Internalization Of External Costs Research Articles

The Internalisation of External Costs in Transport: From the Polluter Pays to the Cheapest Cost Avoider Principle

The European Commission mandated the consulting firm CE Delft to develop a framework for the internalisation of external costs and to devise a number of potential internalisation scenarios for further analysis. The results of their preliminary research are published in a CE discussion paper, and the Commission is now formulating draft legislative proposals which will be subjected to a consultation of stakeholders. The present report offers a critical assessment of the above mentioned CE study, provides a theoretical examination of the relative strengths and weaknesses of the polluter pays principle and the cheapest cost avoider principle in relation to the problems arising in the road transport sector, demonstrates how the cheapest cost avoider principle can be applied in practice by providing examples of external costs in road transport, and puts forward recommendations for the appropriate principles that should guide the Commission's further activities in this area.

Economic assessment of fusion and fusion-driven subcritical systems based on internalization of external costs and benefits

A complete economic assessment of fusion and fusion-driven subcritical system (FDS) systems should include the internalities and externalities, which reflect the costs/benefits of economy, environment and safety. A method of internalization of external costs and benefits, which are quantified by a tax levied on the environmental pollution of energy production, is presented. Based on the methodology, cost–benefit models of FDS are constructed. The economic performances of FDS-I (a typical design of FDS) has been calculated and compared with those of pure fusion energy systems. The impacts of the characteristic parameters of FDS-I on economy have been studied. The results have been specified to give recommendations for the improvement of the design.

From BAT (Best Available Technique) to BCAT (Best Combination of Available Techniques)

Technological choices are multi-dimensional and thus one needs a multidimensional methodology to identify best available techniques. Moreover, in the presence of environmental externalities generated by productive activities, ?best? available techniques should be best from Society's point of view, not only in terms of private interests. In this paper we develop a comprehensive modeling tool, based on methodologies appropriate to serve these two purposes, namely linear programming and internalization of external costs. We conclude that in this context there is in general not a single best available technique (BAT), but well a best combination of available techniques to be used (BCAT). We take a fictitious but plausible numerical example in the lime industry. For a hypothetical plant that has to meet a given demand, we build an original technical economic model within which two scenarios are considered: minimizing the private costs and minimizing the generalized costs (private costs plus external costs). In the first case, only the cheapest fuel is used in all kilns. But in the second case, where the environmental external costs are included, fuel switches occur and cleaner techniques are used. Extending the analysis to the choice of kilns, we find that the socially best combination of available techniques (S-BCAT) is not a fixed one : it varies as a function of the external costs. We therefore trace in a single diagram the whole profile of these best techniques as successive solutions of our linear programs. We conclude by stressing that external cost internalization does influence not only the choice of techniques, but also their appropriate use. Moreover, local environmental conditions play a major role in that choice and in determining that use.

ACROPOLIS: An example of international collaboration in the field of energy modelling to support greenhouse gases mitigation policies

Energy models are considered as valuable tools to assess the impact of various energy and environment policies. The ACROPOLIS initiative, supported by the European Commission and the International Energy Agency, used up to 15 energy models to simulate and evaluate selected policy measures and instruments and then compare their impacts on energy systems essentially in terms of costs of greenhouse gas emissions (GHG) reduction and energy technology choice. Four case studies are formulated considering policies and measures on renewable portfolio schemes and internationally tradable green certificates, emissions trading and global GHG abatement target, energy efficiency standards and internalisation of external costs. The main focus of the project is on the electricity sector. From a large set of quantified results, ACROPOLIS provides an international scientific consensus, on some key issues, which could be useful in assessing and designing energy and environment policies at the world, European and national/regional levels. It concludes that the Kyoto targets (and their continuation beyond 2010 in specific scenarios) could be achieved at a cost around 1% of GDP through global emissions trading, indicating also that this flexibility mechanism is a more cost-effective instrument for GHG mitigation than meeting the goal domestically without trade. It demonstrates that internalising external costs through a price increase reduces local pollutants (SO x , NO x , and others) and it produces other benefits such as triggering the penetration of clean technologies in addition to the curbing of CO 2 emissions.

Combining policy instruments for sustainable energy systems: An assessment with the GMM model

An assessment of the impact of an illustrative portfolio of policy instruments that address different sustainability concerns in the global energy system in areas of climate change, air pollution and introduction of renewable-energy resources is conducted. The effects of a policy set containing three instruments, implemented either individually or in combination, were examined. The policy instruments under examination in this work include: Cap-and-Trade policies imposing a CO2 emission reduction target on the global energy system, a renewable portfolio standard that forces a minimum share of renewable electricity generation, and the internalisation of external costs of power generation associated with local pollution. Implementation of these policy instruments significantly changes the structure and environmental performance of the energy sector, and particularly the structure of the electric-generation sector. The positive effects are amplified when the policy instruments are simultaneously applied, illustrating the potential for synergies between these energy-policy domains. The analysis has been conducted with the multi-regional, energy-system Global MARKAL Model (GMM), a “bottom-up” partial-equilibrium model that provides a detailed representation of energy technologies and endogenizes technology learning.

Internalisation of external cost in the power generation sector: Analysis with Global Multi-regional MARKAL model

The Global MARKAL-Model (GMM), a multi-regional “bottom-up” partial equilibrium model of the global energy system with endogenous technological learning, is used to address impacts of internalisation of external costs from power production. This modelling approach imposes additional charges on electricity generation, which reflect the costs of environmental and health damages from local pollutants (SO 2, NO x ) and climate change, wastes, occupational health, risk of accidents, noise and other burdens. Technologies allowing abatement of pollutants emitted from power plants are rapidly introduced into the energy system, for example, desulphurisation, NO x removal, and CO 2 scrubbers. The modelling results indicate substantial changes in the electricity production system in favour of natural gas combined cycle, nuclear power and renewables induced by internalisation of external costs and also efficiency loss due to the use of scrubbers. Structural changes and fuel switching in the electricity sector result in significant reduction of emissions of both local pollution and CO 2 over the modelled time period. Strong decarbonisation impact of internalising local externalities suggests that ancillary benefits can be expected from policies directly addressing other issues then CO 2 mitigation. Finally, the detailed analysis of the total generation cost of different technologies points out that inclusion of external cost in the price of electricity increases competitiveness of non-fossil generation sources and fossil power plants with emission control.

Internalisation of external costs in the Polish power generation sector: A partial equilibrium model

This paper presents a methodical framework, which is the basis for the economic analysis of the mid-term planning of development of the Polish energy system. The description of the partial equilibrium model and its results are demonstrated for different scenarios applied. The model predicts the generation, investment and pricing of mid-term decisions that refer to the Polish electricity and heat markets. The current structure of the Polish energy sector is characterised by interactions between the supply and demand sides of the energy sector. The supply side regards possibilities to deliver fuels from domestic and import sources and their conversion through transformation processes. Public power plants, public CHP plants, industry CHP plants and municipal heat plants represent the main producers of energy in Poland. Demand is characterised by the major energy consumers, i.e. industry and construction, transport, agriculture, trade and services, individual consumers and export. The relationships between the domestic electricity and heat markets are modelled taking into account external costs estimates. The volume and structure of energy production, electricity and heat prices, emissions, external costs and social welfare of different scenarios are presented. Results of the model demonstrate that the internalisation of external costs through the increase in energy prices implies significant improvement in social welfare.

Identification of Options and Policy Instruments for the Internalisation of External Costs of Electricity Generation. Dissemination of External Costs of Electricity Supply Making Electricity External Costs Known to Policy-Makers MAXIMA

In the present paper, after reviewing the results of the ExternE project and its follow-up stages in the estimation of the external costs of electricity production, we look at the policy instruments for the internalisation of such costs. Emphasis is given to subsidies, such as feed-in tariffs, competitive bidding processes and tradable green certificates to stimulate the use of renewables in the production of electricity. When policy-makers are asked to choose the instrument(s) to internalise the externalities in the electricity production, they have to find a solution that gives the best outcome in terms of efficiency, cost minimisation, impact on the job market, security of energy supply, equity of the instrument, technological innovation, certainty of the level of the internalisation, and feasibility. The choice of the instrument will require some trade-offs among these criteria. Conjoint choice analysis can help in investigating how stakeholders and policy makers trade off the criteria when choosing a policy for the internalisation of the externalities. In this paper we present the first results of a questionnaire that employs conjoint choice questions to find out how policy makers and stakeholders of the electricity market trade off some socio-economic aspects in the selection of the policy instruments for the internalisation of the externalities. The results of this first set of interviews will be useful for further research.

A comparative analysis of energy and CO2 taxes on the primary energy mix for electricity generation

In many countries, economies are moving towards internalization of external costs of greenhouse-gas (GHG) emissions. This can best be achieved by either imposing additional taxes or by using an emission-permit-trading scheme. The electricity sector is under scrutiny in the allocation of emission-reduction objectives, not only because it is a large homogeneous target, but also because of the obvious emission-reduction potential by decreasing power generation based on carbon-intensive fuels. In this paper, we discuss the impact of a primary-energy tax and a CO2 tax on the dispatching strategy in power generation. In a case study for the Belgian power-generating context, several tax levels are investigated and the impact on the optimal dispatch is simulated. The impact of the taxes on the power demand or on the investment strategies is not considered. As a conclusion, we find that a CO2 tax is more effective than a primary-energy tax. Both taxes accomplish an increased generation efficiency in the form of a promotion of combined-cycle gas-fired units over coal-fired units. The CO2 tax adds an incentive for fuel switching which can be achieved by altering the merit order of power plants or by switching to a fuel with a lower carbon content within a plant. For the CO2 tax, 13 €/tonCO2 is withheld as the optimal value which results in an emission reduction of 13% of the electricity-related GHG emissions in the Belgian power context of 2000. A tax higher than 13 €/tonCO2 does not contribute to the further reduction of GHGs. Copyright © 2005 John Wiley & Sons, Ltd.

Corporate optimal production planning with varying environmental costs: A grey compromise programming approach

Corporate environmental and resources management has become more strategically oriented when many pollution charges, environmental taxes, and resources conservation fees have been gradually imposing to the industry. The need for explicit consideration and incorporation of varying environmental costs within production-planning program is becoming critical to corporate management. This paper attempts to assess an optimal production-planning program in response to varying environmental costs in an uncertain environment. The optimal production strategy concerning numerous screening of possible production alternatives of dyeing cloth in a textile-dyeing firm in terms of market demand, resources availability, and impact of environmental costs is treated as an integral part of the multi-criteria decision-making framework based on the grey compromise programming approach. It covers not only the regular part of production costs and the direct income from product sales but also the emission/effluent charges and water resource fees reflecting part of the goals for internalization of external cost in a sustainable society. In particular, all the crucial variables in the model are addressed by interval expressions, the same as they are frequently applied in the grey systems theory, in support of a vital uncertainty assessment, which is much better suited for this particular study than other approaches. Research results demonstrate the applicability and significance of such an approach based on a case study. Industry looking for the competitive advantage of environmental management must be aware of the potential benefits from such an integrated production-planning program once the trend of increasing pollution charges, environmental taxes, and resources conservation fees remains.

Estimation de l'impact de l'internalisation des coûts externes du trafic de fret interurbain en Belgique

The strong expansion of freight road transports throughout Europe is an important source of congestion and pollution, as well as a cause of many accidents. To be solved this problem will require the conjunction of many different remedies. One element of solution would be the promotion and the substitution of transportation modes with less negative effects. This paper is focused on this solution. It presents some results obtained from a detailed modeling of the Belgian multimodal freight transport network inserted within the overall trans-European network. It outlines the results of a simulation of the flows over the Belgian network in 1995 which allows to estimate some of the costs of several external effects of freight transports: the costs of pollution, congestion, accidents, noise and road damages. The paper provides also the simulated impacts on modal choice of a marginal external cost internalization, and an estimation of the corresponding external costs savings.

Social Cost Pricing when Public Transport is an Option Value

A well-known principle of welfare economics states that an efficient allocation of resources can be achieved in a competitive economy when market prices are in line with social marginal costs. When applied to the transport sector, this implies that the price of the various transport modes should be made equal to the sum of marginal production and external costs, like congestion, accidents, pollution, and road maintenance. It is sometimes argued the internalization of external costs would bring about a change in demand patterns with a shift towards public transport and cleaner modes. But public transport is already favoured by discriminatory fiscal treatment. Whereas public services are normally (heavily) subsidized, private transport is taxed in several ways and, in some countries, quite substantially so. The application of the 'optimal pricing' principle, therefore, critically depends on how the subsidization of public services is interpreted. This paper addresses the issue of optimal pricing of urban transport, using different hypotheses concerning the treatment of public services. After reviewing some traditional arguments in favour of public transport subsidization, a new approach, based on uncertainty and option values, is discussed. The implications of this approach are investigated by means of an applied model, where optimal prices for urban transport services in the city of Bologna are computed under alternative assumptions.

Contingent Valuation Methods: Possibilities and Problems

Valuation of external costs created from transport is important to undertake in order to improve the decision-making basis for transport policy. In particular, this information could be utilised with respect to policy measures for the internalisation of external costs as well as with respect to appraisal of specific transport investment projects. A number of methods towards the valuation of external costs have appeared in recent years in parallel with the increased awareness about the environmental problems created by transport. These methods include approaches based on assessing the resources required to reduce the costs as well as utility-based approaches. In particular, the so-called contingent valuation method has been put forward as a way to determine the willingness to pay for various environmental goods/functions for a sample of individuals. This method has been applied in a wide range of empirical context in the last two decades. This paper will provide a critical assessment of contingent valuation methods. In particular, the paper will consider the theoretical and empirical possibilities and problems provided by this method. The paper will include the following sections. Section 1 will identify the need to valuate external costs. In section 2 an overview of contingent valuation methods will be given. This will be followed in section 3 by an examination of the possibilities and problems involved in this method. Section 4 concludes with final remarks and suggestions for further research to improve the method.

Social Cost Pricing when Public Transport is an Option Value

A well-known principle of welfare economics states that an efficient resources allocation can be achieved in a competitive economy when market prices are in line with social marginal costs. When applied to the transport sector, this implies that the price of the various transport modes should be made equal to the sum of marginal production and external costs, like congestion, accidents, pollution, and road maintenance. It is sometimes argued that the internalisation of external costs would bring about a change in demand patterns with a shift towards public transport and cleaner modes. But, public transport is already favoured by a discriminatory fiscal treatment. Whereas public services are normally (heavily) subsidised, private transport is taxed in several ways and, in some countries, quite substantially so. The application of the ioptimal pricingi principle, therefore, critically depends on how the subsidisation of public services is interpreted. This paper addresses the issue of optimal pricing of urban transport, using different hypotheses about the treatment of public services. After reviewing some traditional arguments in favour of public transport subsidisation, a new approach, based on uncertainty and option values, is discussed. The implications of this approach are investigated by means of an applied model, where optimal prices for urban transport services in the city of Bologna are computed under alternative assumptions.

Modeling the Internalization of External Costs of Transport

Increases in traffic congestion and pollution levels in urban areas in Europe have resulted in the need to develop reliable and transferable methods of assessing the environmental and social effects of transport pricing and other regulatory policies. To achieve this, it is necessary to quantify the marginal social costs of transport as a function of travel demand and then to obtain the optimum marginal social cost by maximization of utility subject to budget constraints. The work conducted by Trinity College, Dublin, on a project (TRENEN) funded by the European Union JOULE II Non-Nuclear Energy Program is described. The project involved the development and calibration of an optimization model, the TRENEN model, based on welfare economics to address fundamental issues relating to the external costs of transport. The determination of the optimum function type used to represent the transport demand–delay relationship (which was obtained using an existing four-stage network model) for input to the TRENEN model is described. The TRENEN model is quite different from network modeling in that it is fundamentally macrolevel in its approach and works in an economic framework rather than at a traffic network level. Also discussed is a calibration of the TRENEN model for Dublin, the capital city of Ireland. Dublin currently experiences high levels of traffic congestion, particularly in the morning peak period, resulting from a heavy demand for car travel and the poor level of service associated with public transport. The possibility of using the TRENEN model, which addresses the issue of “social equilibrium” at a macrolevel, in conjunction with the more traditional “network equilibrium” approach used by traditional four-stage microsimulation modeling techniques, is discussed.

Cost Savings from Nuclear Regulatory Reform: An Econometric Model

The nuclear-generated power touted in the 1950s as someday being {open_quotes}too cheap to meter{close_quotes} got dismissed in the 1980s as incapable of being both safe and cost effective. Today, less than 20 percent of American`s electricity is nuclear-generated, no new plants are planned or on order, and some of the earliest units are scheduled for decommissioning within the next decade. Even so, interest in nuclear power has been revived by increasing energy demands, concerns about global warming, and the uncertainty surrounding oil resources in the Persian Gulf. As a long-term alternative to fossil fuels, atomic energy offers the important advantages of clean air and domestic availability of fuel. But these advantages will count for little unless and until the costs of nuclear power can be seen as reasonable. The authors premise is that the relevant costs are those of providing safe and environmentally clean electric energy. To the extent that increased costs have resulted from increasingly stringent regulations, they reflect the internalization of external costs. Indeed, the external costs of nuclear power (particularly safety and environmental protection) have been internalized to a greater degree than with most alternative fuel sources used by electric utilities. Nuclear construction costs are properly comparedmore » with those of alternative sources only after the latter are adjusted for environmental damage and endangerment, including, as examples, the costs of oil spills, of building double-hulled tankers, and of building off-shore offloading facilities. A shift to nuclear sources could reduce these costs whereas it would increase disposal costs for radioactive materials. The authors contend that a better understanding of nuclear plant construction costs is pivotal to a balanced evaluation of the merits of uranium relative to other fuel choices. 12 refs., 2 figs., 5 tabs.« less

A Theory of Nonmarket Failure: Framework for Implementation Analysis

THE principal rationale for public policy intervention lies in the inadequacies of market outcomes. Yet this rationale is really only a necessary, not a sufficient, condition for policy formulation.1 Policy formulation properly requires that the realized inadequacies of market outcomes be compared with the potential inadequacies of nonmarket efforts to ameliorate them. The "anatomy" of market failure provides only limited help in prescribing therapies for government success.2 That markets may fail to produce either economically optimal or socially desirable outcomes has been elaborated in a well-known and voluminous

Airport Noise: Some Analytic and Policy Perspectives

formulation of an analytic framework for noise abatement. The concept of externalities can be a powerful analytic tool for guiding better resource allocation decisions in a wide variety of environmental pollution problems. However, in the case of airport noise, with which we are concerned in this paper, the existence of substantial private benefits linked to airport expansion and development indicate that recommendations which require the internalization of external costs directly to airport authorities and the airline industry may produce a set of consequences which are beyond the scope of airport noise control. If anything, the unrestricted application of normative economic theory to the problem of airport noise is likely not only to produce the wrong guidelines for public policy, but also to result in a magnification of the divergence between social costs and benefits and