Electric Power Environmental Externalities and Their Control

Externalities are defined as "benefits or costs, generated as a byproduct of an economic activity, that do not accrue to the parties involved in the activity. Environmental externalities are benefits or costs that manifest themselves through changes in the physical-biological environment."(24) For example, the pollution emitted by fossil fuel-fired power plants may result in harm to people or the environment. Although those generators of electricity comply with environmental regulations and certainly do not intend to cause that harm, the costs (economic value) of the harm, if any, may not be included in the price of electricity. To the extent that the electricity industry does not pay these environmental costs and consumers do not pay the full cost of electricity they purchase, energy resources may not be allocated efficiently.

The practice of including all costs and benefits in market transactions is known as full-cost pricing. Full-cost pricing of electricity is a complex and controversial matter. Each policy or regulation to ameliorate externalities must account for the existing layer of policies and regulations. Many of these are environmental regulations. Others are regulators' decisions on electricity prices, which may cause prices to exceed the marginal costs of producing electricity. It is also difficult to precisely estimate the magnitude of the externalities. If environmental regulations are not stringent enough, some environmental externalities will remain; if regulations are too stringent, resources will be over-allocated to controls.

Further, the environment can absorb a certain level of pollution without damage. This threshold, below which control is not warranted, may be uniform throughout the country or may vary from region to region, depending on the pollutant and the environmental concern in question. The nature of the pollutant and the environmental problem greatly influence the viability of any abatement approach or strategy, which in turn influences the efficiency of resource allocations.

From the standpoint of developing an efficient control framework, perhaps the most important characteristics of an air pollutant are the sensitivity of its point of emission and whether it causes local, regional, or national air pollution. "Uniformly mixed" pollutants have the same effect on the atmosphere regardless of their geographic point of origin. For example, emissions of CO2 from anywhere in the country or world have uniform impacts on climate change. The effects of "nonuniformly mixed" pollutants, on the other hand, are very sensitive to conditions around the point of emission. This sensitivity depends upon the state of the area's environment and whether the prevailing winds might transport the emissions to another area and exacerbate the problems there. The pollutants that cause urban ozone and acid rain are nonuniformly mixed pollutants. The emission of these pollutants in certain areas may not be a problem or result in externalities, and environmental economic theory states that they should be regulated (or not) accordingly.