Internalization of External Costs of Energy Generation in Central and Eastern European Countries

Abstract

In this article a bottom-up approach to quantification of air pollution externalities from electricity generation is used to show that market-based instruments are not very effective in internalizing these external costs in six CEE countries. Although governments in CEE countries have regulated air emissions by imposing strict command-and-control measures, most of them have also introduced air emission charges and more recently taxes on electricity. We find however that the level of internalization by these two economic instruments is fairly low for existing fossil-fired power plants ranging from 3% for coal- and lignite-fuelled plants to 31% for gas-fuelled plants. The picture improves if cross-subsidies for renewable electricity are accounted for but the internalization level is still below air pollution–related external costs, between 9% and 55% for coal- and oil-fired power plants. A substantial overinternalization by these three instruments is however encountered in the case of gas-fired power plants.