Historical responses to environmental externalities in electric power

Abstract

This paper argues that policies in the USA to internalize environmental externalities from coal fired power plants have been linked to the evolution of our conceptual understanding of externalities and how externalities can be internalized. Government policies are divided into three periods: before the passage of the National Environmental Policy Act (NEPA) in 1969; between the passage of NEPA and actions in 1989 by the State of New York's Public Service Commission to include environmental externalities in integrated planning; and from 1989 to the present, which includes various state actions to explicitly include environmental costs in decision making, and the marketable emission allowances included in the 1990 Clean Air Act. The positions of economists, policy makers, and the general public have tended to converge over time to reach the current acceptance of, if not preference for, economic incentives as alternatives to command and control regulations. In recent years economists have moved from their strict emphasis on economic efficiency to questions of equity and implementation. At the same time policy makers, disciplines other than economics and the general public have come to appreciate the cost saving aspects of economic incentives. Future responses to environmental externalities in electric power will depend on the abilities of economists to accurately evaluate and communicate the pros and cons associated with economic incentives and on the willingness of policy makers and the general public to appreciate the benefits, as well as tolerate the compromises, that a move to a market based system will entail.