External Costs of Energy: How Much Is Clean Energy Worth?

Abstract

This review describes the methodology for the analysis of environmental damages and presents key results obtained by the external costs of energy (ExternE) projects of the European Commission as well as analogous work in the U.S. The classical air pollutants (PM, NOx, SO2, and O3) due to the combustion of fossil fuels cause significant damage costs. The costs of global warming from the emission of greenhouse gases are also large. We show results for the damage cost per kilogram of emitted pollutant for typical conditions in Europe; they are based on the last version of ExternE (published in 2008), but with a major upward adjustment of the monetary values. We also show results that have been published in the U.S. Combined with the emissions data per kilowatt hour, they yield the damage costs of electric power. For the choice between different power technologies, one should take into account not only the emissions from the power plant but also from the entire fuel chain, using life cycle assessment (LCA) inventories. The damage costs of fossil fuels are much higher than most renewable energy sources. The results provide crucial input for the formulation of rational environmental policies, for example, the appropriate level of pollution taxes and the promotion of cleaner technologies.