7
Overall Conclusions and Recommendations

In response to a charge from Congress, the committee defined and evaluated key external costs and benefits associated with the production, distribution, and consumption of energy from various selected sources. We were asked to focus on health, environmental, security, and infrastructure effects that are not—or may not be—fully incorporated into the market price of energy or into government policies related to energy production, distribution, or consumption. The external effects of energy are mostly negative, but the overall benefits of U.S. energy systems to society are enormous. However, the estimation of those benefits, which are mostly reflected in energy prices and markets, was not in the committee’s charge.

The results of this study are intended to inform public policy choices, such as selecting among fuel types, or to help identify situations in which additional regulation may be warranted for reducing external costs produced by an energy-related activity. When sources with large aggregate damages are indentified, analysis of the costs and benefits of reducing the burdens resulting from those damages is warranted.

This chapter presents an overview of the results of the committee’s analyses. It provides factors to keep in mind when interpreting the results of the evaluations, overall conclusions, and recommendations for research to inform future consideration of various issues.

THE COMMITTEE’S ANALYSES

Our study examined external effects over the life cycle of electricity generation, transportation, and production of heat for the residential, com-



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7 Overall Conclusions and Recommendations In response to a charge from Congress, the committee defined and evaluated key external costs and benefits associated with the production, distribution, and consumption of energy from various selected sources. We were asked to focus on health, environmental, security, and infrastructure effects that are not—or may not be—fully incorporated into the market price of energy or into government policies related to energy production, distribution, or consumption. The external effects of energy are mostly negative, but the overall benefits of U.S. energy systems to society are enor- mous. However, the estimation of those benefits, which are mostly reflected in energy prices and markets, was not in the committee’s charge. The results of this study are intended to inform public policy choices, such as selecting among fuel types, or to help identify situations in which additional regulation may be warranted for reducing external costs pro- duced by an energy-related activity. When sources with large aggregate damages are indentified, analysis of the costs and benefits of reducing the burdens resulting from those damages is warranted. This chapter presents an overview of the results of the committee’s analyses. It provides factors to keep in mind when interpreting the results of the evaluations, overall conclusions, and recommendations for research to inform future consideration of various issues. THE COMMITTEE’S ANALYSES Our study examined external effects over the life cycle of electricity generation, transportation, and production of heat for the residential, com- 33

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338 HIDDEN COSTS OF ENERGY mercial, and industrial sectors. We estimated damages that remained in 2005 after regulatory actions had taken place as well as damages expected to remain in 2030 in light of possible future regulations. Our boundaries for analysis were not identical in all sectors, but we sought to use existing data and methods for well-recognized externalities. We did not attempt to de- velop wholly new methods for estimating impacts and damages, but we did identify areas where additional research would be particularly valuable. For electricity generation and production of heat, we focused on mon- etizing downstream effects related to air pollution from coal-fired and gas-fired processes. Upstream effects and other downstream effects have been quantified but not monetized or have been discussed in qualitative terms. We did not assess effects associated with power-plant construction, and we did not assess effects from methane emissions from transporting natural gas by pipeline for heat. For transportation, we monetized effects related to air pollution for essentially the full life cycle, including vehicle manufacture. We considered climate-change effects associated with energy production and use, and we reviewed various attempts that have been made in the literature to quantify and monetize the damages associated with the effects of climate change. We also considered the literature on a variety of damages that are associated with the nation’s energy infrastructure: disrup- tion in the electricity transmission grid, vulnerability of energy facilities to accidents and possible attack, external costs of oil consumption, supply security considerations, and national security externalities. The committee focused its attention on externalities as generally de- fined by economists. As discussed in Chapter 1, there are many other distor- tions that occur in markets related to energy production and consumption that may create opportunities for improvement of social welfare but that are not externalities. There are also equity or “fairness” consequences of market activities. Although other distortions and equity concerns may be appropriate for policy formulation, they are beyond the scope of this study and were not considered. LIMITATIONS IN THE ANALYSES Estimating most of the impacts and damages involves a several-step process based on many assumptions; this process is true for even relatively well-understood impacts. In summarizing our results, we attempt to convey the uncertainty surrounding our estimates. The results of the committee’s study should be considered in light of important caveats. Although our analysis was able to consider and quantify a wide range of burdens and damages (for example, premature mortality resulting from exposure to air pollution), there are many potential damages that we did not quantify. Therefore our results should not be interpreted as a full accounting. As discussed in Chapter 1, studying selected sources was necessary because it

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33 OVERALL CONCLUSIONS AND RECOMMENDATIONS would have been infeasible to evaluate the entire energy system with the time and resources available to the committee. Even within the sources selected by the committee, we were unable to monetize all externalities over a life cycle. Our analysis required use of a wide set of assumptions and decisions about analytical techniques that can introduce uncertainty into the results. Although we did not attempt to conduct a formal uncertainty analysis, we have been cautious throughout our discussion of results—and urge the reader to be cautious—that is, not to over-interpret small differences in results among the wide range of energy sources and technologies assessed. There is uncertainty in the analyses with respect to the quality of the data available, the completeness of the analyses (factors that may have been left out or have been unintentionally given inappropriate weight), and the degree to which computation models correctly include the most important variables. Uncertainty also involves unknowns. For example, some climate effects of greenhouse gas (GHG) emissions are poorly understood and might continue to be for some time. In some cases in which effects werre unknown, the committee was able to conclude that the effects were prob- ably small compared with the known effects. In other cases, the committee was not able to provide even qualitative estimates of unknown effects; in such cases, we had to accept that we did not know. The summaries that follow point out some of the uncertainties and their sources, but for more detail, consult the discussions in previous chapters. ELECTRICITY GENERATION Chapter 2 examines burdens, effects, and damages associated with elec- tricity generation from coal, natural gas, nuclear power, wind, solar energy, and biomass. In the cases of fossil fuels (coal and natural gas) and nuclear power, the analysis includes externalities associated with upstream activi- ties, exploration, fuel extraction and processing, and the transportation of fuel to generating facilities, as well as damages associated with down- stream activities of electricity generation and distribution. Some effects are discussed in qualitative terms and others are quantified and, if possible, monetized. Although this section presents estimates of GHG emissions due to electricity generation, it does not present damages associated with effects related to climate change. Those damages are discussed in separate sections in this chapter. Electricity from Coal For electricity generation from coal, the committee monetized effects on human health, visibility of outdoor vistas, agriculture, forestry, and dam- ages to building materials associated with emissions of airborne particulate

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340 HIDDEN COSTS OF ENERGY matter (PM), sulfur dioxide (SO2) and oxides of nitrogen (NOx) from 406 coal-fired power plants in the United States, excluding Alaska and Hawaii. More than 90% of monetized damages are associated with premature human mortality, and approximately 85% of damages come from SO2 emissions, which are transformed into airborne PM. Aggregate damages (unrelated to climate change) in 2005 were approximately $62 billion (2007 U.S. dollars [USD]), or 3.2 cents per kilowatt hour (kWh) (weighting each plant by the electricity it produces); however, damages per plant varied widely. The distribution of damages across plants is highly skewed (see Fig- ure 7-1). The 50% of plants with lowest damages per plant accounted for 25% of net electricity generation and produced 12% of damages. The 10% of plants with the highest damages per plant also accounted for 25% of net generation, but they produced 43% of the damages. Although damages are 800 Average Total Damages by Decile (Million 2007 $) 666 600 400 300 185 200 124 91 71 48 32 19 8 0 1 2 3 4 5 6 7 8 9 10 FIGURE 7-1 Distribution of aggregate damages from coal-fired power plants by de- cile (2007 U.S. dollars). In computing this chart, plants were sorted from smallest to largest based on aggregate damages. The lowest decile represents the 40 plants with the smallest aggregate damages per plant. The figure on the top of each bar is the average across all plants of damages associated with SO2, NOx, PM2.5, and PM10 Figure 7-1 (particles with diameters less than or equal to 2.5 and 10 microns, respectively). Damages related to climate-change effects are not included. R01631 vector editable

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341 OVERALL CONCLUSIONS AND RECOMMENDATIONS FIGURE 7-2 Air-pollution damages from coal-fired electricity generation for 406 plants in 2005. Damage estimates are reported in 2007 U.S. dollars. Damages re- lated to climate-change effects are not included. Figure 7-2 larger for plants that produce morecolor electricity, less than half of the variation R01631 in damages across plants is explained by differences in net generation. The map in Figure 7-2 shows the sizebitmapped created by each of the 406 uneditable of damages image plants by plant location. Plants with large damages are concentrated to the east of the Mississippi River, along the Ohio River Valley, in the Middle Atlantic, and in the South. Damages per kWh also varied widely across plants (Figure 7-3)—from over 12 cents per kWh (95th percentile) to less than a cent (5th percentile) (2007 USD).1 Most of the variation in damages per kWh can be explained by variation in emissions intensity (emissions per kWh) across plants. In the case of SO2 emissions, over 80% of the variation in SO2 damages per kWh is explained by variation in pounds of SO2 emitted per kWh. Damages per ton of SO2, which vary by plant, are less important in explaining variation in SO2 damages per kWh. (Damages per ton are capable of explaining only 24% of the variation in damages per kWh.) 1 These estimates are not weighted by electricity generation.

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342 HIDDEN COSTS OF ENERGY 30 28.6 24.9 20 Percent 15.5 10 7.9 7.1 7.1 3.2 2.5 2.2 1.5 1.0 0.2 0.5 0.2 0.2 0.2 0.0 0.0 0.0 0.0 0 0 .05 .1 .15 .2 .25 .3 Damage per kWh (2007 $/kWh) FIGURE 7-3 Distribution of air-pollution damages per kilowatt-hour for 406 coal- fired power plants in 2005 (in 2007 U.S. dollars). All plants are weighted equally. Damages related to climate-change effects are not included. For 2030, despite increases in damages per ton of pollutant due to pop- ulation growth and income growth, average damages per kWh (weighted by electricity generation) at coal plants are estimated to be 1.7 cents per kWh, compared with 3.2 cents per kWh in 2005 (2007 USD). The fall in damages per kWh is explained by the assumption that pounds of SO2 per megawatt hour (MWh) will fall by 64% and that NOx and PM emissions per MWh will fall by approximately 50% (see Chapter 2). Greenhouse Gas Emissions The emissions of CO2 from coal-fired electricity-generating facilities are the largest single source of GHG emissions in the United States. Because the heat rate (energy from coal needed to generate 1 kWh of electricity) varies widely among coal-fired plants, the CO2 emissions vary as well. The 5th-95th percentile range is 0.95-1.5 tons (the average being about 1 ton of CO2 per MWh of power generated). The main factors behind the dif- ferences in the CO2 emitted are the technology used to generate the power and the age of the plant.

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343 OVERALL CONCLUSIONS AND RECOMMENDATIONS Electricity from Natural Gas For estimating nonclimate-change-related damages for 498 facilities that generate electricity from natural gas in the United States, we used a similar approach as in the coal analysis. The gas facilities, which include electric utilities, independent power producers, and combined heat and power facilities, each generated at least 80% of their electricity from gas and had installed capacity of at least 5 MW. The aggregate damages as- sociated with emissions of SO2, NOx, and PM from these facilities, which generated 71% of electricity from natural gas, were approximately $0.74 billion (2007 USD), or 0.16 cents per kWh. Thus, on average, nonclimate- change damages associated with electricity generation from natural gas are an order of magnitude lower than damages from coal-fired electricity generation. The distribution of damages across plants is, however, highly skewed (see Figure 7-4). The 10% of plants with highest damages per plant 10 9.73 Average Total Damages by Decile (Million 2007 $) 8 6 4 2.18 2 1.28 0.78 0.46 0.29 0.18 0.10 0.05 0 –0.02 1 2 3 4 5 6 7 8 9 10 FIGURE 7-4 Distribution of aggregate damages from natural-gas-fired power plants by decile (in 2007 U.S. dollars). Plants were sorted from smallest to largest based on aggregate damages to compute this chart. The lowest decile represents the 50 plants with the smallest aggregate damages per plant. The number on the top of each bar is the average across all plants of damages associated with SO2, NOx, PM2.5, and PM10 (particles with diameters less than or equal to 2.5 and 10 microns, Figure 7-4 respectively). Damages related to climate-change effects are not included. R01631 vector editable

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344 HIDDEN COSTS OF ENERGY accounted for 65% of the air-pollution damages produced by all 498 plants. The 50% of plants with lowest damages per plant accounted for only 4% of the aggregate damages. (Each group of plants, respectively, accounted for approximately one-quarter of the electricity generation.) Although dam- ages were larger for plants that produced more electricity, less than 40% of the variation in damages across plants is explained by differences in net generation. The largest damages are produced by gas plants located in the Northeast (along the Eastern seaboard), and in Texas, California, and Florida (see Figure 7-5). Damages per kWh also vary widely across plants: from more than 1.5 cents per kWh (95th percentile) to less than 0.05 cents (5th percentile) (2007 USD).2 Most of the variation in NOx damages per kWh can be explained by variation in emission intensity across plants; however, for PM2.5, which accounted for more than half of the monetized air-pollution damages, variation in damages per ton of PM2.5 (that is, variation related to the location of the plant relative to population distribution and prevailing winds) are as important in explaining variation in PM2.5 damages per kWh as differences in PM2.5 emissions intensity. Damages per kWh at the 498 facilities are predicted to be 30% lower in 2030 than in 2005; they are predicted to fall from 0.16 cents to 0.11 cents per kWh on average (2007 USD) (weighting each plant by electricity gen- eration). The reduction is due to a predicted 19% fall in NOx emissions per kWh hour and a 32% fall in PM2.5 emissions per kWh (see Chapter 2). Greenhouse Gas Emissions Natural gas plants on average emitted approximately half as much CO2 at the generation stage as did coal-fired power plants in 2005—about half a ton of CO2 per MWh. As the heat rate (energy from gas needed to generate 1 kWh of electricity) varied among gas-fired plants, so did CO2 emissions, the 5th-95th percentile ranged from 0.3 to 1.1 tons per MWh. As discussed later in this chapter, nonclimate-change damages from natural-gas-fired electricity generation are likely to be much smaller than its damages related to climate change. Electricity from Nuclear Power The committee did not quantify damages associated with nuclear power; however, we reviewed studies conducted by others and consider 2 These estimates are not weighted by electricity generation.

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34 OVERALL CONCLUSIONS AND RECOMMENDATIONS FIGURE 7-5 Air-pollution damages from natural-gas-fired electricity generation for 498 plants in 2005. Damages are expressed in 2007 U.S. dollars. Damages related to climate-change effects are not included. their conclusions relevant.3 Overall, other studies have found that damages associated with the normal operation of nuclear power plants (excluding the possibility of damages in the remote future from the disposal of spent fuel) are low compared with those from fossil-fuel-based power plants. For surface-mine workers, exposure to radon is generally less important than direct irradiation or dust inhalation, but radon exposure can be impor- tant for underground miners. However, if radiologic exposure is taken into account in miners’ wages, it is not considered an externality. For members of the public, the most significant pathways from an operating uranium mine are radon transport and radionuclide ingestion following surface- water transport. From a rehabilitated mine, the more significant pathways over the long term are likely to be groundwater as well as surface-water transport and bioaccumulation in animals and plants located at the mine 3 The committee did not quantify damages associated with nuclear power because the analy- sis would have involved power plant risk modeling and spent-fuel transportation modeling that would have taken far greater resources and time than were available for this study.

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346 HIDDEN COSTS OF ENERGY site or on associated water bodies. Little uranium is currently mined in the United States; most of the uranium supplied to U.S. nuclear power plants comes from Canada and Russia. Downstream impacts are largely confined to the release of heated water used for cooling and the production of low-level radioactive wastes (LLRW) and high-level radioactive wastes (HLRW) from spent fuel. Release of highly radioactive materials has not occurred on a large scale in the United States (but obviously has occurred elsewhere). LLRW is stored for decay to background levels and then disposed of as nonradioactive waste (a practice possible with slightly contaminated materials), or it is disposed of in near- surface landfills designed for radioactive wastes. For spent nuclear fuel that is not reprocessed and recycled, HLRW is usually stored at the plant site. No agreement has been reached on a geologic repository for HLRW in the United States, and, therefore, little HLRW is transported for long distances. The issue of having a permanent repository is perhaps the most contentious nuclear-energy issue, and considerably more study on the externalities of such a repository is warranted. Electricity from Wind Energy The committee relied on information in the scientific literature for its assessment of wind power for producing electricity; it focused on land- based wind turbines, because no offshore turbines have been permitted yet in the United States. Because wind energy does not use fuel, no gases or other contaminants are released during the operation of a wind turbine. Emissions of SO2, NOx, and PM and GHGs over the life cycle are much smaller per kWh than for coal or natural gas. Upstream effects are related to the mining, processing, fabrication, and transportation of raw materials and parts; those parts are normally transported to the wind-energy plant’s site for final assembly. Effects related to downstream activities include visual and noise impacts, impacts on bird and bat species, and land-use effects that accompany the construction of any electricity-generating plant and transmission of electricity. Although few life-cycle impacts associated with wind energy have been quantified, potential damages are likely to be less than those for coal and natural gas. For example, aggregate land-use damages over the entire life cycle are also likely to be smaller for electricity generation from wind than for coal and natural gas. However, better information is needed, especially in light of the probable increase in the number and density of wind turbines. Even if the expansion of wind energy is taken into account, the estimated number of birds killed by wind turbines is dwarfed by the number killed by transmission lines. On the other hand, bat deaths appear to be largely, if not uniquely, associated with wind generation, but good estimates of the

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34 OVERALL CONCLUSIONS AND RECOMMENDATIONS numbers of bats killed are not available. In addition, the lack of under- standing of the demography and ecology of bats makes it difficult to assess the importance of bat deaths. Societal damages associated with the killing of bats by wind turbines are currently small by comparison with the ag- gregate damages associated with electricity generation by coal, natural gas, and the sum of all other sources. Electricity from Solar Energy Much of the United States receives enough solar energy to produce about 1 kWh per square meter of panel area per day, with considerable lo- cal variability from north to south and regionally as a result of sun angles and weather patterns. At present, most solar panels are installed on build- ing roofs or immediately adjacent to buildings to provide electricity on site. When a site’s electricity use exceeds solar energy availability, electricity is supplied from the grid (or from batteries, if electricity demand is low). In this case, solar panels reduce grid-based electricity demand at the end use, thus becoming similar to an energy efficiency improvement. Some solar panel installations also can feed excess electricity back into the grid during periods of peak solar or low local on-site demand periods. Concentrating solar power (CSP)4 and photovoltaic (PV) electricity generation by the electricity sector combined to supply 500 gigawatt hours (GWh) in 2006 and 600 GWh in 2007, which constitute about 0.01% of the total U.S. electricity generation. Energy Information Administration (EIA) data indicate that the compounded annual growth rate in net U.S. generation from solar was 1.5% from 1997 to 2007 (NAS/NAE/NRC 2009b). However, this estimate does not account for the growth in resi- dential and other small PV installations, which are applications that have displayed the largest growth rate for solar electricity. Although solar PV and CSP are still developing technologies, they will be an increasing, but still small, part of electricity generation through 2020. Like wind power, solar power emits no gaseous pollutants during op- erations to produce electricity. Upstream life-cycle activities include mining of materials for solar panels and the balance-of-system components used to convert the electricity to alternating current. Downstream life-cycle ac- tivities include electricity generation, storage, and disposal or recycling of worn-out panels. Worn-out panels have the potential to produce a large 4 CSP installations use arrays of mirrors to focus direct beam incident sunlight to heat a working fluid and generate electricity through a thermal power cycle. Desert locations with low humidity and high insolation could allow large-scale CSP electricity generation at lower costs than PV installations. Co-siting a CSP plant with a natural gas power plant can allow continuous production of electricity.

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TABLE 7-3 Monetized Damages Per Unit of Energy-Related Activitya Climate Damages (per ton CO2-eq)c Energy-Related Activity (Fuel Type) Nonclimate Damage At $10 At $30 At $100 CO2-eq Intensity Electricity generation 3.2 cents/kWh 2 lb/kWh 1 cent/kWh 3 cents/kWh 10 cents/kWh (coal) Electricity generation 0.16 cents/kWh 1 lb/kWh 0.5 cent/kWh 1.5 cents/kWh 5 cents/kWh (natural gas) Transportationb 1.2 to >1.7 cents/VMT 0.3 to >1.3 lb/VMT 0.15 to >.65 cent/VMT 0.45 to >2 cents/VMT 1.5 to >6 cents/VMT Heat production (natural 11 cents/MCF 140 lb/MCF 70 cents/MCF 210 cents/MCF 700 cents/MCF gas) aBased on emission estimates for 2005. Damages are expressed in 2007 U.S. dollars. Damages that have not been quantified and monetized are not included. bTransportation fuels include E85 herbaceous, E85 corn stover, hydrogen gaseous, E85 corn, diesel with biodiesel, grid-independent HEV, grid- dependent HEV, electric vehicle, CNG, conventional gasoline and RFG, E10, low-sulfur diesel, tar sands. (See Table 7-1 for relative categories of nonclimate damages and Table 7-2 for relative categories of GHG emissions.) cOften called the “social cost of carbon.” ABBREVIATIONS: CO2-eq, carbon dioxide equivalent; VMT, vehicle miles traveled; MCF, thousand cubic feet; E85, ethanol 85% blend; HEV, hybrid electric vehicle; CNG, compressed natural gas; RFG, reformulated gasoline. 361

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362 HIDDEN COSTS OF ENERGY determined from the size of damages alone. We emphasize, however, that economic efficiency is only one of several potentially valid policy goals that need to be considered in managing pollutant emissions and other damages. OVERALL CONCLUSIONS AND IMPLICATIONS Electricity Generation Our analysis of the damages associated with energy for electricity fo- cused on air-pollution damages—both local and global—associated with electricity generation. These estimates can be used to inform the choice of type of fuel used to generate electricity and to guide policies regarding the regulation of air emissions from electricity generation. Regarding Comparisons Among Fuels for Electricity Generation • In 2005 damages per kWh from SO2, NOx, and PM emissions were an order of magnitude higher for coal than for natural gas plants: on average, approximately 3.2 cents per kWh for coal and 0.16 cents per kWh for natural gas (2007 USD). SO2, NOx, and PM emissions per kWh were virtually nil for electricity generation from nuclear, wind, and solar plants and not calculated for plants using biomass for fuel. • Average figures mask large variations among plants in air-pollution damages per kWh, which primarily reflect differences in pollution control equipment. For coal plants, the 5th percentile of the distribution of dam- ages was only 0.5 cents per kWh (2007 USD). Newer plants emit signifi- cantly less SO2 and NOx per kWh than older plants. Regarding the Regulation of Air-Pollutant Emissions from Electricity Generation • Estimates of aggregate air-pollution damages (damages per kWh times kWh generated) can help to identify situations where additional pol- lution controls might pass the benefit-cost test. We note that the damages from SO2, NOx, and PM at all coal plants, conservatively calculated, were approximately $62 billion in 2005 (2007 USD). (This figure represents the damages from emissions in 2005 relative to zero emissions.) When considering regulations, these damages provide important information to be compared with the costs of controlling emissions related to criteria air pollutants—in particular, comparing the marginal damages per kWh or ton of pollutant with the marginal costs of reducing the emissions. • The distribution of damages associated with emissions of SO2, NOx, and PM is highly skewed for both coal-fired power plants and

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363 OVERALL CONCLUSIONS AND RECOMMENDATIONS natural-gas-fired plants. The 10% of coal plants with the lowest damages produced 43% of air-pollution damages from all coal plants, while the 50% of the coal plants with the lowest damages produced less than 12% of the aggregate damages. (Each group of plants produced the same amount of electricity—about 25% of net generation from coal.) The 10% of natural gas plants with the highest damages per plant in our study produced 24% of the electricity but 65% of the damages. • For policy purposes, it is useful to know the damages associated with emitting an additional ton of a pollutant because the most economi- cally efficient pollution-control policies are those that target emissions directly. These damages vary significantly depending on the pollutant (NOx vs. PM) and on where it is emitted. The damage associated with a ton of SO2 varies from $1,800 to $10,700 (5th and 95th percentile) at coal plants and from $1,800 to $44,000 at natural gas plants (2007 USD). The differences reflect the fact that most coal-fired power plants are located farther away from population centers than natural gas plants are located from population centers. The highest damages per ton are associated with directly emitted PM. These damages vary from $2,600 to $160,000 (5th and 95th percentile) at natural gas plants and from $2,600 to $26,000 at coal-fired power plants (2007 USD). Transportation Perhaps the most important conclusion to be taken from the transpor- tation analyses is that, when viewed from a full life-cycle perspective, the re- sults are remarkably similar across fuel and technology combinations. One key factor contributing to the similarity is the relatively high contribution to health and other non-GHG damages from emissions in life-cycle phases other than the operation of the vehicle. (These phases are the development of the feedstock, the processing of the fuel, and the manufacturing of the vehicle.) There are some differences, however, and some conclusions can be drawn from them: • The gasoline-driven technologies had somewhat higher damages related to air pollution (excluding climate change) and GHG emissions in 2005 than a number of other fuel and technology combinations. The grid-dependent electric vehicle options had somewhat higher damages than many other technologies, even in our 2030 analysis, in large measure be- cause of continued conventional emissions and GHG emissions from the existing grid and the likely future grid. • The choice of feedstock for biofuels can significantly affect the rela- tive level of life-cycle damages, and herbaceous and corn stover feedstock have some advantage in our analysis.

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364 HIDDEN COSTS OF ENERGY • Additional regulatory actions can significantly affect levels of dam- ages and GHG emissions: o This is illustrated in the health and nonclimate damage analysis by the substantial reduction in diesel damages from 2005 to 2030. Major regulatory initiatives to reduce electricity-generation emis- sions or legislation to regulate carbon emissions would be expected to significantly reduce the relative damages and emissions from the grid-dependent electric-vehicle options. Similarly, a significant shift to lower-emitting grid technologies, such as natural gas, renewable sources, and nuclear, would also reduce these damages. o In 2030, with the implementation of enhanced 35.5 mpg require- ments now being put in place for light-duty vehicles under CAFE and EPA GHG emission rules, the differences among technologies tend to converge somewhat, although the fact that operation of the vehicle is generally less than a third of overall life-cycle emissions and damages tends to dampen the magnitude of that improvement. Further enhancements in fuel efficiency, such as the likely push for an extension beyond 2016 to further improvements, would fur- ther improve the GHG emission estimates for all liquid-fuel-driven technologies. Overall, there are somewhat modest differences among different types of vehicle technologies and fuels, even under the likely 2030 scenarios, although some technologies (for example, grid-dependent electric vehicles) had higher life-cycle emissions. It appears, therefore, that some break- through technologies, such as cost-efficient conversion of advanced bio- fuels, cost-efficient carbon capture and storage, and a shift to a mix of lower-emitting sources of electricity (such as natural gas, renewable sources, and nuclear) will be needed to dramatically reduce transportation-related externalities. Heat Generation • The damages associated with criteria-pollutant-related emissions from the use of energy (primarily natural gas) for heating in the residential, commercial buildings, and industrial sectors are low relative to damages from energy use in the electricity-generation and the transportation sectors. This result is largely because natural gas has low rates of those emissions compared with emissions typically resulting from the electricity-generation and transportation sectors. • The climate-change-related damages from the use of energy (pri- marily natural gas) for heating in the buildings and industrial sectors are low relative to climate-change-related damages associated with transpor-

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36 OVERALL CONCLUSIONS AND RECOMMENDATIONS tation and electricity production because natural gas carbon intensity is lower than that of coal and gasoline. Regarding energy use for heating, the climate-related damages are in general significantly higher than the noncli- mate damages. • The largest potential for reducing damages associated with the use of energy for heat lies in greater attention to improving the efficiency. The report America’s Energy Future: Technology and Transformation suggests that the potential for improving efficiency in the buildings and industrial sectors is 25% or more—with the likelihood that emissions damages in these sectors could be held constant in spite of sectoral growth between now and 2030 (NAS/NAE/NRC 2009a). Climate Change Given the complexity of evaluating the externalities of energy-induced climate change, the committee focused its efforts on a review of existing IAMs and the associated climate-change literature. The committee came to the following conclusions, as discussed in Chapter 5: • The two features of IAMs that drive estimates of the marginal damage associated with emitting an additional ton of carbon (the marginal social cost of carbon) are the choice of discount rate and the relationship between mean temperature change and the percentage change in world GDP (that is, the aggregate damage function). • Holding the discount rate constant, the damage function used in current IAMs can alter estimates of marginal damages by an order of magnitude. • Holding the damage function constant, changing the discount rate from 4.5% to 1.5% in an IAM will cause the marginal social cost of carbon to change by an order of magnitude. • In all IAMs, marginal damage estimates for 2030 GHG emissions are 50-80% larger than estimates of damages from emissions occurring within the past few years. • There is great uncertainty about the impact of GHG emissions on future climate and about the impacts of changes in climate on the world economy. Mean values of marginal damage estimates are usually reported from integrated planning model simulations. This approach does not ad- equately capture the small probability of catastrophic climate changes. Infrastructure and Security In Chapter 6, the committee considered damages related to disruptions in the electricity-transmission grid, the vulnerability of energy facilities to

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366 HIDDEN COSTS OF ENERGY accidents and possible attack, the external costs of oil consumption, supply security considerations, and national security externalities. The committee strove to clarify approaches for considering security externalities and dis- entangle externalities from other motivations for energy policy. The com- mittee concludes as follows: • The nation’s electricity-transmission grid is vulnerable to outages and to power quality degradation events because of transmission conges- tion and the lack of adequate reserve capacity. Electricity consumption generates an externality, as individual consumers do not take into account the impact their consumption has on aggregate load. Damages from this could be significant, and it underscores the importance of careful analysis concerning the costs and benefits of investing in a modernized grid that takes advantage of new smart technology and that is better able to handle intermittent renewable power sources. • Externalities from accidents at facilities are largely internalized and—in the case of the U.S. oil and gas transmission network—of negligible magnitude per barrel of oil or thousand cubic feet of gas trans-shipped. • The monopsony component of the oil consumption premium is not an externality. Government policy may be desirable as a countervailing force to monopoly or cartel producer power; however, this is a separate issue from the focus of this report. • We find that macroeconomic disruptions from oil supply shocks are not an externality. We also find that sharp and unexpected increases in oil prices adversely affect the U.S. economy. Estimates in the literature of the macroeconomic costs of disruption and adjustment ranged from $2 to $8 per barrel in 2007 dollars • Dependence on imported oil has implications for foreign policy, and we find that some of the effects should be viewed as externalities. We find, however, that it is impossible to quantify these externalities. The role of the military in safeguarding foreign supplies of oil is often identified as a potential externality. We find it difficult if not impossible to disentangle nonenergy-related reasons for a military presence in certain regions of the world from energy-related reasons. Moreover, much of the military cost is likely to be fixed in nature. A 20% reduction in oil consumption, for example, would probably have little impact on the strategic positioning of military forces in the world. • Nuclear waste and security raises important issues and poses dif- ficult policy challenges. The extent to which externalities exist is difficult to measure. Moreover, it is very difficult to quantify them. Thus, we do not report values in this report but recognize the importance of studying this issue further.

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36 OVERALL CONCLUSIONS AND RECOMMENDATIONS RESEARCH RECOMMENDATIONS The committee’s results include two major caveats: A significant number of potential damages cannot be quantified at this time, and substantial un- certainties are associated with the damages that have been quantified. Devel- opers of the committee’s statement of task anticipated such circumstances, stating that when it is not feasible to assess specific externalities comprehen- sively, the committee should recommend assessment approaches and iden- tify key information needs to inform future assessments. In response, the committee has developed a number of research recommendations specific to key topics in this report—electricity, transportation, heat generation, and climate change—as well as one overarching recommendation. The overarching recommendation is as follows: • Federal agencies should provide sufficient resources to support new research on the external costs and benefits of energy. In assembling its repository of literature, models, and data needed to carry out an as- sessment of externalities, the committee became aware that there is limited research funding available to address the topic of externality assessment. In particular, extramural funding from federal agencies provides little support or incentive to pursue this line of research. For example, the APEEP model used in our analysis was funded by a foundation. The GREET model, which we used to estimate transportation-related emissions, is federally supported, but does not explicitly address damages, so it must be coupled with a damage assessment model. EPA has had strong interest and ongo- ing programs in damage and benefit assessment of air pollution but offers limited resources for research to improve and evaluate its approaches or to develop and assess approaches for other environmental concerns. Because of the growing importance of impact assessment and impact valuation for policy decision making at all levels of government and to avoid a situa- tion in which key uncertainties are addressed only as an adjunct to other research programs, the committee encourages federal agencies, such as the Department of Energy, the Department of Transportation, the National Institutes of Health, the National Science Foundation, and EPA, to support new research specific to externalities with financial resources that are suf- ficient to address the recommendations for the key topics below in a timely manner. Electricity • Although life-cycle activities pre- and post-generation generally appear to be responsible for a smaller portion of the life-cycle externalities than electricity generation itself, it is desirable to have a systematic estima-

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368 HIDDEN COSTS OF ENERGY tion and compilation of the externalities from these other activities that are comparable in completeness to the externality estimates for the generation part of the life cycle. In this compilation, it will be particularly important to take into account activities (for example, the storage and disposal of coal combustion by-products and the in situ leaching techniques for uranium mining) that may have locally or regionally significant impacts. • The use of “reduced-form” modeling of pollutant dispersion and transformation is a key aspect in estimating externalities from airborne emissions on a source-by-source basis; these models should continue to be improved and evaluated. • The health effects associated with toxic air pollutants, including specific components of PM, from electricity generation should be quantified and monetized. Given the importance of the “value of a statistical life” in determining the size of air-pollution damages, further exploration is needed to determine how willingness to pay varies with mortality-risk changes and with population characteristics, such as age and health status. • Because current data on electricity-generation facilities are avail- able mainly as national averages, improved data and methods are needed to characterize the mix of electricity-generation technologies (and their associated range of emissions per kWh) at city, state, and regional levels. The current disaggregation of national-level information to regional or state levels that are available from the Department of Energy and EPA are often not sufficiently detailed for impact or damage assessments within specific areas of the United States. • Continued improvement is necessary in the development of meth- ods to quantify and monetize ecological impacts of all stages of the life cycle of electricity generation, especially of fuel extraction, emission of pollut- ants, and land-use changes. Similar needs exist for other types of energy production and use. • For fossil fuel options, more research is needed to quantify and monetize the ecological and socioeconomic impacts of fuel extraction, for example, of mountaintop mining and valley fill. • For nuclear power, significant challenges in estimating potential damages include estimating and valuing risks when the probabilities of ac- cidents and of radionuclide migration (for example, at a high-level waste repository) are very low but the consequences potentially extreme. It is important to assess how such risks would change based on advances in the technology and regulations and to determine whether the costs to utilities of meeting their regulatory requirements fully reflect these potential damages. • The analysis of risks associated with nuclear power in the ORNL/ RFF (1992-1998) reports should be updated to reflect advances in technol- ogy and science.

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36 OVERALL CONCLUSIONS AND RECOMMENDATIONS • For wind technologies, the major issues lie in quantifying bird and bat deaths; in quantifying or otherwise systematically assessing disturbances to local landscapes, ecosystems, and human populations; and in valuing them in terms comparable to economic damages. • For solar technologies, one of the greatest needs is an analysis of the upstream activities that quantifies the possible releases of toxic materials and their damages; other needs are a better understanding of the externali- ties that would accompany disposal or recycling of worn-out panels and dedicating tracts of land to solar power equipment. • For the transmission lines needed in a transition to a national grid system, better estimates are needed of both the magnitude and the spatial distribution of negative and positive externalities that would accompany this transition. Transportation • It is imperative to better understand potential negative externali- ties at the earliest possible stage in the research and development process for new fuels and technologies to avoid those externalities as the fuels and technologies are being developed. • Improved understanding is needed of the currently unquantifiable effects and potential damages related to transportation, especially as they relate to biofuels (for example, effects on water resources and ecosystems) and battery technology (for example, effects throughout the battery life cycle of extraction through disposal). • More accurate emissions factors are needed for each stage of the fuel and vehicle life cycle. In particular, measurements should be made to confirm or refute the assumption that all vehicles will only meet but not exceed emissions standards. In actual practice, there can be significant dif- ferences between on-road performance and emissions requirements, and some alternative-fuel vehicles may do better or worse than expected. • Because a significant fraction of life-cycle health impacts comes from vehicle manufacture and fuel production, it is important to improve and expand the information and databases used to construct emissions fac- tors for those life stages. In particular, there is a need to understand whether and how energy-efficiency improvements in these industrial components might change the overall estimates of life-cycle health damages. • The issue of indirect land-use change is central to current debates about the merit of biofuels. Regardless of whether this impact is regarded as an externality associated with U.S. or foreign biofuels production, it is important to obtain more empirical evidence about its magnitude and causes, as well as to improve the current suite of land-use change models. • As better data become available, future studies should take a range

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30 HIDDEN COSTS OF ENERGY of transportation modes into account—not only those that are alterna- tives to automobiles and light trucks (for example, public transit), but also air, rail, and marine, which are alternatives for long-distance travel and freight. Heat Generation • Assessment of energy use and its impacts in the industrial sector in particular (but in all sectors to some extent) could be improved by de- velopment of more extensive databases that contain details about specific forms of energy use and associated waste streams. Such databases should be designed so that life-cycle analysis of alternatives can be made without inadvertent double counting. • A more quantitative assessment of industrial sector externalities, done collaboratively between the government and industry, would be valu- able in informing priorities for future initiatives to reduce the externalities associated with industrial operations. Such an assessment was not possible in this study largely because of data limitations. Climate Change • More research on climate damages is needed to estimate the im- pacts of climate change, especially impacts that can be expressed in eco- nomic terms, as current valuation literature relies heavily on climate-change impact data from the year 2000 and earlier. • Marginal damages of GHG emissions may be highly sensitive to the possibility of catastrophic events. More research is needed on their impacts, the magnitude of the damages in economic terms, and the probabilities as- sociated with various types of catastrophic events and impacts. • Estimates of the marginal damage of a ton of CO2-eq include ag- gregate damages across countries according to GDP, thereby giving less weight to the damages borne by low-income countries. This aggregate estimate should be supplemented by distributional measures that describe how the burden of climate change varies among countries. In Conclusion In aggregate, the damage estimates presented in this report for various external effects are substantial. Just the damages from external effects that the committee was able to quantify add up to more than $120 billion for

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31 OVERALL CONCLUSIONS AND RECOMMENDATIONS the year 2005.7 Although large uncertainties are associated with the com- mittee’s estimates, there is little doubt that the aggregate total substantially underestimates the damages because it does not include many other kinds of damages, such as those related to some pollutants, climate change, ecosys- tems, infrastructure, and security, that could not be quantified for reasons explained in the report. In many cases, we have identified the omissions in this report, with the hope that they will be evaluated in future studies. Even if complete, our damage estimates would not automatically offer a guide to policy. From the perspective of economic efficiency, theory suggests that damages should not be reduced to zero but only to the point where the cost of reducing another ton of emissions (or other type of burden) equals the marginal damages avoided—that is, the degree to which a bur- den should be reduced depends on its current level and the cost of lowering it. The solution cannot be determined from the amount of damage alone. Economic efficiency, however, is only one of several potentially valid policy goals that need to be considered in managing pollutant emissions and other burdens. For example, even within the same location, there is compelling evidence that some members of the population are more vulnerable than others to a particular external effect. Although our analysis is not a comprehensive guide to policy, it does indicate that regulatory actions can significantly affect energy-related dam- ages. For example, the full implementation of the federal diesel-emissions rules would result in a sizeable decrease in nonclimate damages from diesel vehicles between 2005 and 2030. Similarly, major initiatives to further reduce other emissions, improve energy efficiency, or shift to a cleaner electricity-generating mix (for example, renewable sources, natural gas, and nuclear) could substantially reduce the damages of external effects, includ- ing those from grid-dependent hybrid and electric vehicles. It is thus our hope that this information will be useful to government policy makers, even in the earliest stages of research and development on energy technologies, as an understanding of their external effects and dam- ages could help to minimize the technologies’ adverse consequences. 7 These are damages related principally to emissions of NOx, SO2, and PM relative to a base- line of zero emissions from energy-related sources for the effects considered in this study.