Figure 5: External costs of energy sources related to global health and climate change (logarithmic scale) Source: IPCC (2011)
with those issues separately (IPCC 2007), strengthening the argument for taking measures to control air pollution.
The size of the externalities calculations indicates that various renewable technologies would already be competitive if important external costs were internalised to producers and consumers, but are primarily illustrative as there are acknowledged uncertainties in climate-change modelling and the calculation of the resulting damage costs. Because these external costs are not adequately reflected in energy prices, consumers, producers and decision-makers do not receive accurate price signals that are necessary to reach decisions about how best to use resources.
Governments should, though, consider these externalities in formulating policy and strategy for the energy sector. Table 6 by the European Commission (2008) is an example of how
18. Note that steam cycle power plants require a reliable supply of water that in many areas is an increasingly valuable commodity subject to competing uses.
Hence the analysis presented in Table 6 makes
conservative assumptions concerning production costs of electricity from fossil fuels.
19. The Fourth Assessment Report of the IPCC (2007) reviewed damage cost estimates in peer-reviewed literature at the time of preparation of the assessment (up to 2005), reporting an average of US$ 12 per tonne of CO2, and an upper bound at US$ 95 per tonne of CO2. As discussed below, a more recent review by the German Aerospace Centre and Fraunhofer Institute for System and Innovation Research (DLR/ISI, 2006) proposed a much higher range of € 15-280 per tonne of CO2, based primarily on a modelling report for the UK Department for Environment, Food and Rural Affairs (DEFRA).
incorporating the external costs of CO2 emissions, together
with expected cost reductions for various technologies can alter the competitiveness, in economic terms, of renewable energy technologies in the EU. The table, providing a range of estimates for various technologies, under a moderate fuel-price scenario illustrates how some sources of renewable electricity – in particular hydro and wind – can compete with fossil fuels and nuclear technologies in the EU. It also shows that in the EU the production cost of electricity from on-shore wind could soon be competitive with natural gas technologies. For biomass in the EU, the wide range reflects uncertainties in the costs of biomass. Costs of other renewable energy technologies, namely those for which only prototypes presently exist, are still significantly higher than conventional technologies.18 The cost of electricity generated in the EU by solar PV is projected to fall by around a factor of three by 2030, but it is expected to remain considerably more expensive than that generated by other sources.
Table 6 also illustrates the important role played by the carbon price in assessing the cost-competitiveness of renewable energy generation compared with that derived from fossil fuels. The scenarios assume that each tonne of CO2 € 0/ tCO2
in 2007, € 41/tCO2
directly emitted attracts a levy of in 2020 and € 47/tCO2
in
2030. This assumes a relatively steep rise compared with the current (2011) levels of € 10-15, highlighting the potential of carbon markets (see Box 1).19