Externalities

Prof. Dr. Katrin Rehdanz

Christian-Albrechts University Kiel
News article:

Cartoon: Seppo Leinonen, www.seppo.net

& American Scientific (2009/10/19)
Energy Economics 2
Today’s agenda - Externalities

❑ Cost features of electricity supply

❑ Private vs. social costs
❑ Valuation of externalities
❑ Empirical results

Energy Economics 3
Cost features of electricity supply in general
❑ Energy-related costs related to electricity generation in a facility
▪ Fuels
▪ Variable operating and maintenance costs
➢ Tends to be small for renewable fuels
❑ Capacity costs
▪ Installing the capacity
▪ Fixed operating and maintenance costs
➢ Most important category for RE (50-80% of costs)
❑ Other costs
▪ Environmental damage and climate change
▪ Standby or reserve capacity
▪ Fuel price risk

Energy Economics 4
Private vs. social costs

C𝑜𝑠𝑡𝑠

𝑆𝑜𝑐𝑖𝑎𝑙 𝐶𝑜𝑠𝑡𝑠

𝑃∗ 𝑃𝑟𝑖𝑣𝑎𝑡𝑒 𝐶𝑜𝑠𝑡𝑠

𝑃0

𝐷𝑒𝑚𝑎𝑛𝑑

0 𝑄∗ 𝑄0 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦

Energy Economics 5
Private vs. social costs

C𝑜𝑠𝑡𝑠
𝑆𝑜𝑐𝑖𝑎𝑙 𝐶𝑜𝑠𝑡𝑠?

𝑆𝑜𝑐𝑖𝑎𝑙 𝐶𝑜𝑠𝑡𝑠?
𝑆𝑜𝑐𝑖𝑎𝑙 𝐶𝑜𝑠𝑡𝑠?

𝑃∗ 𝑃𝑟𝑖𝑣𝑎𝑡𝑒 𝐶𝑜𝑠𝑡𝑠

𝑃0

𝐷𝑒𝑚𝑎𝑛𝑑

0 𝑄∗ 𝑄0 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦

Energy Economics 6
Valuation of externalities - Basic principles

❑ Assessment of effects should be carried out using quantitative

figures and functions as far as possible
➢ Ensures transparency and reproducibility

❑ Assessment of effects/damage (e.g. health risk), instead of

pressures (e.g. emissions of pollutants)
➢ Relation between pressure and effect is in general non-linear
➢ Effects depend on time and site of activity
➢ Often used: bottom-up approach to account for the complex
pathways -> impact pathway approach

Energy Economics 7
Valuation of externalities - Steps (I)

1. Identify the effect to be assessed and select the elements of

the external cost of the effect to be assessed
2. Estimate the impacts or effects of the activity (in physical
units)
3. Assume physical effects on the environment, health, etc.
4. Convert the assumed physical effects into monetary values
5. Assessment of uncertainties, sensitivity analysis

Energy Economics 8
Bickel et al. (2005) ExternE Externalities of
Energy: Methodology 2005 Update.

9
Valuation of externalities - Steps (II)

ExternE (2005)

Energy Economics 10
Methods used to quantify and value impacts

ExternE (2005)

Energy Economics 11
Air pollution emissions and damages from
energy production in the U.S.: 2002-2011

Energy Economics 12
A comparison of estimates

Jaramillo and Muller (2016)…

❑ use data for the years 2002, 2005, 2008 and 2011
❑ to estimate monetary damages due to air pollution exposure
PM2.5, SO2, NOx, NH3, VOC
❑ from power generation, oil and gas extraction, coal
mining, and oil refineries.

Energy Economics 13
 Emissions by sector

Jaramillo and Muller (2016)

Energy Economics 14
The integrated assessment model AP2

❑ The AP2 model is a standard IAM that connects emissions

within the US to monetary damages
❑ Final step: monetary damages
▪ Damages for market goods are valued using current prices (e.g.
crop prices)
▪ Illness and mortality risk: Value of Statistical Life (VSL) of about
US$6 million
❑ The model produces marginal damages for all sources and all
years
❑ Gross external damages (GED) are computed by multiplying
marginal damages by source and pollutant times the reported
emissions by source, pollutant and sector
Energy Economics 15
Emission damage

Jaramillo and Muller (2016)

16
External costs from power production in USD

Jaramillo and Muller (2016)

17
Comparison of electricity externality estimates

Energy Economics 18
A comparison of estimates

Sovacool et al. (2021) collect 83 studies which estimate electricity

supply externalities.

Studies vary with respect to:

❑ Methodological approach, esp. monetization technique
❑ Location
❑ Scope
❑ Assumptions
➢ Resulting monetary values taken at face value

Energy Economics 19
 Sources and pathways of the externalities associated with
electricity supply and transport

20
Sovacool et al. (2021)
Range of external cost estimates for electricity supply –
different fuel sources

Energy Economics Data source: Sovacool et al. (2021), 21

own representation
Range of external cost estimates for electricity supply –
different externality types

Energy Economics Adapted from Sovacool et al. (2021) 22

How do private and social costs ultimately
compare?

❑ Unsubsidized LCOE = private costs

❑ LCOE + externality estimates = social costs
➢ Social costs roughly double private costs for coal
and wind!

LCOE - levelized cost of electricity: average minimum cost at which electricity must be sold in order to break-even over the lifetime of the project

Energy Economics Adapted from Sovacool et al. (2021) 23

Environmental costs from power generation in Germany
in €-cent (2020) /kWh

Air pollution Greenhouse gases Greenhouse gases

Total env. costs Total env. costs

Lignite
Coal
Natural gas
Oil

Hydro power
Wind energy
Photovoltaics
Biomass

UBA (2020): https://www.umweltbundesamt.de/sites/default/files/medien/1410/publikationen/2020-12-21_methodenkonvention_3_1_kostensaetze.pdf

Energy Economics 24
How do the UBA estimates fit in ?

Energy Economics Data sources: Sovacool et al. (2021), 25

UBA (2020), own representation
The effect of feed-in tariffs and carbon pricing
in Germany

Energy Economics 26
 Nov. 2013

https://www.ise.fraunhofer.de/en/publications/studies/cost-of-electricity.html
LCOE - levelized cost of electricity: average minimum cost at which electricity must be sold in order to break-even over the lifetime of the project
FLH: Full Load Hours 27
GHI: Global Horizontal Irradiande Kost et al. (2013) 27
 June 2021

https://www.ise.fraunhofer.de/en/publications/studies/cost-of-electricity.html
LCOE - levelized cost of electricity: average minimum cost at which electricity must be sold in order to break-even over the lifetime of 28
the project 28
CCGT - combined cycle gas turbines
Technology cost trends and key material prices

Energy Economics 29
Technology cost trends and key material prices

Energy Economics 30
Literature lecture 10

➢ Bickel, P., & Friedrich, R. (Eds.)(2005). ExternE: Externalities of

energy. Methodology.
https://www.researchgate.net/publication/232075838_ExternE_Ext
ernalities_of_Energy_Methodology_2005_Update
➢ Jaramillo, P., & Muller, N. Z. (2016). Air pollution emissions and
damages from energy production in the US: 2002–2011. Energy
Policy, 90, 202-211.
➢ Sovacool, B. K., Kim, J., & Yang, M. (2021). The hidden costs of
energy and mobility: A global meta-analysis and research synthesis
of electricity and transport externalities. Energy Research & Social
Science, 72, 101885.

Energy Economics 31