Environmental Engineering Reference
In-Depth Information
through legislation or regulation. “Pigovian taxation” philosophy promotes taxa-
tion of negative externalities, which are, essentially, activities associated with det-
rimental impacts. The Pigovian tax therefore shifts the emphasis from the subsidiz-
ation of negative externalities to the subsidization of positive externalities, or activ-
ities that create benefits in order to further positively incentivize associated activit-
ies.
One of the most efficient solutions to externalities is to include them in the cost
to those engaged in the activity, that is, to internalize the externality. This would
keep externalities from being seen as market failures, which could, in turn, weaken
the case for government intervention. It is generally believed that this approach is
better than regulations.
Another method for controlling negative externalities associated with energy
production is the “Cap and Trade” system. The Cap and Trade system sets max-
imum emission levels for a given group of sources over a specific time period.
Unused allowances can be traded, bought and sold, or banked for future use. Over
time, the cap is lowered and, in theory, this should encourage more efficient pro-
cesses so that additional profits can be realized by selling allowances to less effi-
cient producers.
In the 1990s, the European Union (EU) Commission launched ExternE, a major
research program to provide a scientific basis for the quantification of energy-re-
lated externalities and to give guidance supporting the design of internalization
measures. The program used a bottom-up impact pathway ranging from single-
source emission via changes in air, soil, and water quality, to physical impacts such
as increased emissions.
The ExternE study found that externalities in the European Union region ranged
from 40 billion euro to 70 billion euro for fossil fuel and nuclear in 2003. The study
highlighted that, if included in energy prices, identified externalities would double
the cost of producing electricity from coal or oil and increase the cost of electricity
production from gas by 30%.
A typical example of an externality would be a carbon charge on the cost of
electricity generated in thermopower plants using fossil fuels. These charges will
probably amount to US$25 per ton of CO
2
emitted, and they could increase the cost
of coal-generated electricity by 2.1 ¢/kWh (from 6.2 to 8.3 ¢/kWh) and the cost of
gas-generated electricity by 1¢/kWh. For the European Union, costs of external-
ities incurred from biomass, hydro, photovoltaic, and wind energies are generally
smaller.
