Jonathan Koomey and Florentin Krause

Energy Analysis Program
Lawrence Berkeley Laboratory
Berkeley, CA 94720

Published in the CRC Handbook on Energy Efficiency in 1997

According to Griffin and Steele (1986), external costs exist when "the private calculation of benefits or costs differs from society's valuation of benefits or costs". Pollution represents an external cost because damages associated with it are borne by society as a whole and are not reflected in market transactions.

The goals of this article are modest. It does not attempt a systematic review of the current state of externalities analysis, because such reviews have been recently completed by other authors (CEC 1994, CECA 1993, ECO Northwest 1993, OTA 1994, Weil 1991). Instead, it serves as an introduction for the interested but uninformed reader to some of the key issues in assessing environmental externality costs, and gives references for those readers wishing to investigate further.

Many analysts have attempted to quantify societal costs of pollution and other externalities associated with fossil fuel combustion, and some regulatory bodies have even attempted to crudely incorporate externality costs into investment decisions (Cohen et al. 1990, Hashem and Haites 1993). Efforts to incorporate externalities have generally been confined to the regulated sectors of the energy system (electricity, and to a lesser extent, natural gas),. Unfortunately, estimates of externality costs are often based on quite different assumptions, making comparisons difficult. Uncertainties in such estimates are large, and can even span orders of magnitude.

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