The Social Cost of Electricity

The Social Cost of Electricity

Scenarios and Policy Implications

The Fondazione Eni Enrico Mattei series on Economics, the Environment and Sustainable Development

Edited by Anil Markandya, Andrea Bigano and Roberto Porchia

This book reports and rationalizes the state-of-the-art concerning the social costs of electricity generation. Social costs are assessed by adding to the private generation costs, the external costs associated with damages to human health, the environment, crops, materials, and those related to the consequences of climate change. The authors consider the evolution of these costs up to 2030 for major electricity generating technologies and, using these estimates, evaluate policy options for external cost internalization, providing quantitative scenarios by country and primary fuel for 2010, 2020 and 2030. While mainly focusing on European countries, the book also examines the situation in key emerging economies such as China, India, Brazil and Turkey.

Chapter 6: Policy Instruments

Gesine Bökenkamp, Wan-Jung Chou, Olav Hohmeyer, Wouter Nijs, Alistair Hunt and Anil Markandya

Subjects: economics and finance, energy economics, environmental economics, environment, environmental economics


Gesine Bökenkamp, Wan-Jung Chou, Olav Hohmeyer, Alistair Hunt, Anil Markandya and Wouter Nijs 6.1 POLICY INSTRUMENTS TO PROMOTE RENEWABLE ENERGY SOURCES IN EU MEMBER STATES Introduction This chapter presents policy instruments for the internalisation of external costs via the promotion of renewables. This introduction will recall the definition of external costs and show their connection to renewable energies. External costs are defined as non-market disadvantages (or advantages) experienced by third parties, for example households, the public or future generations (Bartmann, 1996: 36). These advantages or disadvantages are not taken into account in private costs calculations. The sum of private costs and external costs is called social costs or full costs. In this chapter the discussion is restricted to negative external effects of energy production. By not taking these effects into account the price of the production causing the effects is too low and as a consequence the quantity produced is too high. Consideration of the external costs could be achieved by internalising these costs in the market and price mechanisms (Krewitt and Schlomann, 2006: 5). If the producer was forced to consider the external costs, the supply curve would shift, the produced quantity would be reduced and the price increased. As different energy production technologies cause diverse external effects the relative prices of the technologies and, hence, the merit order, would also change. Several policy instruments have been proposed to achieve internalisation of external costs. The optimal instrument for internalisation creates no distortions on the market. Furthermore it should...

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