Environmental Externalities: Short history and basic concepts

Transcription

1 Cigré International Session 2010 Paris Palais des Congres Environmental Externalities: Short history and basic concepts P. Girardi August 2010

2 Cost-Benefit Analysis A project appraisal process involving, whether explicitly or implicitly, weighing the total expected costs against the total expected benefits of one or more actions in order to choose the best or most profitable option. Every time an investment decision has to be taken, one form or another of weighting costs against benefits is involved, and some form of calculation over time is needed to compare the former with the latter when they accrue in different years (EU commission, DG regional policy guide to CBA Benefits and costs are often expressed in money terms Paris 2010 Pierpaolo Girardi 2

3 Application Cost benefit analysis is typically used by governments to evaluate the desirability of a given intervention; Cost benefit analysis is used mainly to assess the monetary value of very large private and public sector projects (private sector organizations tend to make much more use of other project appraisal techniques, such as rate of return, where feasible). One of the problems is determining which cost and benefit should be included. Paris 2010 Pierpaolo Girardi 3

4 Private cost (and benefit) Private costs\benefit are the costs that the buyer of a good or service pays the seller (e.g. costs internal to a firm or to a proponent) Private cost analysis is the ratio between money spent and revenues Paris 2010 Pierpaolo Girardi 4

5 Public decision maker should consider also External costs\benefit (also called externalities), in contrast, are the costs that people other than the buyer are forced to pay as a result of the transaction. [ ]The second step of the economic analysis is to include in the appraisal those project impacts that are relevant for society, but for which a market value is not available(eu commission, DG regional policy guide to CBA ) Social costs are the sum of private costs and external costs Paris 2010 Pierpaolo Girardi 5

6 Externalities Externality is a cost or benefit, not transmitted through prices, incurred by a party not involved in the decision causing the cost or benefit. A benefit in this case is called a positive externality or external benefit, while a cost is called a negative externality or external cost. In these cases in a competitive market, prices do not reflect the full costs or benefits of producing or consuming a product or service. Hence too much or too little of the good will be produced or consumed in terms of overall costs and benefits to society. The market is not efficient in resource allocation (market failure) Paris 2010 Pierpaolo Girardi 6

7 Environmental Externalities Many externalities deal with environmental impacts; Environmental impact are not considered in classic CBA but affect welfare; A factory, or an infrastructure causes impact on Landscape Air quality Global warming Biodiversity Water quality All those are environmental externalities; Paris 2010 Pierpaolo Girardi 7

8 The Definition of External Costs (from ExternE) Definition: An external cost, also known as an externality, arises when the social or economic activities of one group of persons have an impact on another group and when that impact is not fully accounted, or compensated for, by the first group. Example: a power station that generates emissions of SO 2, causing damage to building materials or human health, imposes an external cost. This is because the impact on the owners of the buildings or on those who suffer damage to their health is not taken into account by the generator of the electricity, when deciding on the activities causing the damage Paris 2010 Pierpaolo Girardi 8

9 Internalised costs and External Costs SO2 Emission of coal fired power plant 2000 mg/nm3 SO2 Emission reduction obliged by law 100 mg/nm3 External costs Environmental impact due to residual airborne emission Money spent for end of pipe treatment Internalised costs Paris 2010 Pierpaolo Girardi 9

10 Solutions? Externalities can be internalised in the market (e.g. by means of tax and subsidies) Carbon tax Subsidies to buy new more eco-friendly car. Subsidies to renewable energy. The problem is the quantification in monetary terms Air quality, noise, amenity has no market value. Paris 2010 Pierpaolo Girardi 10

11 Environmental Valuation Valuation, the process of placing monetary values on environmental impacts, is an essential element in incorporating the benefits and costs of environmental effects into the analysis of alternatives. In this way, the wider array of benefits and costs associated with a a project can be considered in deciding which alternative produces the largest net benefit to society. Although valuation is often needed because market prices do not exist or are difficult to measure, recent advances have greatly increased the range of environmental impacts that can be monetized. ( ->environment- >environmental economics -> environmental valuation) Paris 2010 Pierpaolo Girardi 11

12 Monetisation of non-market impacts The most frequently used method is the willingnessto-pay (WTP) approach, which allows the estimation of a money value through users revealed preferences or stated preferences. In other words, users preferences can be observed either indirectly, by observing consumers behaviour in a similar market or directly, by administering ad hoc questionnaires. (EU commission, DG regional policy guide to CBA ) Paris 2010 Pierpaolo Girardi 12

13 Valuation methods for non-market goods Revealed Preference (RP):behaviour shown in the past. Indirect valuation Hedonic Price Method Averting Behaviour Method Travel Cost Method Contingent Behaviour Method Past behaviour of public decision makers Stated Preference (SP): Surveys Direct valuation Contingent Valuation Method (CVM) guidelines from NOAA* panel Choice experiment Surveys for preferences of public decision makers *The National Oceanic and Atmospheric Administration (NOAA) is a federal agency focused on the condition of the oceans and tatmosphere. Paris 2010 Pierpaolo Girardi 13

14 Externalities of Energy: ExternE European Project Complete methodology. Impact pathways Focus on Airborne pollution Paris 2010 Pierpaolo Girardi 14

15 Impact Pathway Source: e.g emission of particulates Kg/year of PM10 Dispersion: e.g atmospheric dispersion model Increase in concentration e.g of PM10 µg/m 3 Dose response function: Impact: cases of asthma due to concentration of PM10 Monetary evaluation: Costs: due to each new cases of asthma Paris 2010 Pierpaolo Girardi 15

16 ExternE: impacts not addressed Landscape and amenity Biodiversity Damocles' effect (high consequences, low probability) Risk aversion Others Other studies has faced these problems, but no similar comprehensive methodologies has been developed. Paris 2010 Pierpaolo Girardi 16

17 WG C3.08 Internalization of external costs for power lines Back Ground Electricity generation and transmission activities have the potential to have a wide range of environmental and social impacts. Scope The aim of the WG is to recommend procedures and methods to evaluate and assess the external costs for Power Lines. Paris 2010 Pierpaolo Girardi 17

18 Starting point and goals Experts share the conviction that the most important impacts are: Impact on biodiversity (flora, fauna, especially birds) Impact on land use and territory Impacts on landscape Impact on property values Open questions deal with quantification of residual impacts and quantification in monetary terms. Paris 2010 Pierpaolo Girardi 18