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Important progress has been made in recent years in the valuation of social costs of energy and transport. This progress has encouraged the insight that systems of "Green Accounting" considering social costs and policy instruments for the internalization of social costs are necessary tools to realize the worldwide goal of sustainable development. This workshop report provides an excellent survey of the latest results of social costs in the energy and transport sector. Further, the theoretical framework of social costs is extended to a broader concept of sustainable development. Finally, concepts and first experiences of the internalization of social costs e.g. through least cost planning or an ecological tax reform are reviewed.



Social Costs and Sustainability — An Overview

1. Social Costs and Sustainability — an Overview

The 1995 conference on environmental externalities in Ladenburg, Germany has been the third of its kind: after Ladenburg in 1990 and Racine (Wisconsin) in 1992. Substantial research has been conducted on the valuation of external costs during the past few years and externalities have been used by both utilities and governments to a certain degree. Additionally, the growing understanding of environmental risks with a new temporal and spatial dimension, especially of global warming, has led to a search for new economic approaches responding to such threats. A central goal of the third conference on environmental externalities was to link the concept of social costs with the broader, more ecologically oriented approaches of sustainable development. The two areas contributing most to a non-sustainable development today are stationary energy conversion processes and the transportation sector. Hence, the goals of the 1995 conference in Ladenburg in 1995 have been: Presenting and discussing recent American and European valuation studies in the fields of energy and transportation,Reporting the progress made in the use of environmental and other external costs in national accounting systems,Discussing the suitability of measuring external costs and discounting future risks with regard to global environmental threats like global warming,Discussing the need of new economic paradigms to achieve sustainable development, and the question of how to measure sustainability,Informing energy utilities and governments about ways to internalize their externalities, e.g., by establishing carbon taxes and other pollution taxes and fees which take environmental costs into account,Analyzing examples of success and failure in implementing such instruments.

Olav Hohmeyer, Richard L. Ottinger, Klaus Rennings

General Discussion of the Theoretical Relevance and Empirical Evidence of Social Costs


2. Externalities Studies: Why are the Numbers Different?

This paper summarizes important differences among a number of studies that estimate the externalities of fuel cycles1. All of these studies essentially define externalities to be health, environmental, or other damages (or benefits) that affect the well being of third parties. Table 1 lists the studies that this paper reviews. The paper focuses on the first seven; and alludes briefly to the last two of these studies (California Energy Commission and Northern States Power).

Russell Lee

3. Have Recent Studies Rendered Environmental Externality Valuation Irrelevant?

Three recent major studies of electric utility environmental externalities, one for the U.S. Department of Energy (DOE Study), a second, combined in some respects with the DOE Study, by the European Community (EC Study), and the third for New York State (NY Study), all find that the externalities measurable through damage cost valuation of damages to society from electric utility operations are a fraction of a cent per kilowatt-hour. This paper concludes that these studies fail to value such a significant proportion of externalities, and so undervalue the externalities for which values are calculated, as to render the values adopted irrelevant to any policy formulation or resource selection decisions. If externalities are not more fully valued, then it is posited that environmental decision making throughout the world is likely to be distorted, with possible serious consequences to public health and the environment.

Richard L. Ottinger

Economic and Ecological Approaches to Sustainable Development


4. Economic and Ecological Concepts of Sustainable Development: External Costs and Sustainability Indicators

Concepts of defining and measuring sustainable development can broadly be placed in two categories: weak and strong sustainability. The concept of weak sustainability is based on neo-classical economic theory and assumes that manufactured and natural capital are close substitutes. This means that costs of environmental deterioration (e.g., forest damage) can be compensated by benefits from manufactured capital (e.g., income). Thus, environmental damages are valued in monetary units. The concept of strong sustainability denies the degree of substitution that weak sustainability assumes, at least for some critical elements of natural capital. This paper pledges for strong sustainability indicators, especially for critical loads and critical levels. Nevertheless, the costs and benefits of avoiding critical impacts have to be taken into consideration. Hence, a combination of strong and weak sustainability indicators is suggested.

Klaus Rennings

5. Social Costs of Climate Change Strong Sustainability and Social Costs

The possible costs of man-made climate change have become the center of attention of the discussion on the social costs of energy. First estimates have been presented, differing by orders of magnitude. The paper discusses the reasons for these discrepancies and shows that most of them stem from more or less necessary but hidden value judgments. As economics should not predetermine political decisions on strategies to cope with man-made global climate change on the basis of hidden value judgments and as these judgments are a necessary precondition to come up with sensible monetary values for possible damages, the paper suggests to base strategies to cope with global climate change on the fundamental principles of strong sustainability. Such an approach makes it possible to design sound strategies not relying on damage costing and its necessary value judgments. An example is sketched at the end of the paper to show a possible solution to the problem.

Olav Hohmeyer

6. Pressure Indices and Relative Valuation of Environmental Damages

The sociopolitical discussion in democratic industrialized countries focuses mainly on three important “clusters” or “basic goals”: material wealth & economic growth (higher living standard & more fun, measured as GNP)social equity & employment (justice & a job for everybody, expressed as income distribution measures and/or unemployment rate)the fight for a better environment (give nature a chance, currently not measured in a consistent way)

Jochen Jesinghaus

7. Integrated Environmental and Economic Accounting

There has already been a long and partly hot debate on how national accounting should be extended towards environmental accounting (see, e.g., Ahmad, El Serafy, Lutz 1989; Costanza 1991 part II: Accounting, Modeling and Analysis; Lutz 1993; Franz, Stahmer 1993)

Carsten Stahmer

New Valuation Studies on Social Costs Of Energy


8. External Costs of Fossil Fuel Cycles

The use of energy causes damage to a wide range of receptors, including human health, natural ecosystems, and the built environment. Such damages are referred to as external costs, as they are not reflected in the market price of energy. Traditional economic assessment has ignored externalities, and policy makers have tended to opt for “command and control” legislation for environmental issues. However, there is a growing interest in adopting a more sophisticated approach involving the quantification of the environmental and health impacts of energy use and their related external costs. This requires policy analysts to take account of environmental aspects in their decision making and to undertake a specified cost-benefit analysis.

W. Krewitt, P. Mayerhofer, R. Friedrich, A. Trukenmüller, N. Eyre, M. Holland

9. Quantifying the Risks Of Nuclear Electric Energy

The cost of electricity generation can be divided into private costs and external costs. The former are the costs borne by the generators and the latter are costs directly borne by the public at large, but not part of the generators’ direct costs. The sum of private and external costs is defined as the social cost (Markandya, 1995). An example of a private cost is the cost of capital equipment, cost of operation etc. An example of an external cost is the damage caused by non-routine radiation, for which the generator does not bear liability.

Anil Markandya

10. The External Costs of Wind Energy — and What They Mean for Energy Policy?

Ever since studies on external costs of electricity began in the late 1980s, one of the driving forces behind the interest in the subject has been to identify the difference between the external costs of conventional sources (fossil and nuclear) and those of the new renewables — wind, solar etc. Because the new renewables have very limited pollution emissions, it has often been assumed that they have negligible external costs. Early analyses (e.g., Hohmeyer, 1988) tended to confirm this judgement.

Nick Eyre

11. External Costs and External Price Addings in the Swiss Energy Sector

This was the idea which led to a research project (Ott, Masuhr, 1994) aiming at determining the external costs of energy use in Switzerland. Initiated by the Federal Office for Economic Policy (FOEP) it was cofinanced by the Federal Office of Energy and the Office for Federal Building. The project emerged from a FOEP-pro-gram which intends to accelerate know-how transfer in the energy sector to support energy saving measures and the use of renewable energy. It was expected that lower external costs can be used as promoting arguments for energy savings and renewable energy use. Federal support was not unanimous at first. Official energy and environmental policies rather tend towards a standard-price approach with energy-and CO2-taxes, where necessary tax rates are determined by political acceptance and by the chosen standard not by external costs in a Pigouvian sense. But it was then acknowledged that political acceptance for standards and for taxes needs information about avoided external costs too.

Walter Ott

12. The Magnitude of Electricity Externalities Through Time

Externalities have been an important issue in electric resource selection decisions. However, through time, environmental impacts of existing and new facilities have been increasingly regulated and the externalities internalized through more advanced pollution control technologies. In this paper we examine how the magnitude of externalities has changed through time by computing and comparing externalities for representative electricity generating facilities for different time periods and standards, including those built prior to the 1980s, recent facilities and standards, and current and future facilities and standards. These comparisons also allow us to examine the net benefits of retiring an existing facility and replacing it with a new/relicensed facility meeting current environmental standards.

Robert D. Rowe, Carolyn M. Lang, John Smolinsky

13. Counting the Costs: Scientific Uncertainty and Valuation Perspective in EXMOD

The computer model, EXMOD, quantifies externalities associated with electric generating facilities using the damage function approach. EXMOD uses data for facilities sited in New York State and for impacts in the northeastern U.S. and Canada. EXMOD is able to address some of the limitations and uncertainties inherent in the damage function approach by providing the user with access to the model’s fundamental assumptions used to calculate physical impacts and the monetary estimates of those impacts. In this paper, a set of alternative default facility, impact, and valuation assumptions has been developed. The effect of these alternative assumptions on the external costs computed by EXMOD has been tested in a case study of a coal plant situated near New York City. Results show that central estimates of the external costs are about 7 mills per kWh for a new facility with EXMOD’s default assumptions, and about 70 mills per kWh for an existing facility using alternative impact and valuation assumptions. Because of its strengths and flexibility, if carefully applied and interpreted, EXMOD can be a valuable tool in electricity resource assessment and policy, complementing other tools and approaches, in a wide range of contexts and locations.

Stephen Bernow, Bruce Biewald, William Dougherty, David White

Consideration of Social Costs in Decision Making of Energy Utilities


14. Least-Cost Planning — An Instrument for Minimization of Social Costs

There are two points where the concept of Least-Cost Planning (LCP, which is used here in the same sense as the more modern wording of Integrated Resource Planning-IRP) and the concept of “external” social costs, especially environmental costs, interact.

Stefan Thomas

15. Sustainability and the Valuation of Externalities from Electricity Generation in California

The economic rationale for the valuation of and accounting for externalities is that their presence in the production and consumption of goods and services causes markets to deviate from the socially optimal levels. Externalities are costs (or benefits) to society that result from interactions among firms and individuals which are not reflected in market prices. Proper accounting for externalities in planning and decision making can bring market outcomes closer to their optimal levels. A critical element of sustainability is a growth path that results from accounting for externalities to the environment and to future generations that result from current economic activities.

Marwan Masri, Sulayman Al-Qudsi

16. The Use of Externality Adders for Greenhouse Gas Emissions in Electric Utility Resource Planning

Some state Public Utility Commissions (PUCs) in the United States require the use of external environmental adders in utility evaluations of the social costs of alternative power plants. These states require adders for CO2 and other greenhouse gas emissions. This paper evaluates the adder approach as applied to greenhouse gas emissions, coming to several conclusions. First, the existing adders are based inappropriately upon the costs of tree planting to sequester CO2, rather than on the conceptually-correct measure, i.e., the damages from additional greenhouse gases or, equivalently, the benefits from reduced greenhouse gases. Second, a state policy requiring adders for greenhouse gases in utility planning would represent an extremely altruistic policy, because virtually all of the benefits from reduced emissions would accrue to citizens outside the state, while state residents would bear virtually all of the costs from more expensive electricity. Third, reductions in CO2 emissions due to state adders would be offset by increases elsewhere due to increased utility rates that encourage customers to use other electricity or energy suppliers or to move out of state, a phenomenon known as “leakage” in the national or international context. Four, although there is some argument that altruistic state policies such as CO2 adders would have a “snowball” effect on national and international decisionmakers and eventually lead to coordinated decisions on global warming, there seems to be little evidence of such an effect in previous international environmental issues.

David Harrison, Albert L. Nichols

17. Climate for Climate Change Actions in the U.S.: The New York Experience

In April 1993, the United States (U.S.) announced its commitment to reduce GHG emissions to 1990 levels by the year 2000. In October of that same year, President Clinton released his Climate Change Action Plan (CCAP) which details the U.S. response to climate change. The CCAP depends largely on the voluntary reduction of GHG emissions by electric utilities and businesses in the U.S. The paper evaluates how the President’s voluntary initiatives for reduction of GHGs and other instruments of environmental control are being utilized in the U.S. for reducing the threat of the climate change.

Ajay K. Sanghi

18. Competitive Values of Electric Generation Plants in New York Based on Social Costs

The electric industry in the United States and in many other countries is moving away from a structure characterized by large centrally planned, utility built generating stations to more dispersed sources owned by a variety of utility and non-utility interests. The utility industry, which operated as a vertically integrated monopoly in protected franchised areas, is struggling to adapt to changes in governmental policies aimed at increasing competition.

Sury Putta, Glenn S. Barnette

19. A Canadian Utility’s Experience in Implementing Sustainable Energy Development, Particularly Through the Use of Full Cost Accounting

The focus of this paper is on what Ontario Hydro, a Canadian electrical utility, is doing to implement sustainable energy development, and in particular, how we are using a full cost accounting (FCA) approach to better integrate environment into decision-making. Both process issues — what mechanisms are in place to drive a change to a more sustainable energy future — as well as specific program activities, will be described.

Helen Howes

20. Environmental Externalities: Analysis and Advocacy

Much effort has been expended in recent years to identify, quantify and monetize the unpriced environmental costs borne by society from the production and consumption decisions of the members of society. Some attempts have been made to evaluate methods for internalizing those costs with the expectation that this will lead to better choices. A number of such methods have actually been used in the regulation of energy utilities and some government policy settings. Vermont’s legislature and regulators have grappled with this problem in the electric and natural gas industries and for energy generally for some years. This paper describes these efforts, some of their outcomes and their reception. Several challenges facing the process of internalizing environmental costs are considered.

William Steinhurst

Social Costs of Transportation


21. External Costs of Transport in Germany

Apart from the advantages of personal mobility, transport is a very important economic factor. It provides the possibility for production processes based on the division of labor. In addition to this role, as a means for industrial production, transport has become an important economic sector in its own right. But besides the benefits, transport causes many problems. More than 50,000 persons die in road accidents every year in Western Europe. Air pollution and noise caused by transport are big problems, especially in metropolitan areas. The problems are aggravated by the tremendous growth, in particular of the volume of road and air transport. Even if future total emissions of pollutants like NOx, VOC, and CO are likely to be reduced by technical measures, such as three way catalytic converters, total emissions of CO2 will rise if no additional measures are taken.

Peter Bickel, Rainer Friedrich

22. The True Cost of Road Transport in the United Kingdom

No doubt the growth in road transport reflects the considerable benefits which it makes available. But it is becoming increasingly apparent that the success of private transport is also to some extent due to the fact that it succeeds in “externalising” a range of impacts, i.e., shifting many of the costs for which it is responsible on to other people without the motorist being charged for those costs. Costs in economic language comprise losses of well-being or “welfare”. The result of this shifting of costs onto others is that there are currently many journeys undertaken where the costs to society outweigh the benefits to the individual. Economists are generally of the opinion that any policy to tackle these problems must involve confronting the motorist with the true cost of his or her journey. Only by these means will society be able to derive the utmost benefit from its road network or rely upon price signals for the purposes of planning investment projects. In fact, there have been many attempts to quantify the external costs of road transport, presumably with the intention of influencing transport policy. These have not had the impact that the researchers working on these projects have intended. One reason for this is that researchers have, often without appreciating it, ended up confusing equity and efficiency issues.

David Maddison

23. The Annualized Social Cost of Motor Vehicle Use in the U.S.-Based on 1990–1991 Data: Summary of Theory, Data, Methods, and Results

Every year, American drivers spend hundreds of billions of dollars on highway transportation. They pay for vehicles, maintenance, repair, fuel, lubricants, tires, parts, insurance, parking, tolls, registration, fees, and other items. These expenditures buy Americans considerable personal mobility and economic productivity.

Mark A. Delucchi

24. The Cost of Transportation’s Oil Dependence

The societal costs of oil dependence do not fit neatly into the definition of a market externality. Though oil dependence costs have some of the features of external costs, result from what most would agree is a market failure, and almost certainly demand some form of public policy action, the paradigm of the public good externality fails to capture the essence of the problem. The essence of the oil problem is as follows: 1) the geographical concentration of oil resources in a relatively few countries creates the potential for significant market disruptions, most especially the exercise of monopoly power by a cartel; 2) the inelasticity of oil supply and demand, especially in the short-run, confers enormous monopoly power even on a cartel holding less than half of the world market; 3) developed and developing nations, especially their transport sectors, consume enormous quantities of oil making them vulnerable to oil price shocks and price increases.

David L. Greene

25. Overcoming Barriers to Transportation Cost Internalization

Much progress has been made in accounting for the externality costs related to transportation decisions in recent years. However, major institutional and political barriers currently impede both public awareness of this information and the introduction of market-based pricing mechanisms that might begin to better internalize both marginal costs and social and environmental cost factors to inform decision making by both consumers and policy-makers. Focusing mostly on the U.S. experience, this paper explores these barriers and discusses strategies that might contribute to progress in both cost internalization and regulatory reform. Incremental progress can come through the development of information, analysis, and decision support systems for transportation and long range planning, through appropriate applications of Intelligent Transportation Systems technologies such as electronic road and parking pricing, through the development of performance and incentive based regulatory systems, and perhaps by influencing advertising that shapes public attitudes towards motor vehicles.

Michael Replogle

Consideration of Social Costs in Policy Making


26. Economic Effects of an Ecological Tax Reform

The need to realize sustainable economic development, which preserves the basis for human existence, is now widely recognized. Natural resources must be used more economically and the burden on the environment eased. The traditional instruments of environmental policy, in particular the use of command and control measures, are inadequate for this purpose and induce economic costs which are unnecessarily high. In the light of this, an ecological reform of the taxation system involving the greater use of environmental charges is a demand which has been frequently raised in the environmental discussion. Such a reform, it is argued, would enable environmental objectives to be realized more efficiently. The revenue from such taxes is to be refunded to those social groups paying the tax, or other taxes or charges are to be reduced to a corresponding extent. In this way, negative economic or social side-effects of environmental charges can be mitigated, and a “double dividend” can be obtained by reducing distortions that are caused by existing “traditional” taxes.

Stefan Bach, Michael Kohlhaas, Barbara Praetorius

27. Energy Taxes, the Climate Change Convention, and Economic Competitiveness

Interest in energy taxes as an environmental policy tool has grown over recent years. This interest has been spurred partly by a growing recognition that even with stringent environmental regulations, energy production and use impoe health and amenity costs on society that are not considered in private economic decisions. Increasingly, however, analysts and policymakers are turning to energy taxes as a tool for addressing the problem of global climate change, rather than simply as a means of internalising social costs. This trend is likely to gain momentum as the governments of developed countries face their commitments under the United Nations Framework Convention on Climate Change (UNFCCC), and agree to further more stringent commitments.

Frank Muller

28. Using Environmental Externalities to Regulate the Risk of Harm From Greenhouse Gas Emissions

The idea that environmental damage from industrialization is external to the economic market for industrial products has become of increasingly practical importance as the result of the United Nations Framework Convention on Climate Change. The Convention seeks:

[…] stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system within a time frame sufficient to allow ecosystems to adapt naturally, ensure that food production is not threatened and to enable economic development to proceed in a sustainable manner.


David Hodas

29. The Role of Technical Progress in Economic Models of Environmental Policy

Pollution taxes, especially broad-based ones such as carbon taxes, are said to impose a cost on the economy by reducing economic activity and growth. There are several mechanisms by which this is supposed to happen. This paper explores one line of argument: the contention that carbon taxes (which would increase energy prices) slow down technical progress and therefore lead to a reduction in GDP growth. This argument partially rests on the results of some econometric analyses which depend on a particular mathematical specification of technical progress. These same results are then used in a model to simulate the effect of environmental taxes on the economy. This paper argues that such a specification is not a good depiction of reality and that it is counterproductive for environmental policy making: First, it leads us to believe that environmental policy may be more costly than it actually would be. Second, this treatment of technical change is passive, implying that we cannot influence its nature and direction. More generally, this example is meant to provide a warning against a too easy reliance on economic models in environmental decision making.

Irene Peters

30. Beyond Economics and Econometrics: Some Psychological and Political Aspects of the Internalization of External Costs

Efforts to describe external costs still have not fully succeeded. Current studies in the United States and Europe are characterized by a blatant underrating of the external costs (Ottinger: “a fraction of a cent”). This is no coincidence. Rather, we must assume that errors of perception and/or comprehension (as the result of using incomplete or wrong search systems and even owing to viruses that have been planted) are responsible for this phenomenon. They are apparently distorting the results even of exhaustive studies aimed at systematically determining the external costs of energy supply.

Eberhard Moths

31. The External Costs Of Energy Use: Internalization Without The State?

(1) The protection of the environment has become one of the most important challenges of our time. No one can seriously deny that the industrialized nations in particular have caused enormous damage to the environment by the way in which their economies function, and by the manner in which they produce and consume. This damage now directly threatens the very basis of our life on this planet. Even worse, numerous studies show that the reckless exploitation of nature is continuing virtually unabated and on a global scale. The constant rise in world energy consumption is one of the main causes of this damage. The associated emission of a number of hazardous pollutants is endangering nearly all of life’s sustaining media — the air, soil, and water — and with them, humankind and the Earth’s flora and fauna.

Klaus P. Masuhr


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