KANSAS CORPORATION COMMISSION

Externalities in Benefit Cost Tests

EXTERNALITIES: DRAWING THE LINES External to What? Changing Notions of Insult/Value Assessing Damages Assigning Costs

Adapted from Koomey and Krause, Lawrence Berkeley Laboratory, 1997

WATER

Source: USGS Circular 1268, March 2004

(LESS) WATER

Source: NOAA

AIR

Source: Brian McLean, U.S. EPA, "Experience with Cap-and-Trade Programs"

CLIMATE

Slide from Jon Anda, President of Environmental Markets Network

HEALTH

Concerns Asthma Stroke Heart Attack Lung Disease Mercury Poisoning (especially in utero) Insect-borne Disease (changing pathogen

vectors)

CDC, ALA, ACS, EPA, Harvard School of Public Health

IT’S NOT ZERO…

WHAT’S THE RIGHT COST?

EXTERNAL TO WHAT?

STAGES OF ENERGY SOURCES (“INTERNAL”) Exploration/Evaluation Harvesting Processing/Refining Transportation/Distribution Storage Conversion (electric generation) Marketing End UseHoldren, John P., "Energy and Human Environment: The Generation and Definition of

Environmental Problems," in Goodman, Kristoferson, Hollander: Academic Press.

EXTERNAL TO WHAT?

PHASES WITHIN A STAGE Research Development/Demonstration Commercial Construction Operation and Maintenance Dismantling Management of Long-Lived Wastes Environmental Controls Regulation and Monitoring

Holdren, John P., "Energy and Human Environment: The Generation and Definition of Environmental Problems," in Goodman, Kristoferson, Hollander: Academic Press.

INSULTS

To Physical Health and Human Environment Resources Used (land, water, energy) Material Effluents (Nox, SO2, CO2) Other Physical Transformations (dredging) Socio-political Influences (politics,

employment)

Holdren, John P., "Energy and Human Environment: The Generation and Definition of Environmental Problems," in Goodman, Kristoferson, Hollander: Academic Press.

PATHWAYS

Convert Insults to Stresses Media (air, water, ice, soil, rock, biota) Processes (evaporation, diffusion,

conduction)

Holdren, John P., "Energy and Human Environment: The Generation and Definition of Environmental Problems," in Goodman, Kristoferson, Hollander: Academic Press.

STRESSES

Physical or Social Consequences of Insults Magnitudes of Consequences Temporal Distribution of Harm Spatial Distribution of Harm Coincidence of Risks and Benefits Scaling (linear or nonlinear) Resistance to Remedy Irreversibility Visibility of Harm

Holdren, John P., "Energy and Human Environment: The Generation and Definition of Environmental Problems," in Goodman, Kristoferson, Hollander: Academic Press.

DOING THE MATH

EC= EF x HR x VED

EC = Externality Cost in ¢/kWhEF = Emission Factor, in lbs/Btu of fuel

consumedHR = Heat Rate of power plant, in Btus/kWhVED = Value of Environmental Damage, in ¢/lb

PITFALLS IN ANALYSIS

Inconsistent Boundaries Average v. Marginal Comparisons Illusory Precision Stochasticity “What’s Countable v. What Counts”

IMPLICATIONS FOR BENEFIT/COST Estimating value of externalities

challenging and not strictly necessary Societal Cost Test problematic Total Resource Cost Test more

conservative and, at this time, sensible Many states have years of experience,

results Ratepayer Impact Measure: Would new

generation withstand this test? Emphasis on lower bills

EFFICIENCY AS A RESOURCE

Efficiency is properly treated AS new generation assuming: Verified, permanent reductions Performance standards

Reasonable savings estimates: Years of empirical savings data by program is available

Ratio of benefits:costs – 2:1 or even 3:1 has been achieved elsewhere As long as efficiency is the least cost

resource, it should be pursued

If we choose not to provide incentives for investor-owned utilities that, added to avoided costs, rival ROI for new generation, then we need to look closely at the following map:

Perverse Incentives

STATES WITH PUBLIC BENEFIT FUNDS

Nancy Jackson Executive Director jackson@climateandene

rgy.org (785) 331-8743 www.climateandenergy.o

rg