What is External Costs

Different approaches may be used for estimating environmental costs of electricity generation, and the way they are applied may vary from situation to situation. The extent to which environmental costs should be considered as external costs (i.e. not borne directly by electricity producers) depends partly on the environmental protection policy of the country and on the control instruments that are implemented. Damage costs can be assessed by two approaches: “top-down” (which relies on aggregated data) and “bottom-up” (requires the use of site-specific data). This chapter describes external costs of electricity and impact pathway method for their calculation. This method links burdens to the environment caused by power generation chains with physical impacts they cause and assigns monetary values to those impacts. Calculated external costs can be applied in various environmental policy case studies. Two such applications are illustrated: cost-benefit analysis of imposing stricter NOx emission standard and inclusion of external costs in power system expansion planning.