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Maximizing Social Benefits: Evaluating Externalities in Benefit-Cost Analysis

This resource delves into the complexities of externalities in benefit-cost analysis, exploring the various impacts of insults and values across different sectors. Drawn from authoritative sources, it covers topics such as assessing damages, assigning costs, and the importance of considering environmental, health, and societal factors in cost evaluations. Practical solutions and calculations are provided to help understand and quantify the costs associated with environmental damages. The text emphasizes the significance of addressing social costs to ensure a comprehensive evaluation of projects and policy decisions.

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Maximizing Social Benefits: Evaluating Externalities in Benefit-Cost Analysis

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  1. Kansas corporation commission Externalities in Benefit Cost Tests

  2. EXTERNALITIES: DRAWING THE LINES • External to What? • Changing Notions of Insult/Value • Assessing Damages • Assigning Costs Adapted from Koomey and Krause, Lawrence Berkeley Laboratory, 1997

  3. WATER Source: USGS Circular 1268, March 2004

  4. (LESS) WATER Source: NOAA

  5. AIR Source: Brian McLean, U.S. EPA, "Experience with Cap-and-Trade Programs"

  6. CLIMATE Slide from Jon Anda, President of Environmental Markets Network

  7. HEALTH • Concerns • Asthma • Stroke • Heart Attack • Lung Disease • Mercury Poisoning (especially in utero) • Insect-borne Disease (changing pathogen vectors) CDC, ALA, ACS, EPA, Harvard School of Public Health

  8. WHAT’S THE RIGHT COST? IT’S NOT ZERO…

  9. EXTERNAL TO WHAT? • STAGES OF ENERGY SOURCES (“INTERNAL”) • Exploration/Evaluation • Harvesting • Processing/Refining • Transportation/Distribution • Storage • Conversion (electric generation) • Marketing • End Use Holdren, John P., "Energy and Human Environment: The Generation and Definition of Environmental Problems," in Goodman, Kristoferson, Hollander: Academic Press.

  10. EXTERNAL TO WHAT? • PHASES WITHIN A STAGE • Research • Development/Demonstration • Commercial Construction • Operation and Maintenance • Dismantling • Management of Long-Lived Wastes • Environmental Controls • Regulation and Monitoring Holdren, John P., "Energy and Human Environment: The Generation and Definition of Environmental Problems," in Goodman, Kristoferson, Hollander: Academic Press.

  11. INSULTS • To Physical Health and Human Environment • Resources Used (land, water, energy) • Material Effluents (Nox, SO2, CO2) • Other Physical Transformations (dredging) • Socio-political Influences (politics, employment) Holdren, John P., "Energy and Human Environment: The Generation and Definition of Environmental Problems," in Goodman, Kristoferson, Hollander: Academic Press.

  12. PATHWAYS • Convert Insults to Stresses • Media (air, water, ice, soil, rock, biota) • Processes (evaporation, diffusion, conduction) Holdren, John P., "Energy and Human Environment: The Generation and Definition of Environmental Problems," in Goodman, Kristoferson, Hollander: Academic Press.

  13. STRESSES • Physical or Social Consequences of Insults • Magnitudes of Consequences • Temporal Distribution of Harm • Spatial Distribution of Harm • Coincidence of Risks and Benefits • Scaling (linear or nonlinear) • Resistance to Remedy • Irreversibility • Visibility of Harm Holdren, John P., "Energy and Human Environment: The Generation and Definition of Environmental Problems," in Goodman, Kristoferson, Hollander: Academic Press.

  14. DOING THE MATH EC= EF x HR x VED EC = Externality Cost in ¢/kWh EF = Emission Factor, in lbs/Btu of fuel consumed HR = Heat Rate of power plant, in Btus/kWh VED = Value of Environmental Damage, in ¢/lb

  15. PITFALLS IN ANALYSIS • Inconsistent Boundaries • Average v. Marginal Comparisons • Illusory Precision • Stochasticity • “What’s Countable v. What Counts”

  16. IMPLICATIONS FOR BENEFIT/COST • Estimating value of externalities challenging and not strictly necessary • Societal Cost Test problematic • Total Resource Cost Test more conservative and, at this time, sensible • Many states have years of experience, results • Ratepayer Impact Measure: Would new generation withstand this test? • Emphasis on lower bills

  17. EFFICIENCY AS A RESOURCE • Efficiency is properly treated AS new generation assuming: • Verified, permanent reductions • Performance standards • Reasonable savings estimates: Years of empirical savings data by program is available • Ratio of benefits:costs – 2:1 or even 3:1 has been achieved elsewhere • As long as efficiency is the least cost resource, it should be pursued

  18. Perverse Incentives If we choose not to provide incentives for investor-owned utilities that, added to avoided costs, rival ROI for new generation, then we need to look closely at the following map:

  19. STATES WITH PUBLIC BENEFIT FUNDS

  20. Nancy Jackson • Executive Director • jackson@climateandenergy.org • (785) 331-8743 • www.climateandenergy.org

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