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1 Executive Summary
1.1 Overview of the Methodology
The ExternE methodology provides a framework for transforming impacts that are expressed
in different units into a common unit – monetary values. It has the following
principal stages:
1) Definition of the activity to be assessed and the background scenario where the
activity is embedded. Definition of the important impact categories and
externalities.
2) Estimation of the impacts or effects of the activity (in physical units). In general,
the impacts allocated to the activity are the difference between the impacts of the
scenario with and the scenario without the activity.
3) Monetisation of the impacts, leading to external costs.
4) Assessment of uncertainties, sensitivity analysis.
5) Analysis of the results, drawing of conclusions.
The ExternE methodology aims to cover all relevant (i.e. not negligible) external
effects. However, in the current state of knowledge, there are still gaps and uncertainties.
The purpose of ongoing research is to cover more effects and thus reduce gaps and
in addition refine the methodology to reduce uncertainties. Currently, the following
impact categories are included in the methodology and described in detail in this report:
1) Environmental impacts:
Impacts that are caused by releasing either substances (e.g. fine particles) or energy
(noise, radiation, heat) into the environmental media: air, soil and water. The
methodology used here is the impact pathway approach, which is described in detail in
this report.
2) Global warming impacts:
For global warming, two approaches are followed. First, the quantifiable damage is
estimated. However, due to large uncertainties and possible gaps, an avoidance cost
approach is used as the recommended methodology.
3) Accidents:
Accidents are rare unwanted events in contrast to normal operation. A distinction can
be made between impacts to the public and occupational accident risks. Public risks can
in principle be assessed by describing the possible accidents, calculating the damage
and by multiplying the damage with the probability of the accidents. An issue not yet
accounted for here is the valuation so-called ‘Damocles’ risks, for which high impacts
with low probability are seen as more problematic than vice versa, even if the expected
value is the same. A method for addressing this risk type has still to be developed.
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1.2 The Impact Pathway Approach
The impact pathway approach (IPA) is used to quantify environmental impacts as defined
above. As illustrated in Figure 1.1, the principal steps can be grouped as follows:
Emission: specification of the relevant technologies and pollutants, e.g. kg of
oxides of nitrogen (NOx) per GWh emitted by a power plant at a specific site;
Dispersion: calculation of increased pollutant concentrations in all affected regions,
e.g. incremental concentration of ozone, using models of atmospheric dispersion
and chemistry for ozone (O3) formation due to NOx ;
Impact: calculation of the cumulated exposure from the increased concentration,
followed by calculation of impacts (damage in physical units) from this exposure
using an exposure-response function, e.g. cases of asthma due to this increase in O3;
Cost: valuation of these impacts in monetary terms, e.g. multiplication by the
monetary value of a case of asthma.
impact
(e.g., cases of asthma due to ambient
concentration of particulates)
DOSE-RESPONSE FUNCTION
(or concentration-response function)
cost
(e.g., cost of asthma)
MONETARY VALUATION
DISPERSION
(e.g. atmospheric dispersion model)
emission
(e.g., kg/yr of particulates)
increase in concentration
at receptor sites
(e.g., µg/m3 of particulates
in all affected regions)
SOURCE
(specification of site and technology)
Figure 1.1 The principal steps of an impact pathway analysis, for the example of air
pollution.
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Whereas only the inhalation dose matters for the classical air pollutants (PM10, NOx,
SO2 and O3), toxic metals and persistent organic pollutants also affect us through food
and drink. For these a much more complex IPA is required to calculate ingestion doses.
Two models were developed for the assessment of external costs due to the emission of
the most toxic metals (As, Cd, Cr, Hg, Ni and Pb), as well as certain organic pollutants,
in particular dioxins.
Table 1.1 Air pollutants and their effects on health.
Primary Pollutants Secondary
Pollutants
Impacts
Particles
(PM10, PM2.5, black
smoke)
mortality
cardio-pulmonary morbidity
(cerebrovascular hospital admissions, congestive heart
failure, chronic bronchitis, chronic cough in children,
lower respiratory symptoms, cough in asthmatics)
SO2
mortality
cardio-pulmonary morbidity
(hospitalisation, consultation of doctor,
asthma, sick leave, restricted activity)
SO2 Sulphates like particles?
NOx morbidity?
NOx Nitrates like particles?
NOx+VOC Ozone
mortality
morbidity (respiratory hospital admissions, restricted
activity days, asthma attacks, symptom days)
CO mortality (congestive heart failure)
morbidity (cardio-vascular)
PAH
diesel soot, benzene,
1,3-butadiene, dioxins
cancers
As, Cd, Cr-VI, Ni cancers
other morbidity
Hg, Pb morbidity (neurotoxic)
In terms of costs, health impacts contribute the largest part of the damage estimates of
ExternE. A consensus has been emerging among public health experts that air
pollution, even at current ambient levels, aggravates morbidity (especially respiratory
and cardiovascular diseases) and leads to premature mortality (see Table 1.1). There is
less certainty about specific causes, but most recent studies have identified fine
particles as a prime culprit; ozone has also been implicated directly. The most
important cost comes from chronic mortality due to particles (this term, chosen by
analogy with acute and chronic morbidity impacts, indicates that the total or long-term
effects of pollution on mortality have been included, in contrast to acute mortality
impacts, which are observed within a few days of exposure to pollution).
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1.3 Methods for Monetary Valuation
The impact pathway requires an estimation of the impacts in physical terms and then a
valuation of these impacts based on the preferences of the individuals affected. This
approach has been successfully applied to human health impacts, for example, but in
other areas it cannot be fully applied because data on valuation is missing (e.g.
acidification and eutrophication of ecosystems) or because estimation of all physical
impacts is limited (e.g. global warming).
For these cases, a second best approach is better than having no data. Therefore the use
of approaches that elicit implicit values in policy decisions to monetise the impacts of
acidification and eutrophication and of global warming has been explored. Table 1.2
gives a general overview of the methods for quantifying and valuing impacts.
Table 1.2 Overview of methods used in ExternE to quantify and value impacts.
Air pollution
Public health Agriculture, building
materials
Ecosystems
Global
warming
ExternE, “Classical” impact pathway approach
Quantification of
impacts
Yes Yes Yes, critical
loads
Yes, partial
Valuation Willingness
to pay (WTP)
market prices Yes, WTP &
market prices
Extension: Valuation based on preferences revealed in
Political
negotiations
UN-ECE;
NEC
Implementing
Kyoto, EU
Public referenda Swiss
Referenda
Under certain assumptions the costs of achieving the well-specified targets for
acidification, eutrophication and global warming can be used to develop shadow prices
for pollutants or specific impacts from pollutants. These shadow prices can be used to
reflect these effects for comparison of technologies and fuel cycles.
For global warming damage cost estimates of ca. €9/tCO2 were derived for a medium
discount rate. However, this figure is conservative in the sense that only damage that
can be estimated with a reasonable certainty is included; for instance impacts such as
extended floods and more frequent hurricanes with higher energy density are not taken
into account, as there is not enough information about the possible relationship between
global warming and these impacts.
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Thus, to account for the precautionary principle, we propose to use an avoidance costs
approach for the central value. The avoidance costs for reaching the broadly accepted
Kyoto target is roughly between €5 and €20 per t of CO2. In addition it is now possible
to analyse the prices of the tradeable CO2 permits, which increased from end of July
2005 to the beginning of October 2005 from about €18/tCO2 to about €24/tCO2. This
confirms the use of €19/t CO2 as a central value. The lower bound is determined by the
damage cost approach to about €9/t CO2.
More stringent reduction targets, e.g. the EU target of limiting global warming to 2°C
above pre-industrial temperatures may lead to marginal abatement costs as high as
$350/tC = ca. €95/t CO2. However it is still an open question whether such an
ambitious goal with such high costs will be accepted by the general population. Thus,
as an intermediate target, the Dutch value of ca. €50/t CO2 could be used as an upper
bound for sensitivity analysis.
In the context of acidification and eutrophication the study shows that a simple analysis
may not be correct, i.e. abatement costs for SO2 and NOX need to be corrected for other
impacts. By analysing the decisions of policy makers in detail, shadow prices for
exceedance of critical loads for eutrophication and acidification (ca. €100 per hectare of
exceeded area and year with a range of €60 - 350/ha year) have been derived.
1.4 Uncertainties
Damage cost estimates are notorious for their large uncertainties and many people have
questioned the usefulness of damage costs. The first reply to this critique is that even an
uncertainty by a factor of three is better than infinite uncertainty. Second, in many
cases the benefits are either so much larger or so much smaller than the costs that the
implication for a decision is clear even in the face of uncertainty. Third, if policy
decisions are made without a significant bias in favour of either costs or benefits, some
of the resulting decisions will err on the side of costs, others on the side of benefits.
Analyses of the consequences of such unbiased errors found a very reassuring result:
the extra social cost incurred because of uncertain damage costs (compared to the
minimal social cost that one would incur with perfect knowledge) is remarkably small,
less than 10 to 20% in most cases even if the damage costs are in error by a factor
three. However, without any knowledge of the damage costs, the extra social cost could
be very large.
One possibility to explore the uncertainties in the context of specific decisions is to
carry out sensitivity analyses and to check whether the decision (e.g. implementation of
technology A instead of technology B) changes for different assumptions (e.g. discount
rate, costs per tonne of CO2, valuation of life expectancy loss). It is remarkable that
certain conclusions or choices are robust, i.e. do not change over the whole range of
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possible values of external costs. Furthermore, it can be shown that the ranking of
electricity production technologies, for example, with respect to external costs does not
change if assumptions are varied. A further option is to explore how much key values
have to be modified before conclusions change. It can then be discussed whether the
values triggering the change in decision can be considered realistic or probable.
A considerable share of uncertainties is not of a scientific nature (data and model
uncertainty) but results from ethical choices (e.g. valuation of lost life years in different
regions of the world) and uncertainty about the future. One approach to reduce the
range of results arising from different assumptions on discount rates, valuation of
mortality, etc. is to reach agreement on (ranges of) key values. Such “conventions for
evaluating external costs”, resulting from discussion of the underlying issues with
relevant social groups or policy makers, help in narrowing the range of costs obtained
in sensitivity analyses. This would help to make decision making in concrete situations
easier and to focus on the remaining key issues to be solved in a specific situation.