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Chapter 4. Externalities and Wind compared to other Technologies

Introduction to Externalities

Analyses of the economics of wind energy have shown that it is increasingly competitive with conventional electricity generation technologies. However, in present market conditions the gap towards full competitiveness has to be covered by economic support instruments such as feed-in tariffs, and tradable green certificates.

While wind energy and other renewable energy sources have environmental benefits compared with conventional electricity generation, these benefits may not be fully reflected in electricity market prices, despite a fledgling CO2 emission trading scheme. The question therefore is: "Do present electricity market prices give an appropriate representation of the full costs to society of producing electricity?". In other words, are externalities included in the price mechanisms?

The externalities of electricity generation deal with such questions in order to estimate the hidden benefit or damage of electricity generation not otherwise accounted for in the existing pricing system. The costs are real and "external" because they are paid for by third parties and by future generations, and not directly by the generators or consumers. In order to establish a consistent and fair comparison of the different electricity generation technologies, all costs to society, both internal and external, need to be taken into account.

The following sections of Chapter 4 explain the basic economic concept of external cost, the policy options to internalise external cost and the present knowledge of the external costs of different electricity generation technologies. Finally, empirical results on the specific and total emissions, and on the external cost of fossil-fuel based electricity generation in the EU27 are presented on Member State level for the year 2005. Chapter 5 continues with quantitative results on the environmental benefits of wind energy in terms of avoided emissions and external costs for different wind deployment scenarios in the EU27 Member States up to the years 2020 and 2030.

Economic Concept of External Effects

Definition and Classification

The different definitions and interpretations of external costs relate to the principles of welfare economics, which state that economic activities by any party or individual making use of scarce resources cannot be beneficial if they adversely affect the well-being of a third party or individual.

From this, a generic definition of externalities is "benefits and costs which arise when the social or economic activities of one group of people have an impact on another, and when the first group fails to fully account for their impacts" (European Commission (1994).

By definition, externalities are not included in the market pricing calculations and, therefore, it can be concluded that private calculations of benefits or costs may differ substantially from society's valuation if substantial external costs occur. Externalities can be classified according to their benefits or costs in two main categories:

  • Environmental and human health externalities: These can additionally be classified as local, regional, or global, with the latter referring to climate change caused by emissions of CO2 or destruction of the ozone layer by emissions of CFCs or SF6.
  • Non-environmental externalities: Non-environmental externalities refer to hidden costs, such as those borne by tax-payers in the form of subsidies, research and development costs or benefits like employment opportunities; although for the latter it is debatable whether this constitutes an external benefit in the welfare economics sense.

If an external cost is recognised and charged to a producer, then it is said to have been 'internalised'.

Importance of Externalities

By definition, markets do not include external effects or their costs. It is therefore important to identify the external effects of different energy systems and then to monetise the related external costs. It is then possible to compare the external costs with the internal costs of energy, and to compare competing energy systems, such as conventional electricity generation technologies and wind energy.

As markets do not intrinsically internalise external costs, internalisation has to be achieved by adequate policy measures, such as taxes or adjusted electricity rates. Before such measures can be taken, policy-makers need to be informed about the existence and the extent of external costs of different energy systems. Analysing external costs is not an easy task. Science (to understand the nature of the impacts) and economics (to value the impacts) must work together to create analytical approaches and methodologies, producing results upon which policy-makers can base their decisions for appropriate measures and policies.

Valuation procedures are needed, for example: putting a value on a person becoming ill due to pollution, or on visual intrusion caused by a wind turbine, or on future climate change damage caused by a tonne of CO2. Such evaluations of externalities have uncertainties due to assumptions, risks and moral dilemmas. This sometimes makes it difficult to fully implement the internalisation of externalities by policy measures and instruments (e.g. emission standards, tradable permits, subsidies, taxes, liability rules, voluntary schemes, etc.). Nevertheless, they offer a base for politicians to improve the allocation processes of the energy markets.

Subsequently, the question arises whether the internalisation of externalities in the pricing mechanism could impact on the competitive situation of different electricity generation technologies, fuels or energy sources. As Figure 4.1 illustrates, a substantial difference in the external costs of two competing electricity generating technologies may result in a situation where the least-cost technology (where only internal costs are considered) may turn out to be the highest-cost solution to society, if all costs (internal and external) are taken into account.

Figure 4.1 Social cost of electricity generation, source Auer

Figure 4.1 Social cost of electricity generation, source Auer

Present State of Knowledge

Serious study of external costs began in the late 1980s, when the first studies were published attempting to quantify and compare the external costs of electricity generation. The most important early studies are listed in the Appendix. These studies seeded public interest in externalities, since they indicated that external costs could be of the same order of magnitude as the direct internal costs of generating electricity. Since that time more research and different approaches, better scientific information, and constant improvement of the analytical methodologies used, have advanced the study of externalities, especially in Europe and the U.S.

This development has resulted in a convergence of methodologies, at least for calculating the external costs of fossil-fuel based electricity generation and wind energy. Despite the uncertainties and debates about externalities, it can be stated that with the exception of nuclear power and long-term impacts of GHGs on climate change, the results of the different research groups converge and can be used as a basis for developing policy measures aimed at a further internalisation of the different external costs of electricity generation.

Externalities of Different Types of Electricity Generation Technologies

Pioneering Studies

The most noted project on determining the external cost of energy is the ExternE project (ExternE - Externalities of Energy), which attempted to develop a consistent methodology to assess the externalities of electricity generation technologies. Work and methodologies on the ExternE project are continuously updated. For comprehensive details on ExternE, refer to

Prior to the ExternE project, studies were conducted in the late 1980s and beginning of the 1990s, that gave an early insight into the importance of externalities for energy policy as a decision-making tool. An overview of the key aspects of these early studies is presented in the Endnote of Chapter 5.

The ExternE methodology is a bottom-up approach, which first characterises the stages of the fuel cycle of the electricity generation technology in question. Subsequently, the fuel chain burdens are identified. Burdens refer to anything that is, or could be, capable of causing an impact of whatever type. After having identified the burdens, an identification of the potential impacts is achieved independent of their number, type or size. Every impact is then reported. This process just described for the fuel cycle is known as the 'accounting framework'. For the final analysis, the most significant impacts are selected and only their effects are calculated.

Afterwards, the 'impact pathway' approach developed by ExternE proceeds to establish the effects and spatial distribution of the burdens to see their final impact on health and the environment. Then, the 'economic valuation' assigns the respective costs of the damages induced by each given activity.

The methodology summarised above was implemented in the computer model EcoSense (also within the ExternE project). EcoSense is based on the impact pathway approach and, therefore, widely used to assess environmental impacts and the resulting external costs of electricity generation technologies. Moreover, EcoSense provides the relevant data and models required for an integrated impact assessment related to airborne pollutants.

Figure 4.2 Impacts pathway approach. Source: European Commission (1994).

Figure 4.2 Impacts pathway approach. Source: European Commission (1994).

The modelling approach of EcoSense is briefly summarised in section

Methodology for the Calculation of External Costs of Different Electricity Generation Technologies based on the EcoSense Model where the different steps for the determination of empirical results of external costs of electricity generation in the EU27 Member States are presented. It is important to note that the EcoSense model not only includes the external costs caused by conventional electricity generation in its own country but also models the pathway of emissions from conventional power plants to the different receptors (humans, animals, plants, crops, materials, etc.) all over Europe (i.e. also those located thousands of kilometres outside an EU Member State). The aspect that emissions from one country pass to other countries, and, especially for climate change, to the whole world is essential to derive robust results. The objective of the EcoSense model, however, is to model cross-border effects in Europe only, and not on global scale (for further details about the EcoSense model see

Methodology for the Calculation of External Costs of Different Electricity Generation Technologies based on the EcoSense Model


Because air pollutants can damage a number of different receptors (humans, animals, plants, etc.), the task of analysing the impacts of any given emission is complex. Moreover, the final values of external effects and external costs vary between different countries and regions, since specific peculiarities from every country have an influence on the results due to a different range of technologies, fuels and pollution abatement options as well as locations.

In general, the fossil-fuel cycle of electricity generation demonstrates the highest values on external effects and external cost (coal, lignite, peat, oil and gas), of which gas is the least damaging. In the ExternE studies, nuclear and renewable energy show the lowest externalities or damages.

Fuel Cycle of Electricity Generation Technology

In almost all studies to date, the fossil-fuel cycles of electricity generation are associated with higher external costs than nuclear and renewable energies. An exception are the studies undertaken by Hohmeyer (1988) and Ottinger (1990) which also show significant external costs of nuclear energy:

  • For the fossil-fuel cycles, earlier studies derived the impacts of emissions from regional and national statistics as a base for the economic valuation of the damage (top-down approach). In contrast, the more recent studies made use of the damage function approach in which emissions of a pollutant are site-specifically quantified and their dispersion in the environment modelled to quantify the impact through dose-response functions. Finally, a monetary value is assigned to the impact (bottom-up approach). The emissions, concentrations and impacts of earlier studies are greater than those for recent studies leading also to diverse results. For instance, atmospheric sulphur oxides (SOx), nitrogen oxides (NOx), total suspended particles (TSP), and carbon dioxide (CO2) are greater in earlier studies, thereby, results for associated health effects are larger.
  • In the case of nuclear power, the assessment of severe accidents is the major focus of the analyses. Factors contributing to result variation are risk perception, resource depletion, and public spending on research and development. Hohmeyer (1998) and Ottinger et al. (1990), in contrast to the other studies, used data from the Chernobyl accident as the basis for their external cost analysis from severe reactor accidents. Generally, all studies conclude that the issue of the public's perception of the risks of nuclear power remains unresolved. Concluding, the weakest points of externality studies of electricity generation so far has been that in almost all studies it is assumed that (i) in the nuclear cycle waste and other hazardous impacts are well managed and (ii) the problem of accidents (e.g. severe core melt-down accidents with containment rupture) and its disastrous effects for society are not addressed accordingly and/or are completely neglected.
  • For renewable energies the external costs are usually lowest among all energy generation technologies. However, the use of hydro power can have significant external effects as it can impact high-value ecosystems and adjacent population. External effects from wind energy such as noise creation and visual impacts can also be significant in certain areas (for a detailed discussion on that, see earlier chapters of this volume as well as

    Methodology for the Calculation of External Costs of Different Electricity Generation Technologies based on the EcoSense Model

Emissions of Fossil-fuel Based Electricity Generation

The most important emissions concerning electricity generation are CO2, SO2, NOx and also PM10 (particulate matter up to 10 micrometers in size). Emissions generally depend on the type of fuel used:

  • CO2 emissions are related to carbon content. There is no realistic opportunity of reducing such carbon dioxide emissions by using filters or scrubbers, although techniques such as burning fossil-fuel with pure oxygen and capturing and storing the exhaust gas may reduce the carbon content of emissions. Carbon (dioxide) capture is the only possibility.
  • For SO2, the quantity of emissions per kWh electricity generated depends on the sulphur content of the input fuel. Furthermore, SO2 emissions can be reduced by filtering the exhaust gases and converting SO2 to gypsum or elementary sulphur. In general, the sulphur content of lignite is rather high, fuel oil and hard coal have a medium sulphur content and natural gas is nearly sulphur free.
  • In contrast, NOx emissions are practically unrelated to input fuel. As NOx gases are formed from the nitrogen in air during combustion, their formation depends mainly upon the combustion temperature. Thus, NOx emissions can be reduced by choosing a favourable (low) combustion temperature or by denitrifying the exhaust gases (by wet scrubbing).
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