Revenue Allocation on behalf of Toward Utility Rate Normalization, CPUC App. 88-12-006, Exhibit 235, April 1989.
k	New York State Energy Office, Division of Policy Analysis and Planning, Environmental Externality Issue Report, February 1989.
l	Paul L. Chernick, unpublished Paper on Externalities prepared for Boston Gas Company, January 1989.
m	Gayatri M. Schilberg, Jeffrey A. Nahigian, and William B. Marcus, "Valuing Reductions in Air Emissions and Incorporation into Electric Resource Planning: Thoreretical and Quantitative Aspects," August 25, 1989, CPUC Docket 88-ER-8.
n	William D. Nordhaus, "Economic Policy in the Face of Global Warming," March 9, 1990 (unpublished).
o	H.C. Cheng and M. Steinberg, "Effects of Energy Technology on Global CO2 Emissions," prepared for the Carbon Dioxide Research Division of Office of Basic Energy Sciences of U.S. Department of Energy, November 1985.
p	W.B. Marcus, prepared testimony of behalf of the Small Power Producers Association of Nova Scotia, Nova Scotia Public Utilities Board, N.S. Power Corp. Work order to Construct Point Aconi Coal Plant, March 1989.

Estimating Pollution Coefficients

The combustion of fossil fuels such as gas (natural or propane), oil and coal produces a fixed amount of emissions per MBtu (million BTU, or British Thermal Unit) burned. Any time fossil fuel use is reduced by some percentage, pollution is reduced by the same amount. The impact of burning fossil fuels is thus pretty straight-forward.

Table 2 provides a summary of fossil fuel pollution coefficients. Note that one of the worst greenhouse gases, CO2, is emitted in very large amounts when fossil fuels are burned. The other pollutants are sulphur dioxide (SO2), nitrogen oxides (NOx), carbon monoxide (CO), hydrocarbons (HC), and particulate matter (PM).

The pollution created by off-site power plants is much more difficult to estimate than that from the (on-site) burning of fossil fuels. The pollution from a power plant depends on what source(s) of fuel were used to generate the electricity, a factor that can vary - from hour to hour - with most utility providers! And for an economic analysis to account for the value of pollution reduction over the course of the "economic analysis period" there's the question of what source(s) of fuel will be used in the future.

Table 3a provides an example of average (off-site) pollution coefficients for electricity generated from burning gas, oil, or coal. Because some power plants burn a combination of these fuels, as well as others, the pollution coefficient(s) must be applied accordingly. Also, electricity purchased "from the grid" could come from just about anywhere, making the source fuel difficult to predict. Coal might be used to satisfy customer electrical loads except during peak periods, such as when air conditioners all come on during a hot summer afternoon, at which point a natural gas based generation source might come on line. For this reason, simplified estimates are often made based on information such as that in Table 3.

To determine the particular mix of fuel sources used to generate electricity in your area, check with your State Energy Agency. For example, The California Energy Commission has on-line information concerning where it's electricity comes from as well as a historical perspective regarding the various energy sources used to generate that electricity.

Notes regarding Table 3:
1) Efficiency of electricity production assumed to be 28.5%, which includes transmission losses, in-plant use and combustion losses; based on utility-sized boilers (versus industrial-sized boilers used in on-site electricity production).
2) Surphur Dioxide estimates in Table 3b are EPA Green Lights regional estimates and are aggregations of state pollution emission factors; electrical energy assumed equally divided between fossil fuel types, nuclear, hydroelectric, and other sources as per state percentage breakdowns for electricity production.

Resources

Note: Abstracts provided below are from the resources listed.

1) "Hiding The True Costs of Energy Sources", The Wall Street Journal, Sept. 17, 1985, by H. Richard Heede and Amory B. Lovins.

2) "Contribution of Working Group III to the Second Assessment Report of the Intergovernmental Panel on Climate Change," Bruce, J., Lee, Hoesung and Haites, E. (eds.); Dec 1995.

Abstract: The social costs of climate change will vary dramatically from country to country. This landmark assessment addresses the response options, applicability of cost-benefit analysis to climate change, and the costs faced by the many countries committed to limit greenhouse gas emissions by 2000. The eleventh session of the Intergovernmental Panel on Climate Change (IPCC) met in Rome from 11-15 December 1995. Some 500 experts from 120 countries attended the meeting to adopt the Second Assessment Report, which was drawn up with the help of 2,000 scientists worldwide. Like its First Assessment Report, which was published in 1990, the IPCC's Second Assessment Report was prepared by three working groups. Working Group I analyzed the functioning of the climate system and potential changes to it resulting from human activities. Working Group II assessed potential impacts of climate change, adaptation strategies, and measures that could be adopted to reduce greenhouse gas emissions. Working Group III focused on evaluating the economic implications of climate change.The draft Second Assessment Report, which highlights a "discernible human influence" on climate, goes beyond the 1990 report when human influence on climate was something that could not really be concluded at all. WMO Secretary-General Godwin Obasi told the delegates at the opening ceremony this conclusion was "a warning to humanity that we have gone beyond the point where the sustainable use of the atmosphere as a highly mobile dump for man's waste is possible without serious consequences". Based on the findings of the three working groups, the draft report says that the earth's temperature could rise by between one and 3.5 degrees Celsius by the year 2010 ó an average rate of warming probably higher than any in the last 10,000 years. It says it would expect temperatures to continue rising after that, even if emissions of the greenhouse gases such as carbon dioxide and methane that trap heat in the atmosphere were stabilized at that time. While not all scientists agree on the causes, or even the phenomenon of global warming, most believe the build-up of such gases, to a large part caused by burning fossil fuels, could have drastic consequences. The draft IPCC report came under fire from major oil producing countries, who want no action on cutting emissions until there is scientific certainty. These countries spent much of the week attempting to block adoption of the report. The IPCC report will be published in the following three volumes in early 1996:

Volume 1: The Science of Climate Change;
Volume 2: Scientific-Technical Analyses of Impacts, Adaptations, and Mitigation of Climate Change
Volume 3:. Economics and Social Dimensions.

Source/availability: all three working group volumes can be ordered from: Cambridge University Press Distribution Center, 110 Midland Ave, Port Chester, NY 10583 USA; tel: +1-800-872-7423 (US); +1-914- 937-9600 (outside US); fax: +1-914-937-4712; document can be ordered from World Wide Web: http://www.cup.org; info above was obtained from:

http://www.iisd.ca/linkage/climate/news.html (Recent meetings).


3) NARUC Documents (National Association of Regulatory Utility Commissioners)

"Proceedings - National Conference on Environmental Externalties, Jackson Hole Wyoming;" Oct. 1990.

Note regarding Table 1, above : this table is taken directly from a report from these proceedings entitled "Introduction To The Use Of Social Costs In Utility Planning And Regulation," written by Erik F. Haites, Principal of Barakat & Chamberlin.

Abstract: These proceedings contain a number of landmark papers authored by nationally recognized professionals from Public Utility Commissions ("PUC's") around the U.S., as well as the U.S. DOE, National Labs, state energy offices, etc.

Categories of papers include:
ï Environmental Challenges of the 1990's
ï Environmental Externalities: What Are They and Why Should They Be Given Consideration in The Planning & Regulatory Process".
ï Introduction to The Economies of Social Cost.
ï The Valuation and Quantification of Social Cost in The Production and Consumption of Energy
ï Regulatory Processes: Legal and Institutional Barriers
ï Regulatory Processes and Externalities
ï Externalities and Rates - Who Pays and How Much?
ï Externalities: Federal Views, Social Costs, and Environmental Assessment Regulations
ï State Regulatory Experiences In Attempting To Quantify and Incorporate Environmental Externalities
ï Reflections on the Future Challenges of Public Utility Regulatiion in Meeting Ther Competing Goals of Energy Reliability and Environmental Protection.

"Environmental Externalities and Electric Utility Regulation;" Sept. 93.
Abstract: ** Coming Soon **

"Promoting Environmental Quality in a Restructured Electric Industry;" Jan. 96.
Abstract: ** Coming Soon **

Source/availability:: All documents above can be ordered from the National Association of Regulatory Utility Commissioners, Room 1102 ICC Building; PO Box 684, Washington DC 20044 (202-898-2200; general number); to order from the NARUC Publications office call 202-898-2203; for questions re. externalities contact Anne Thompson (202-898-2210).


4) "Federal Energy Subsidies: Energy, Environmental and Fiscal Impacts," The Alliance To Save Energy; Appendix A - 5, "The issue of externalities;" April 1993.

Source/availability:: The Alliance To Save Energy, 1725 K Steet, NW, Suite 509, Washington D.C. 20006-1401. Phone: 202-857-0666, Fax: 202-331-9588.


5) CADDET (Centre for the Analysis and Dissemination of Demonstrated Energy Technologies)

Abstract: If your work involves decisions on renewable energy projects you can benefit from the high quality, up-to-date information available through CADDET Renewable Energy.

CADDET provides both specific and general information across all of the renewable energy technologies for those interested in the international status of renewables, their environmental issues and the deployment of renewable energy projects.

CADDET Renewable Energy gathers information on full-scale commercial projects which are operating in the member countries, Currently Australia, Denmark, Finland, Japan, Republic of Korea, The Netherlands, New Zealand, Norway, Sweden, Switzerland, United Kingdom and United States. This information is made available through the following products:

The Renewable Energy Register. The Renewable Energy Register is a database of demonstrated renewable energy projects. Each entry includes a technical description of the project, economic, environmental and performance data, publication references and contacts for further information. The database may be accessed from any IBM-compatible PC system. Copies are available from the National Teams or from CADDET Centre.

Technical Brochures. The Technical Brochures are case studies of projects selected from the CADDET Renewable Energy Register. Each brochure expands on the data available for a particular project and includes the project description, performance information, economics and contact details for further information. They are normally four-page glossy publications and include photographs and illustrations of the installation. Copies of the brochures are available from the National Teams or from CADDET Centre.

CADDET Renewable Energy Newsletter. The Newsletter is a quarterly magazine containing the latest information on renewable energy technologies around the world, highlighting news items, national renewable energy policies, individual projects and special events. The contents are provided by the member countries and include details of current CADDET products. The Newsletter is issued through the National Teams and the CADDET Centre.

Mini-Review Workshops. The added-value of the CADDET Renewable Energy operation is that studies are conducted into various aspects of the deployment of renewable energy projects, carried out by experts in the field. These meetings have been called "Mini-Reviews" and were based on 2-3 day expert meetings, with each of the participating countries contributing a national paper in advance.

Each Mini-Review will produce a final report which will give the latest information on the current status and future trends in each technology and a list of recommendations for further studies which might be undertaken by CADDET Renewable Energy over the coming years. CADDET Renewable Energy has convened three workshops to review the status of:

ï Wind Power; was held in Oxford during April 1995 and was led by Mr Ruud de Bruijne from Novem (the Netherlands). The review concentrated on grid-connected wind turbines. A strong link was established with the IEA R&D Wind Implementing Agreement who offered their recent data on Wind Energy and sent observers to the Mini-Review meeting. A final report on this study is in preparation and will be available shortly.

ï Active (Thermal) Solar Energy; held in Copenhagen during May 1995 and led by Mr Ken Sheinkopf from the Solar Energy Education and Research Foundation (USA). The review covered active solar energy for:(1) domestic hot water systems, (2) commercial buildings and industrial systems, (3) swimming pool systems, and(4) district heating systems. High temperature solar heating technologies were not included. A final report on the study is in preparation and will be available shortly.
ï Energy Crops; was held in Oxford during May 1995 and led by Dr Caroline Foster from ETSU (UK). The review covered "biomass energy from crops and crop residues", including woody crops, herbaceous energy crops, commodity crops (such as maize, cereals, rape, soy bean, etc), forest residues and crop residues. A final report on the study is in preparation and will be available shortly.

The CADDET programme covers the full range of renewable energy technologies:
Wind
Biomass (Energy Crops and Advanced Conversion Technologies)
Waste (Landfill Gas, Municipal, Industrial and Agriculture and Forestry Waste)
Solar (Active, Passive, and Solar Thermal Power)
Photovoltaics
Hydro-power
Geothermal
Tidal/Wave
Combined (Hybrid) Renewable Energy Systems

A number of datasheets are available which contain current information on the CADDET products and prices. Copies may be obtained through the National Teams or from the CADDET Centre.

6) CABET Documents (Center for Atmospheric & Biospheric Effects of Technology)
LBL (Lawrence Berkeley Labs) - Energy & Environment Division

Abstract: Energy technologies benefit society in many ways, but they often trigger adverse biospheric processes-ozone formation and acid deposition, for example-whose complex pathways, components, and impacts cannot be adequately understood without integrated, interdisciplinary study.

The Center for Atmospheric and Biospheric Effects of Technology plans, coordinates, and develops such research while enhancing collaboration in environmental and related sciences among programs at LBNL, the nine campuses of the University of California, and other research institutions.

The Center's major research themes include combustion processes atmospheric transport/transformation of combustion effluent environmental and human impacts of combustion emissions and oxidants human and ecological exposures to chemical pollutants, and health risks therefrom technologies and strategies to reduce the adverse environmental and human impacts of technologies.

The Center also functions as a resource to Lawrence Berkeley National Laboratory on matters pertaining to the atmosphere and biosphere.

Center Head: Joan M. Daisey

Source/availability::
http://eande.lbl.gov/CABET/CABET.html


7) "Energy & the Environment - Creating New Industries," Solar Today Magazine, May/June 96.

Article discusses how economic & environmental issues can be reconciled with help of emerging technologies. Includes CO2 emissions from various types of electric power generation facilities and environmental cost discussion.

8) "Pollution Reduction Through Energy Conservation, REEP Model," Peter G. Stroot, Robert J. Nemeth, and Donald F. Fournier, from USACERL.