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IOA News Letters Summary

by Michel GAUTHIER. Acting IOA Chairman

Economists define an "externality" as the cost (or the benefit) that is not included in the market price of a product. This definition is most often used in the context of negative externalities. Energy sector externalities include damage to the natural and constructed environment, such as effects of air pollution, occupational diseases, accidents, etc. Traditional economic assessment of fuel cycles has tended to ignore these effects and in general, this is thought to work against the development of renewable energies and sustainable development.

The ExternE project, a research project of the European Commission, is a comprehensive attempt to use a consistent methodology to evaluate the external costs associated with a range of different fuel cycles. Starting with a core group of five European teams in 1991, participation in the project has grown to over 50 teams from 15 countries. This effort aims at strengthening the European Community's challenge to aid policy and decision makers in the Energy - Environment - Economy area and is also contributing to a more efficient and sustainable economy by integrating the environmental dimension.

The major conclusion of this study may be that, in spite of the uncertainties underlying the analyses, a large set of externalities for electricity generation has been calculated, and therefore, a first attempt towards the integration of environmental aspects into energy policy may be carried out taking into account all the limitations. The fact that this study has been carried out at a European level implies that the results may be compared across countries, thus supporting the site-specificity of the externalities assessed.

The comparison may not be, however, so straightforward. In spite of the general objective of comparing similar technologies, the different national interests have produced a very broad range of technologies, fuels, and abatement options. Therefore, due to the site - and technology - specificity of results, these will sometimes be very different. Among the most significant fuel cycles for which differences are more obvious among countries are the nuclear and biomass fuel cycles, since upstream activities for these cycles (the extraction of the fuel used, its transport and processing) are highly variable among countries, and therefore their impacts will vary to a large extent.

This can be seen on the table below where ranges for External costs for electricity production in the EU are given for fossil and renewable "fuels" Costs are in EURO cents/kWh(From ExternE, Externalities of Energy. Vol 10: National Implementation. EUR 18528, Office for Official Publications of the European Communities, L-2985 - Luxemburg, P.6.)

Coal &
Oil Gas Nuclear Biomass Hydro Photo
1.8~15 2.6~10.9 0.7~3.5 0.25~0.7 0.2~5.2 0.03~0.7 0.1~0.3 0.05~0.25


The external costs indicated are sub-totals of quantifiable externalities. They do not include other "social costs" such as security of supply. Although the results are considered sub-totals and there are still a number of impacts to be quantified in monetary terms, these figures are already significant, especially if global warming damages are taken into account. For example, the coal fuel cycles assessed show an average external cost of around 5  EURO cents/kWh, which is at least the same magnitude as the private costs. Gas, which is always considered as a clean fuel, also shows an external cost averaging of about 1  EURO cents/kWh,which is also significant.

In general, it may be said that fossil fuels have significant external costs, while renewable energies have very small ones. The nuclear fuel cycle also features small external costs, although it is not too clear whether all the significant impacts of this fuel cycle have been duly quantified.

When it comes to the aggregation of the damages for the entire electricity sector of the participating countries, the figures obtained, although still preliminary, show significant values, up to 1% of the GDP for some countries.

Therefore, it may be concluded that the external costs of some fuel cycles are high enough to affect energy policy decisions. However, remember that the methodology still has a large number of uncertainties.

These uncertainties create some difficulties in using the results directly for policy-making. Several aspects should be improved, mainly the estimation of global warming damages. Atmospheric dispersion models, which for some countries should account for complex topographic conditions, are also a controversial aspect. An important issue that should also be studied is the relationship between atmospheric pollution and chronic mortality, and the valuation of the deaths caused by atmospheric pollution.

Regarding global warming damages, its range of estimated results is so broad that it dominates the results for fossil fuel cycles. This results in the fact that, when the higher estimate for global warming damages is considered, fossil fuels cannot compete with nuclear or renewables. Therefore, the high estimates for global warming costs benefit, to a large extent, these energy sources.

Considering that chronic mortality is a major externality of fossil fuel cycles, the fact that there is only one exposure-response function for its estimation from the US that hasn't been verified in Europe, adds a lot of uncertainty to the final results.

The valuation of human life is also a significant factor affecting the results, as it determines the human health externality. Controversy still exists around this issue and, in spite of the modifications introduced in the valuation of life by the Core Project, the values assigned are still contested outside the project.

All these uncertainties affect the individual fuel cycles examined. For the aggregation of results to the whole electricity sector, more problems arise, such as the transferability of results from one site to another, or the accounting of effects for which there is a threshold. Indeed, differences in the damages per ton of pollutant emitted between different sites are quite large, so the direct transfer of results from one site to another is not reasonable. In the case of nuclear or hydro, this transferability is even more difficult.

Hence, it is recommended to use the results provided by this report only as background information. This background information might be very useful for establishing economic incentives, such as environmental taxes, or subsidies for renewable energies, or for energy planning measures. However, these results should not be used directly until the methodology is refined.

The results may be used directly for planning processes where the quantitative results are not so relevant, as shown by the different policy case studies carried out within the project. For example, the results could be used for cost-benefit analysis of policy measures or to choose among different energy alternatives. In general, both types of studies show that cleaner technologies, such as renewables, gas or nuclear, or pollution abatement technologies, are always profitable from a social point of view even though not all their environmental benefits have been assessed yet. This social profitability is reflected in the larger share captured by these technologies for electricity dispatching decisions, extension of power systems, or future energy scenarios.

Other case studies have also been undertaken outside the electricity sector, illustrating the fact that environmental policies should be addressed with an integrated approach, moving across sectors if required. This would require, of course, the extension of the assessment of externalities to other environmentally relevant sectors, such as transport or industry.

Although further research is required to refine the methodology and produce more precise results thereby removing the existing uncertainties, this report is the first comprehensive attempt to estimate the externalities of electricity generation in the EU. The ExternE Project has succeeded in quantifying externalities and their associated uncertainties in more detail than any previous study. The uncertainties are rather large, but they are more a reflection of the existing knowledge than a function of the methodology used. The ExternE results therefore provide the information that policy makers need to make informed decisions about energy/environment issues, enabling them to balance the risks of not taking action against the costs of doing so.

Externalities are most often used in the sense of negative impacts but they may also be positive. The present worldwide interest and the process that seeks to identify and assess the environmental and social impacts associated with energy production is of great importance for the IOA community to develop methodology and reliable tools to show OTEC/DOWA¡¦s full potential value.

Most of this article is extracted from EU ExterneE report available at http://externe.jrc.es.

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