External cost

The use and effective costs of various energy alternatives are shown in Table 2. Use or internal costs include production, transportation, and distribution. Effective costs take into account the use costs estimated external costs, which include costs associated with damage to the environment caused by utili2ation of various fossil fuels and fuel utili2ation efficiencies, ie, the efficiency of converting fuels into mechanical, electrical, or thermal energy. The effective costs are expressed as /GJ of fossil fuel equivalent (15). The overall equation for the effective cost is... 

The solution to the problems posed by energy externalities is to internalize the externality, so that the external costs and/or benefits are included m the transactions and other activities involved in the pro-... 

Each resei voir generally has a dominant drive, an optimal pattern ofwell locations, and a maximum efficient rate of production (MER), which, if exceeded, would lead to an avoidable loss of ultimate oil recovery. Unfortunately, oil, gas, and water are not evenly distributed within the reservoir. With multiple leases above the reservoir, some lease owners will have more oil, gas, or water than will others, and coordination among competing firms in well placement and in controlling production rates is difficult. Efficient production of the reservoir suggests that some leases not be produced at all. Further, since each firm s production inflicts external costs on the other firms on the formation, some mechanism must be found to internalize those costs in production decisions. 

Market prices of energy often diverge from the true cost to society of consuming that energy. Two of the most common reasons for that divergence are external costs and subsidies, both of which make consumers think that energy is less expensive to society than it really is, and hence lead to more consumption of energy than would be economically optimal. 

According to J. M. Griffin and H. B. Steele (1986), external costs exist when the private calculation of costs differs from society s valuation of costs. Pollution represents an external cost because damages associated with it are borne by society as a whole, not just by the users of a particular fuel. Pollution causes external costs to the extent that the damages inflicted by the pollutant are not incorporated into the price of the fuel associated with the damages. External costs can be caused by air pollution, water pollution, toxic wastes, or any other damage to the environment not included in market prices for goods. 

A comprehensive analysis of external costs and subsidies must treat each and evei"y stage and phase m the process, which makes any such calculation inherently difficult. Uncertainties abound m these calculations, especially for external costs. As a result, estimates of total external costs and subsidies for different energy sectors vary widely. 

While exact estimates of the magnitude of external costs and subsidies are highly dependent on particular situations, a hypothetical example can help explain... 

If the particular energy source in question is already taxed (say at a five percent rate), then part of the external cost is already internalized. The true cost of fuel would remain the same (P X 1.04 X 1.10) but the size of the additional tax needed to correct for the externality would be smaller (about five percent instead of ten percent). 

New subsidies often outlive the public policy purpose that they were intended to address. The better-designed subsidies contain sunset provisions that require explicit action to reauthorize them after a certain time. Subsidy and externality policies arc often interrelated. It may be politically difficult to tax an energy source with high external costs, but much easier to subsidize a competing energy source with low external costs. Such second best solutions arc often implemented when political considerations block the preferred option. 

Damages to human health and the environment are by economists most often considered as market failures since they are external costs not included in the price when a transaction is taking place on the market. If the damage were to be fully financially compensated in the transaction, the damage would not be an external cost and the market would function properly. A properly functioning market implies that there is no problem to be solved (from the point of view of an economist). Externalities is the term used by economists when exploring non-priced effects of transactions [6]. 

External costs, damage costs, also often called just externalities, are a monetization of negative external effects being the consequences of, for example, some sort of environmental degradation. These effects and damages are external because the affected does not receive any compensation and the polluter does not need to pay for the damage. In order for physical measures of impacts to be commonly measurable, they must be valued in monetary units. The monetary valuation of different effects is not a straightforward procedure since many of the effects have no market value. The total value is often composed of both use values and non-use values. 

External costs have to be considered and included in prices in order to give the product their real cost. One way to include external costs is to follow the Polluters Pay Principle (PPP). The PPP state that the polluter should bear the cost of policy... 

External cost of damage is where economic valuation of these impacts i.e. external costs and their value is performed [2]. Evaluation of impacts on both the humans and the ecosystem is based on valuation studies, in order to monetize the external effects. 

The EPS system was initially developed to be used within the product development process as a tool to help assess the environmental performance of products. The system is based on LCA (Life Cycle Assessment) methodology and uses inventory data (kg of substance A), characterization factors (impact/kg of substance X) and weighting factors (cost/impacts) to calculate the external costs or values of a product. By multiplying the characterization factor with the weighting factor, an impact index is obtained (cost/kg of substance X) which describe the cost/values related to the emission per use of a kg of a certain substance. 

In order to illustrate how the results finally mm out, examples for external costs induced by lead emissions and environmental and human health end points are presented here. The example presenting the external costs of lead emissions is more elaborate so as to give the reader an opportunity to follow a typical line of reasoning, while the generic table on typical external costs can be used as examples of final results from economic valuation studies. 

Table 2 presents results from three different methods and studies that have performed large-scale inventories on external costs associated with environmental and human health impacts [37, 38, 44, 45]... 

Table 2 External costs for different environmental and human health impacts...

The external costs of using the flame retardants are caused by long-term adverse impacts in the aquatic environment (reduction in fish production capacity) and severe nuisance in humans (7) and potentially disturbance in human development (Z). There are as of yet no economic values derived for the latter two but we express the values as Y and U. For reduction in fish production capacity the value from the literature is 1 per kilogram fish [37, 38]. And in our example, we assume that the production capacity is reduced by some 10 tonnes of fish. 

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