Institutional - Wind Energy: Renewable Energy and the Environment - page 235

11.7 EXTERNALITIES
Externalities are defined as social or external costs and benefits, which are attributable to an activity
that is not borne by the parties involved in that activity. Externalities are not paid by the producers
or consumers and are not included in the market price, although someone at sometime will pay for
or be affected by them.
Social benefits, generally called subsidies, are paid by someone else and accrue to a group.
An example is the Rural Electrification Act, which brought electricity to rural United States. An
example of a positive externality (social benefit) is the benefit everyone gets from cleaner air from
installation of wind farms. On the other side, a good example of a negative externality is the use of
coal in China, as every city of 100,000 and over has terrible smog, due to use of coal for heating,
cooking, industry, and production of electricity. In 20 years, there will be a large public health cost
for today's children.
External costs can be divided into the following categories:

r Hidden costs borne by governments, including subsidies and R&D programs.

r Costs associated with pollution: health and environment damage, such as acid rain, destruc-

tion of the ozone, unclean air, and lost productivity. An example is CO 2 emissions [45], and
even though global warming is disputed by many in industry and some scientists, it may
have far-reaching effects.

Mechanisms for including externalities into the market are:

Government regulation: This historical approach has led to inefficient and monopolistic
industries, inflexible and highly resistant to change. The current vogue is for deregulation
and privatization of energy industries. However, if external costs are not included, short-
term interests prevail. Regulations can require a mix or minimum use of energy sources
with lowest life cycle costs, which include externalities.
Pollution taxes: Governments can impose taxes on the amount of pollution a company gener-
ates. European countries have such taxes. Another possibility is to give renewable energy
credits for producing clean power. Pollution taxes and avoidance of pollution have the merit
of simplicity, and have only a marginal effect on energy costs, but they are not a true integra-
tion of external costs into market prices. The taxpayer pays, not the consumer. The pollution
tax could be assessed in the consumer bill; therefore, it is paid based on how much is used.
Integrated resource planning (IRP): This model combines the elements of a competitive
market with long-term environmental responsibility. An IRP mandate from the govern-
ment would require the selection of new generating capacity to include all factors, not just
short-term economic ones.
Subsidies for R&D and production.

Many studies on externalities have been conducted. The European Union's six-volume ExternE:
Externalities of Energy is probably one of the most systematic and detailed studies to evaluate the
external costs associated with a range of different fuel cycles [46]. In their estimates, external costs for
production of electricity by coal can be as high as $0.10/kWh, and for nuclear power, $0.04/kWh.
Since 1995, companies in the United States have been trading sulfur dioxide (SOX) and nitrogen
oxide (NOX) emissions, which are precursors of acid rain and contributors to ground-level ozone and
smog. Essentially, industries trade in units called allowances, which can be bought, sold, or banked
for future use. Carbon dioxide trading [47] is not included in the United States; however, some states
are now passing laws to reduce CO 2 production, and when the next president takes office, it is very
probable that there will be national regulations on CO 2 emissions. Wind generator systems reduce
CO 2 emissions by almost 10 tons/MWh ( Table 11.2 ) when displacing coal generation [48].