Internalizing the externalities of electricity production

At least in theory, the most efficient process for imposing the 'polluter pays principle' would be to internalize as many of the environmental externalities of power generation as possible. Using the marketplace would permit energy producers and consumers to respond to such price signals in the most efficient and cost-effective way.

However, it should be emphasized that only external damage costs associated with emissions from fossil fuel combustion have been considered explicitly in these calculations. Those associated with other forms of power generation, security of supply considerations and with energy subsidies must also be incorporated into the analysis in order to achieve a reasonable balance across the range of power generating technologies, both renewable and non-renewable. For example, without such action nuclear power, with its negligible level of CO2 emissions per kWh, would possess a marked competitive advantage over all other technologies (with the exception of some hydro systems), both renewable and non-renewable. However, as noted earlier, costs associated with emission of pollutants other than CO2 are very variable and tend to be site-specific.

Once monetary values have been derived to reflect the external costs of differing technologies, the next step is to devise a mechanism for 'internalizing'

them into market prices. In theory, an energy tax would represent a relatively straightforward solution, although the practicalities of its imposition would be fairly complicated. The tax would be required to be imposed at differential rates, depending upon the total estimated damages resulting from the fuel in question. A simple carbon tax alone, for example, would not impose any cost on the nuclear power industry. The tax would also have to be imposed by all countries, to ensure that the competitiveness of their industries in global markets was not compromised. The resulting tax revenue would also have to be distributed in such a way that implicit energy subsidies were not (re-)introduced. Finally, the worst of any social impact of energy taxes on poorer sections of society would have to be offset to ensure that the tax burden was not disproportionate in its incidence.

An alternative approach to the problem of reflecting external costs, and one that would possibly cause less economic disturbance, would be to introduce 'environmental credits' for the uptake of renewable energy technologies. Examples are currently commonplace. However, such credits do not 'internalize' the social costs of energy production but rather subsidize renewables. In addition, the taxpayer pays the subsidy and not the electricity consumer, thus rejecting the 'polluter pays principle'.

Renewable energy technologies are characterized by relatively high initial capital costs per MW of installed capacity, but very low running costs. This characteristic can make renewable technologies financially unattractive compared with traditional fossil fuel derived power using traditional project evaluation techniques based upon the anticipated life of the electricity generating facility (say, 30 years), due to discounting.15 However, in terms of an economic/ environmental evaluation, the relevant time frame should be set by the date at which all of the consequences attributable to the project had ceased to exist. In the context of CO2 emissions from fossil fuel power stations this period could exceed 100 years, and in the case of spent-fuel storage for nuclear plants many centuries. Further, it is likely that the value of emission reduction will continue to rise into the future given projected world population growth, economic growth, and the subsequent difficulties in meeting global climate change agreements. In this context, the rate of discount is crucial in assessing the relative cost and benefit streams of alternative energy technologies in the context of intergen-erational equity.16

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