Internalisation of external costs electricity generationpascal.iseg.utl.pt/~jpais/naturalresources/Internalisation_of... · generation Power generation Plant dismantling Plant

Marco Estrela

Nuno Creado

Ricardo Manso

Tiago Seabra

Internalisation of External Costs Internalisation of External Costs Internalisation of External Costs Internalisation of External Costs

for Electricity Generationfor Electricity Generationfor Electricity Generationfor Electricity Generation

January 8, 2008Economics of Natural Resources and the Environment

ContentsContentsContentsContents

1. Environmental Externalities: the Basic Concepts and Categories

2. Environmental impacts of electricity production

3. Economic valuation of the external costs of electricity production

4. Policy instruments to internalise externalities in the electricity market

5. Which instruments to use for the internalisation of externalities in the electricity market?

6. Conclusions

7. References

Environmental Externalities: the Environmental Externalities: the Environmental Externalities: the Environmental Externalities: the

Basic Concepts and CategoriesBasic Concepts and CategoriesBasic Concepts and CategoriesBasic Concepts and Categories

Market FailureMarket FailureMarket FailureMarket Failure

Occurs when the Market does not allocate resources efficientelly in order to maximize social outcomes. Occurs when the Market does not allocate resources efficientelly in order to maximize social outcomes.

Social Costs and Benefits

Private Costs and Benefits

Producer Consumer

Money

Product/Service

Production external costs

or benefits

+/-

Consumption external

costs or benefits

+/-

Externality ConceptExternality ConceptExternality ConceptExternality ConceptExternality ConceptExternality ConceptExternality ConceptExternality Concept

Negative Externality Positive Externality

When the production or consumption of a good has costs or benefits to a third party that are not taken into account.When the production or consumption of a good has costs or benefits to a third party that are not taken into account.

Marginal private cost

Marginal social cost

Marginal social benefit

QuantityQM QO

PM

PO

Cost

0

Marginal social cost

Marginal private cost


QuantityQO QM

PO

PM

Cost

0

Supply Externalities

Externality ConceptExternality ConceptExternality ConceptExternality ConceptExternality ConceptExternality ConceptExternality ConceptExternality Concept

Negative Externality Positive Externality

Demand Externalities

Marginal private and social cost

Marginal private benefit


QuantityQO QM

PM

PO

Cost

0

Marginal private and social cost


Marginal private benefit

QuantityQM QO

PO

PM

Cost

0

Externalities: energy production example Externalities: energy production example

• Energy production increases our well-being – heat, light, power

• Benefits are measured by willingness to pay (WTP); related to price

• Costs associated with energy production include drilling, power generation, and distribution

• Externalities : costs that producers do not directly pay

� Acid rain� Particulate pollution� NIMBY

� Global warming� Risk of accidents� Noise pollution

Environmental impacts of electricity Environmental impacts of electricity Environmental impacts of electricity Environmental impacts of electricity

productionproductionproductionproduction

Coal mining

Coal cleaning

Coal transport

Transport of personnel

Limestone transport

Limestone Extraction

Plant construction

Plant construction

Power generation

Power generation

Plant dismantling

Plant dismantling

HeatHeat

ElectricityElectricity

GypsumGypsum

Waste disposal

Waste disposal

Coal fuel cycle – Impacts

Environmental Impacts should not be adressed only to the Power Generation itself.Environmental Impacts should not be adressed only to the Power Generation itself.

Life-Cycle Analysis should be taken in account in the evaluation of Environmental Externalities.Life-Cycle Analysis should be taken in account in the evaluation of Environmental Externalities.

ThermoelectricityThermoelectricityThermoelectricityThermoelectricityCategory Externalities Description

Climatic Changes GHG emissions from extraction, refining and fossil fuels combustion.

Acidification SO2 and NOx emissions from Refining and fossil fuels combustion.

Local Pollution TSP emissions from extraction, refining and fossil fuels combustion.

Tropospheric O3 Indirect emissions from NOx.

Water Pollution Pollutants leaching; Refrigeration Waters.

Soil Degradation Coal extraction and fuels storage generate soils degradation andcontamination.

Coastal Areas and Marine Ecosystems Degradation

Fossil fuels transportation contaminates marine ecosystems.

Abiotic Resources Depletion

Fossil fuels are non-renewable abiotic resources.

Solid and Dangerous Wastes

Refining and fossil fuels combustion generate ashes.

Serious Incidents Possibility of Fire and Explosion in all stages

Visual Impact Facilities and Structures generate visual impact.

Noise Associated activities increase noise levels.

HydroelectricityHydroelectricityHydroelectricityHydroelectricity

Category Externalities Description

Hydrologic Fluxes Changes in Rivers regime; Reduction of Water Flow.

Water Pollution Eutrophization in dams.

Biodiversity Loss Negative impacts in fish populations; Terrestrial Ecosystems Submersion;

Cumulative Impacts.

Soil Degradation Flood areas are significant; Soil Salinization Risk.

Coastal Areas and Marine

Ecosystems Degradation

Reduction of silts, generating an erosion increase and a production

decrease.

Serious Incidents Seismicity Increase;

Visual Impact Structures generate visual impact; Positive Effect generated by the

Reservoir.

Social –Economic Submersion of villages and patrimonial structures; New business

opportunities;

EolicEolicEolicEolic


Biodiversity Loss Risk of birds collision with aerogenerators.

Soil Degradation Large areas occupied (but not completely).

Visual Impact Aerogenerators generate visual impact.

Noise Operation noise could be a restriction in implementation.

Solar PhotovoltaicSolar PhotovoltaicSolar PhotovoltaicSolar Photovoltaic


Climatic Changes Cells Production is an intensive energetic process.

Soil Degradation Large Areas used.

Abiotic Resources

Depletion

Some cells use scarce resources.

Solid and Dangerous

Wastes

Dangerous wastes generation during cells displacement.

Chemical Risks Some Materials are dangerous.

Visual Impact Structures generate visual impact.

Solar ThermalSolar ThermalSolar ThermalSolar Thermal


Water Pollution Discharge of heat transference fluids.

Soil Degradation Large areas used.

Abiotic Resources

Depletion

Materials used in cells production.

Solid and Dangerous

Wastes

Dangerous wastes generation during cells displacement.

Chemical Risk Heat Transference fluids.



BiomassBiomassBiomassBiomass


Climatic Changes GHG emissions not accounted.

Acidification SO2 and NOx emissions from combustion.

Local Pollution TSP emissions from combustion.

Tropospheric O3 Generated Indirectly by NOx from combustion.

Hydrologic Fluxes Vegetation removal could cause contamination and eutrophization.

Water Pollution Agrochemicals leaching; Refrigeration Waters.

Soil Degradation Energy Cultures soil degradation; Risk of Erosion.

Solid and Dangerous

Wastes

Combustion generates ashes.

Visual Impact Energy Cultures generate visual impact.

GeothermalGeothermalGeothermalGeothermal


Climatic Changes GHG emissions (CO2 and CH4).

Acidification Sulphidric Acid and Ammonia emissions.

Hydrologic Fluxes Risk of Freatic Level Decrease.

Water Pollution Hydrothermal Fluxes could contaminate resources.

Soil Degradation Soil occupied by Facilities.

Coastal Areas and Marine

Ecosystems Degradation

Risk to maritime species associated to Hydrothermal Fluxes.

Human Health Dangerous Compounds emitted to atmosphere.

Serious Incidents Increase in Seismicity and Explosion Risks.



NuclearNuclearNuclearNuclear


Water Pollution Thermal and Radioactive Pollution by Refrigeration Waters.

Biodiversity Loss Radioactive Emissions could affect living organisms.

Soil Degradation The extraction of nuclear fuels cause soil degradation.

Abiotic Resources

Degradation

Nuclear Fuels are non-renewable abiotic resources.

Solid and Dangerous

Wastes

Radioactive Wastes Generation.

Human Health Radiation Impact.

Serious Incidents Nuclear accident.

Visual Impact Facilities generate visual impact.

Electricity Transport and Electricity Transport and Electricity Transport and Electricity Transport and

DistributionDistributionDistributionDistribution


Climatic Changes SF6 emissions.

Water Pollution PCB oils and Toxic compounds leaks.

Soil Degradation Underground Cables installation.

Biodiversity Loss Habitats fragmentation associated to aerial cables. Risk of birds collision.

Human Health Electromagnetic Fields.



Economic valuation of the external Economic valuation of the external Economic valuation of the external Economic valuation of the external costs of electricity productioncosts of electricity productioncosts of electricity productioncosts of electricity production

• Externalities are not a problem for the manufacturer but for society - negative externalities are borne by society

• Prices do not account for harm or benefit done to third parties, and so there is no incentive to change behaviour

• External costs should be reduced, and passed on to those who generate them (application of the “polluter pays principle” through internalisation)

Why are external costs a problem?Why are external costs a problem?Why are external costs a problem?Why are external costs a problem?

environmentalenvironmental

e.g. socialimpacts

Valuation of externalities in theoryValuation of externalities in theoryValuation of externalities in theoryValuation of externalities in theory

PRIVATE COSTSPRIVATE COSTS EXTERNAL COSTSEXTERNAL COSTS

non-environmentalnon-environmental

TOTAL SOCIAL COSTSTOTAL SOCIAL COSTS

regulation

e.g. labourcosts

e.g. sulfur dioxideemissions

•Investment decision and technology assessment: comparison of energy technologies (subsidies, research support)

�Fossil fuels: coal and oil technologies with varying degrees of flue gas cleaning, natural gas, centralized systems and CHP (combined heat and power)�Nuclear: PWR (Pressurized water reactor) , open and closed systems for fuel provision�Renewable: onshore and offshore wind, hydro, a wide range of biomass fuels (waste wood, crops) and technologies

•Internalising external costs – ‘getting the prices right’

�Ecological taxes, subsidies

It helps to take into account all externalities in a consistent way when making decisionsIt helps to take into account all externalities in a consistent way when making decisions

Aim of externality valuationAim of externality valuationAim of externality valuationAim of externality valuation

• Cost-Benefit analysis, e. g. for measures and directives to protect the environment and human health

�Directive on non-hazardous waste incineration

�Large combustion plant directive

�EU strategy to combat acidification

�Costs and benefits for the emission ceilings directive

�Air quality limits for PAHs (Polycyclic aromatic hydrocarbons)

�Costs and benefits of acidification and ground level ozone

• Sustainability and welfare indicator

�Adjustment of GDP

Aim of externality valuationAim of externality valuationAim of externality valuationAim of externality valuation

• Health impacts of emissions

• Global warming

• Impacts on crops and building materials

• Impacts on biodiversity

Focus of external costs assessment Focus of external costs assessment Focus of external costs assessment Focus of external costs assessment

in the energy sectorin the energy sectorin the energy sectorin the energy sector

Estimating the cost of externalities Estimating the cost of externalities Estimating the cost of externalities Estimating the cost of externalities

associated with pollutionassociated with pollutionassociated with pollutionassociated with pollution

• Typical Problems� finding appropriate method� obtaining useful data� comparing results from different methods� interpreting the answer

• Aim is to determine how human well-being is affected

• Methods generally neglect� future generation well-being� animal well-being

Abatement cost approach•Costs of controlling or mitigating damage•Costs of meeting legislated regulations•Implicit value of damage

Damage cost approach•Net economic damage from negative externalities•Relies on preferences•Top-down vs. bottom-up approaches

Externality valuation in practiceExternality valuation in practiceExternality valuation in practiceExternality valuation in practice

TopTopTopTop----down approachdown approachdown approachdown approachNational damage

estimate

% of damage related to activity

Estimated damage of pollutant from

activity

National estimate of pollutant from

activity

BottomBottomBottomBottom----up approachup approachup approachup approach

Phases of pathwayPhases of pathway ExampleExample

Utilization of resourcesUtilization of resources

EmissionsEmissions

Pollution transportPollution transport

CourseCourse

ImpactImpact

DamageDamage

Monetary valuationMonetary valuation

Production of electricityProduction of electricity

SO2 EmissionsSO2 Emissions

Addition to the atmospheric concentration

Addition to the atmospheric concentration

Acidification of forest ecosystems

Acidification of forest ecosystems

Disruption of ecosystem stability

Disruption of ecosystem stability

Damages on forest production and non-production functions

Damages on forest production and non-production functions

Market and non-market valuation of forest functions

Market and non-market valuation of forest functions

Each source is taken andits “ecological and social footprint” is analyzed.

Each source is taken andits “ecological and social footprint” is analyzed.

Project ExternEProject ExternEProject ExternEProject ExternE

Externalities of Energy, launched in 1991, financed by DG Research (EC)

Scope

� airborne pollutants from power plants

� development of the Impact Pathway Approach

1) Assessment or weighting of effects should as far as possible becarried out using quantitative figures and functions

ensures transparency and reproducibility

2)Assessment of effects/damage (e.g. health risk), not of pressures (e.g. emissions of pollutants)

relation between pressure and effect is in general non-linear and effects depend on time and site of activity

� Bottom-up approach needed for the complex pathways: the ‘impact pathway approach’

Basic principlesBasic principlesBasic principlesBasic principles

SOURCE(specification of site and technology)

emission(e.g., kg/yr of particulates)

DISPERSION(e.g. atmospheric dispersion model)

increase in concentration at receptor sites

(e.g., µg/m3 of particulatesin all affected regions)

DOSE-RESPONSE FUNCTION(or concentration-response function)

impact(e.g., cases of asthma due to ambientconcentration of particulates)

MONETARY VALUATION

cost(e.g., cost of asthma)

Impact pathway approachImpact pathway approachImpact pathway approachImpact pathway approach

Quantification of impacts and costsQuantification of impacts and costsQuantification of impacts and costsQuantification of impacts and costs



Valuation methods for nonValuation methods for nonValuation methods for nonValuation methods for non----market goodsmarket goodsmarket goodsmarket goods

Revealed Preference

Behaviour (shown in the past)

Stated Preference

Surveys (hypothetical situations)

Indirect valuation

Assesses costs or efforts that can be linked to the non-market good

•Hedonic Price Method

•Averting Behaviour Method

•Travel Cost Method

•Contingent Behaviour Method

•Past Behaviour of public decision makers

Direct valuation

•Contingent Valuation Method (CVM)

•Attribute Based Choice Modelling (ABCM)

•Participatory approaches

•Surveys for preferences of public decision makers

Monetary valuationMonetary valuationMonetary valuationMonetary valuation

Exposure Response Function:Additional Years of Life Lost

= 3.9 · 10-5 · ∆ Sulfate · Population

Quantified number of additional Years of Life Lost due toone year operation : 103

Monetary value50 000 Euro2000 per Year of Life Lost

Damage costs per year:5.1 Million Euro2000


Quantified External Costs [EuroQuantified External Costs [EuroQuantified External Costs [EuroQuantified External Costs [Euro----Cent / kWh] of Cent / kWh] of Cent / kWh] of Cent / kWh] of

a Coal Fired Power Station (steam turbine)a Coal Fired Power Station (steam turbine)a Coal Fired Power Station (steam turbine)a Coal Fired Power Station (steam turbine)

Source: ExternE

Results for Electricity Systems in EUResults for Electricity Systems in EUResults for Electricity Systems in EUResults for Electricity Systems in EU----15151515(ExternE-Pol: Dones et al., 2004)

0

1

2

3

4

5

6

7

8

Lignit

eHar

d Coa

l

Hard

Coal P

FBC OilOil C

C

GasGas

CC

LWR

PWR (c

entri

fuge

enr

.)

Hydro

power

(alpi

ne)

PV pan

el (S

-Eur

ope)

PV inte

grat

ed (S

-Eur

ope)

PV inte

grat

ed fu

ture

(S-E

urop

e)

Wind

ons

hore

800

kW

Wind

offs

hore

2M

W

coge

n die

sel S

CR 200

kWe

coge

n ga

s lam

bda=

1, 1

60kW

e

coge

n ga

s lea

n bu

rn 1

MW

e

Ext

erna

l Cos

ts (

Eur

o ce

nt /

kWh)

RestPower Plant

Coal Oil Gas Nuclear

Hyd

ro

Gas

Photovoltaic WindCogeneration

(all.exergy)

Die

sel

RenewablesFossil

Biomass technology

Low High

Greenhouse gas impacts

Low

High

Nuclear

Wind

Natural gas technologies

Existing coal technologies

New coal technologyies

Source: ExternE

Air pollution Impac

ts (PM10

) an

d other im

pac

ts

no gas cleaning

Impacts of different technologiesImpacts of different technologiesImpacts of different technologiesImpacts of different technologies

Human Health Effects due to Electricity Human Health Effects due to Electricity Human Health Effects due to Electricity Human Health Effects due to Electricity Production in the EU25 CountriesProduction in the EU25 CountriesProduction in the EU25 CountriesProduction in the EU25 Countries

Source: ExternE, 2005

Policy instruments to internalise Policy instruments to internalise Policy instruments to internalise Policy instruments to internalise

externalities in the electricity marketexternalities in the electricity marketexternalities in the electricity marketexternalities in the electricity market

Reduce externalitiesElectricity is nowadays a basic need for all persons in the industrialized word and permits many appliances with optimum efficiency.

Today, electricity generation is one of the leading sources of greenhouse gas emissions and, to reduce this contribution, industry is putting the accent above all in:

� Improve electricity generation efficiency;

� Promote renewable energy sources;

� Internalize the external costs of electricity production;

� Introduce a more rational use of energy.

Policy instruments

to internalize the externalities

� Non-economical instruments

( Commonly referred as regulations )� Complex forbidden regime;

� Complex authorization regime;

� Juridical obligations of control and vigilance;

� Creation of standards to protect the environment:� Environment quality;

� Quantity of emissions;

� Product standard ( characteristic of fossil fuels );

� Operational standard ( technical processes of production ).

Example of a standard (decreto-lei)

applied to petrol products

Decreto-Lei n.º 235/2004 de 16-12-2004

combustível para motores de ignição por compressão ( gasóleo e gasolina )

A partir de 1 de Janeiro de 2005, considera-se um teor de enxofre no máximo de 50 mg/kg;

A partir de 1 de Janeiro de 2009, o teor de enxofre deve ter o valor máximo de 10 mg/kg.

Gasóleo para máquinas móveis não rodoviárias e tractores agrícolas e florestais

O gasóleo para máquinas móveis não rodoviárias e tractores agrícolas e florestais comercializados no território nacional não pode conter mais de 2000 mg/kg de enxofre.

A partir de 1 de Janeiro de 2008, o gasóleo mencionado no número anterior não pode conter mais de 1000 mg/kg de enxofre.

NonNonNonNon----economical instrumentseconomical instrumentseconomical instrumentseconomical instrumentsTechnology-based command and control

� Regulator specifies the methods and equipment that firmsmust use to meet the target.

� Negative aspects: � This policy does not stimulate firms to increase research efforts towards new technologies.

� Positive aspects: � Information on the best technology (provided by the regulator) is spread in the economy and all firms have access to it.

Example of a Technology-based command

and control – forbidden to use fuel-oil and

change coal technology

Descomissionamento:

2008 — 400 MW (aprox.) de dois grupos da antiga central do Carregado e dos grupos 3 e 4 da Central de Tunes;

2010 — encerramento da central do Barreiro a fuel e funcionamento zero das restantes centrais a fuel.

A partir de 2010 — encerramento das restantes centrais a fuelóleo.

Substituição de 5 % a 10 % do carvão nas centrais termoeléctricas de Sines e do Pego por biomassa ou combustível derivado de resíduos (CDR).

NonNonNonNon----economical instrumentseconomical instrumentseconomical instrumentseconomical instrumentsPerformance-based command and control

� Regulator sets an overall target for each firm, or plant, and gives firms some discretion in how to meet the standard;

� Negative aspects: � Technology forcing standards demand a performance that may not be feasible with the existing technology;

� Industries invest to meet the standard and then stop.

� Positive aspects: � Firms are induced in developing innovative technologies.

Economical instrumentsEconomical instrumentsEconomical instrumentsEconomical instrumentsCarbon Tax� The objective of a carbon tax is to internalize the external cost of CO2-pollution into the price of fossil fuels;

� Tax levied on fuels in accordance with their carbon content, with the aim to encourage using less carbon-intensive;

� Negative aspects: � Double purpose of collecting revenues and try to influence the behavior of the economic agents;

� Substantial increase of energy prices if the tax is designed to fully internalize the external costs.

� Many countries have in fact only partially taxed carbon, and have partially been levied simply on energy.

Example of a Portuguese carbon

tax and the creation of a fund

Foi criado um Fundo Português de Carbono (Decreto-Lei n.º 71/2006), instrumento operacional destinado a financiar medidas que facilitem o cumprimento dos compromissos do Estado Português no âmbito do Protocolo de Quioto. Tem como objectivo suprir um total de 5,8 Mt CO2e/ano e tem um financiamento de 348 milhões de euros/ano.

Uma das iniciativas que irá financiar o FPC é o valor da taxa sobre lâmpadas de baixa eficiência energética ( calculado de acordo com a seguinte fórmula ):

taxa=(Wlâmpada–Wreferência)×Horaslâmpada×FactorEmissãoSEN×Preço CO2

Economical instrumentsEconomical instrumentsEconomical instrumentsEconomical instrumentsEmissions permits� Each permit represents a fixed quantity of allowed CO2-emissions. A penalty is applied in case the actual emissions are in excess of this quantity;

� Permits could be allocated to companies on the basis of their historical output of emissions (grandfathering) or they could be auctioned.

� Positive aspects:� Flexible instrument;� Permits not only for CO2, but also for NOx and SO2!

PNALE (Plano Nacional de Atribuição de Licenças de Emissão):O montante de emissões de GEE que Portugal não poderá exceder no período 2008 -2012 é de 381 M tCO2e, representando um valor médio anual de 76 387 505 tCO2e.As novas metas 2007 apresentam um potencial de redução de emissões de GEE de 1,556 milhões de toneladas (Mt) de CO2e/ano (0,901 Mt CO2e/ano associados ao sector da oferta da energia e 0,655 Mt CO2e/ano associados ao sector dos transportes).

Economical instrumentsEconomical instrumentsEconomical instrumentsEconomical instrumentsVoluntary Agreements

� Results from co-operation and negotiation between an authority and an industry and are intended to be followed by some form of contract;

� Commitments by the industry to decrease the level of emissions in exchange, for example, of a training programmefor energy-efficient purchasing and an audit provided by the authority;

� Voluntary Agreements can never replace legislated regulations or other more conventional policy instruments.

Economical instrumentsEconomical instrumentsEconomical instrumentsEconomical instrumentsInvestment Subsidies

� Investment subsidies help a high initial investment

� Usually range is 20 –50% of eligible investment costs, however within the limitations of the Community guidelines on State aid for environmental protection.

Economical instrumentsEconomical instrumentsEconomical instrumentsEconomical instrumentsSubsidies: Feed-in tariffs

� Minimum guaranteed price per unit of renewable electricity produced to be paid to the producer� Premium in addition to market electricity prices� The level of the tariff is normally set for about 15 years� Producers of green electricity are encouraged to exploit all available generating sites until the marginal cost of producing green electricity equalizes the proposed feed-in tariff price.

Medium feed-in tariffs accepted by the

Portuguese regulator to the special regime

producers (accordingly to the technology).

Economical instrumentsEconomical instrumentsEconomical instrumentsEconomical instrumentsSubsidies: Competitive bidding processes� The regulator defines a reserved market for a given amount of renewable energy and organizes a competition between renewable producers to allocate this amount.

� Electric utilities are obliged to purchase the electricity from the selected power producers.

� Competition focuses on the price per kWh proposed during the bidding process.

� Each of the renewable energy generators selected is awarded a long term contract to supply electricity at the pay-as-bid price.

� The implicit subsidies attributed to each generator correspond to the difference between the bid price and the wholesale market price.

Economical instrumentsEconomical instrumentsEconomical instrumentsEconomical instruments

Subsidies: Green renewable certificates

� Regulator imposes a quota as a percentage of the total electricity production, which has to come from renewable sources.

� To give them more flexibility and compensate for missing green kWh, they can purchase green certificates from the green electricity producers.

� The price of green certificates will be close to the difference in price between renewable electricity and classical electricity. The additional revenues for the producers will compensate them for this difference in price.

� Distributors, which do not achieve the quota imposed by the regulator, will have to pay penalties.

Criteria for choosing the policy Criteria for choosing the policy Criteria for choosing the policy Criteria for choosing the policy

instrumentsinstrumentsinstrumentsinstruments

Criteria for choosing policy instrumentsCriteria for choosing policy instrumentsCriteria for choosing policy instrumentsCriteria for choosing policy instruments

EfficiencyEfficiency

Cost Cost minimizationminimization

EquityEquity

TechnologicalTechnologicalinnovationinnovation

Energy Energy SecuritySecurity

EfficiencyEfficiencyEfficiencyEfficiency

�Tradable Green Certificates;� Feed-in tariffs;� Competitive bidding designs;� Taxes;� Emission permits;

Subsidies

Tradable Green Certificates are the most apropriate.Tradable Green Certificates are the most apropriate.

Efficiency of voluntary agreements is questionable.Efficiency of voluntary agreements is questionable.

Economic instruments: best outcome.Economic instruments: best outcome.

Cost minimizationCost minimizationCost minimizationCost minimization

� Command and control instruments impose cost of monitoring;

� Tradable Green Certificates require state involvement to setup the market;

� Voluntary agreements are time consuming;

Exploit forces embed in installed market transactionsExploit forces embed in installed market transactions

Economic incentives should replace comand and controlEconomic incentives should replace comand and control

Technological innovationTechnological innovationTechnological innovationTechnological innovation

� The optimal instrument should remove technological imperfections;

� Economic instruments should generate incentives on corporate and consumer behavior;

� Different effect on prices and quantities as a function of the instrument � Energy Security;

� Command and control may identify technological best practices;

May discourage investment on new utilitiesMay discourage investment on new utilities

High price of state of the art technologiesHigh price of state of the art technologies

May impact on job marketMay impact on job market

Energy SecurityEnergy SecurityEnergy SecurityEnergy Security

� Policy instruments can affect the security of energy supply;

� Policy concerns should take into account the increasing level of demand;� Policy concerns should consider consumption efficiency;

Stimulate the growth of Green Energy instead of Stimulate the growth of Green Energy instead of affecting its priceaffecting its price

Green Energy decrease import dependenceGreen Energy decrease import dependence

� Polluter pays principle. Who is the polluter?

�Where is the externality produced?

� Increase in electricity prices that consumers pay;

� Consumer willingness to pay;

EquityEquityEquityEquity

ConclusionsConclusionsConclusionsConclusions

•Today, environmental policy has to face economic considerations more than in formertimes.

•By means of an economic valuation of environmental damage, it ispossible to estimate the economic utility of environmental policy measures.

•Studies have demonstrated that the internalisation of environmental costs has been achieved in part only. Policy makers may choose different ways to gradually improve this situation.

Conclusions (I)Conclusions (I)Conclusions (I)Conclusions (I)Conclusions (I)Conclusions (I)Conclusions (I)Conclusions (I)

•Economic valuation means to weigh a number of choices and targets against each other. Valuation requires value judgments.

•How to define a damage event? How to weigh different goods which deserve protection against each other and damage occurringtoday against that occurring in the future? How to deal with uncertainty with regard to future returns and risks?

•These are only a few of the problems depending on value judgments that we have to face.

Conclusions (II)Conclusions (II)Conclusions (II)Conclusions (II)Conclusions (II)Conclusions (II)Conclusions (II)Conclusions (II)

•Internalisation of external costs is economically and socially justified. It leads to more efficient overall economy.

� If “internalised”, external costs can help to move towards a more sustainable energy system

� If not internalised and taking into consideration public goods (like air or soil or water quality) there is a sort of distortion of the market favouring non sustainable technologies

�Alternative technology options can become competitive through the internalisation of external costs

Conclusions (III)Conclusions (III)Conclusions (III)Conclusions (III)Conclusions (III)Conclusions (III)Conclusions (III)Conclusions (III)

•External costs are no panacea and have limitations. Serious attempts to estimate some of the controversial costs usually lead to low estimates but this is not accepted by some stakeholder groups.

•Internalisation does not necessarily mean that citizens will have to face higher financial burdens in the form of higher taxes or charges.

•Fair cost recovery may also be achieved for example by reducing environmentally harmful subsidies and by partly shifting the money saved to support more eco-friendly technologies.

Conclusions (IV)Conclusions (IV)Conclusions (IV)Conclusions (IV)Conclusions (IV)Conclusions (IV)Conclusions (IV)Conclusions (IV)

ReferencesReferencesReferencesReferences

� Agência Portuguesa do Ambiente (2004), Metodologia de Atribuição de Licenças de Emissão – PNALE 2006-2007

� Antunes, P., R. Santos, S. Martinho, G. Lobo (2001), Estudo sobre Sector Eléctrico e Ambiente, 2º Relatório do estudo “Avaliação Económica dos Impactes Ambientais do Sector Eléctrico” para a ERSE, Centro de Economia Ecológica e Gestão do Ambiente, DCEA, FCT, UNL.

� Deloitte (para APA). Estudo de Diagnóstico sobre Instrumentos Fiscais de Incidência Ambiental - Estudo de Impacte do CCL do Reino Unido, e dos CO2 Tax da Suécia, Dinamarca e Noruega.

� EDP (2007), Relatório e Contas 2006, Caderno de Sustentabilidade.

� European Commission, (2007), ExternE Information System, http://www.externe.info/

� European Commission (2005), ExternE, Externalities of Energy. Methodology 2005 Update.

ReferencesReferencesReferencesReferencesReferencesReferencesReferencesReferences

� European Commission (2005), EU emissions trading – an open scheme promoting global innovation.

� Faucheux, Sylvie e Noël, Jean-François (1997), Economia dos Recursos Naturais e do Meio Ambiente, Instituto Piaget, Lisboa.

� Mankiw, N.G., 2006. Principles Of Economics, 4th Edition. South-Western College Pub, USA.

� Martins et al, (1999), Implementation in Portugal of the ExternE accounting framework, CEETA, Comissão Europeia/Direcção Geral de Energia, Lisboa.

� McConnell, B., Barbiero, 2003. Microeconomics, 9th Edition. McGraw Hill, Toronto.

� Umweltbundesamt (2007), Awareness of external costs – helps to improve environmental protection, Dessau, 2007.

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