Economic Evaluation of Energy Externalities

H.M.A.B. Herath

Externalities arise due to failures in market, policy or institutions. Externalities exist when economic transactions between two or more parties result in an impact on a third party, who is not involved in the transaction.

Economic evaluation of energy systems strongly depends on four factors; Capital cost, Maintenance cost, Fuel cost, External cost. Fuel and external costs are sensitive to fuel type & efficiency of the used system. Economic parameters like discount rates, inflation and escalation rates deeply affect the evaluation. Most of the external costs related to energy sector have been evaluated.

Some of the following externalities have not been evaluated in Sri Lankan context. Socio-economic externalities such as, Indigenous knowledge loss, Loss of traditional cultivations, Biological externalities such as algal blooms, Physical externalities such as Encroachments in the catchment areas have not been evaluated.

Contingent valuation method can be adopted and IK conservation program can be hypothetically established in order to evaluate the WTP of people for the conservation of IK. The productivity change method can be used in evaluating loss of traditional cultivations. Travel cost method can be used to evaluate the depletion of recreational value of cultural and biologically valuable places.
Some externalities related with ecosystems are hard to monetized as these are uncertain and are long term externalities. E.g. Severe damage to an ecosystem

Benefit- transfer method can be used to evaluate issues which have been already evaluated in other countries.

Externalities can be reduced by adopting sustainable energy sources like wind or solar power and the capital costs can be covered by incentives provided to CDM projects. To reduce the externality costs, the power plant can be established in a remote area.