Nobel Prize-winning economist Amartya Sen recently decried “the failure to develop a framework for assessing the comparative costs of different sources of energy . . . inclusive of the externalities involved.” As if on cue, the European Union (EU) issued an interim research report by an outside consultancy last month that purported to do just that.
The report by Ecofys, a Netherlands-based consultancy specializing in sustainable energy, estimates that energy use for the 28 EU Member States in 2012 failed to account for approximately €2012 200 billion ($250 billion) in external costs. External costs are effects on third parties that are not reflected in the market price, such as pollution. As shown in the report’s Figure 3-11 (below), half of the $250 billion in estimated costs consist of estimated damages from climate change alone.
The report estimated the net external cost of climate change to be 43.33 €2012/tCO2e—roughly 50% higher than the United States government’s 2013 social cost of carbon estimate of €2012 28 per ton, which is itself controversial in some quarters. The report also included controversial estimates for the value of “depletion of energy resources.”
The Ecofys report marks an ambitious attempt to use lifecycle analysis to try to calculate “all in” estimates of the external costs of producing and using energy on a comparative basis. But estimates of external costs still remain highly uncertain endeavors. As the EU report itself cautioned, its methods for valuing external costs come with high uncertainties because by definition there is no market value for external costs. For example, the report explains its methods for estimating the long-term costs of disposing of nuclear waste in a lengthy annex.
These difficulties are not new. In 2010 the National Research Council (NRC) valued the external costs of energy in the United States at $120 billion for 2005. However, the report omitted from this figure many types of damages, including damages from climate change, which the NRC declined to include due to the then-evolving and uncertain understanding of climate change effects and damages.
Economists argue that all-in estimates of the lifecycle costs of various energy sources may be useful to policymakers in deciding which energy sources are preferable. For example, one of the more controversial claims in the Ecofys report is that solar energy (both rooftop and utility-scale) may have larger external costs than other renewables when the coal-fired energy used to manufacture the components in China is taken into account. See Figure 3-8 below.
These estimates have not been officially endorsed by the EU, nor subject to peer review, and we can expect continuing debate on the subject in the years ahead.