1. NEEDS FORUM 1 NEEDS FORUM 1 Accepting the Real Price for Sustainable Energy NEEDS – New approaches to externalities Andrea Ricci – ISIS 24 May 2005

2. This presentation Introduction Policy relevance of external costs State of the art and main outstanding issues The NEEDS Integrated Project (EU – FP6)

3. Introduction Policy relevance of external costs State of the art and main outstanding issues The NEEDS Integrated Project (EU – FP6)

4. Externalities are changes of welfare generated by a given activity without being reflected in market prices. They may be positive (benefits) or negative (costs) A cost (benefit) is external when it is not paid (enjoyed) by those who have generated it Negative externalities are borne by society: they should be reduced, and passed on to those who generate them (application of the “users pay principle” through internalisation) Externalities

5. Examples of external costs Air pollution increases hospital admissions for respiratory illness Costs of healthcare Lost productivity Own pain and suffering Pain and suffering of others Water pollution leads to loss of fish Reduced recreational opportunity Commercial losses Impact on biodiversity

6. Intrroduction Policy relevance of external costs State of the art and main outstanding issues The NEEDS Integrated Project (EU – FP6)

7. External costs are quantitatively relevant Unpaid costs (externalities) can be as large as private (internal) costs  Important market distorsions calling for corrections (internalisation) Alternative technology options can differ very substantially in terms of their external costs  Immediate input to investment decisions

8. Sustainable energy policies Pricing (structure and level of taxes and charges) Regulatory interventions (prescriptive, restrictive, etc.) LCA (impacts and use of resources) SCBA (of energy investments) Assessment of the real costs of energy provision and use Valuation of external costs Actions on demand Actions on supply Provision and enhancement of infrastructure, products & technologies for the extraction, transport, conversion and use of energy

9. Policy relevance of external cost accounting Supply side policies (infrastructure, other products and services) Extended accounting framework for CBA Comparison between alternative investment options (differential values) Demand side policies (regulation, pricing and taxation) Mitigation/abatement Internalisation (absolute values)

10. Examples of input to EU policies Directive on non-hazardous waste incineration Large Combustion Plant Directive EU strategy to combat acidification National Air Quality Strategy Emission Ceilings Directive

11. External costs valuation methods Control costs (top-down) compliance costs abatement costs mitigation costs Damage costs (bottom-up) market prices hedonic pricing contingent valuation (WTP/WTA)

12. Top-down Vs Bottom-up +- Top- down  Simplicity  Data availability  Direct link to policy  Circularity  Inaccuracy (context independent)  Over/under estimation Bottom- up  Accuracy  Context dependency  Sensitivity  Complexity  Data requirements  Monetary valuation  Linearity?

13. Introduction Policy relevance of external costs State of the art and main outstanding issues The NEEDS Integrated Project (EU – FP6)

14. Basic concepts and principles Definition of external costs (= costs not yet internalised?) Inclusion/exclusion (security of supply, accidents, depreciation of infrastructure publicly funded…) Boundaries of the LCA and how to fully integrate it into the external cost accounting frameworks External benefits?

15. Methodologies and uncertainties Additional burdens and impacts (sub-micron PM, ecosystem damages, land use/land take, soil and water pollution...) Refining, validating and improving the accuracy of models (dispersion, deposition…) Improving monetary valuation techniques Monetary valuation of life Very long term effects (e.g. discount rates…)

16. Data and knowledge base Energy technologies coverage More bottom-up studies (to cope with time and site variability) Consolidation and continuous updating of a reference knowledge base (technological change, update of E/R functions…)

17. Generalisation and transferability Assessing and representing context dependency (clustering techniques, reconciling bottom-up with top-down estimates...) extrapolating data Vs generalising (and simplifying) methodologies How to pass the costs on to the users Inter-sectoral implementation problems (phased approach?…), but also intra- sectoral Practical implementation

18. Selling external costs to policy makers Transparency and communication Consensus, credibility, etc Ethical issues (value of life, PPP,…) Public acceptability

19. Introduction Policy relevance of external costs State of the art and main outstanding issues The NEEDS Integrated Project (EU – FP6)

20. NEEDS New Energy Externalities Developments for Sustainability SIXTH FRAMEWORK PROGRAMME [6.1] [ Sustainable Energy Systems]

21. NEEDS: an Integrated Project of FP6  Duration: 48 months, starting September 2004  66 partners (15% are SMEs), representing Universities, Research Institutions, Industry and NGOs from 27 Countries (19 EU members, 3 MED, 5 ‘Other’)  Leading partners:  ISIS (IT) - Coordinator  DLR (DE)  IER Stuttgart (DE)  OME (FR)  Uni Prague (CZ)  CNR-IMAA (IT)  PSI (CH)  ECO (NO)  ISI-FRAUNHOFER (DE)  1118 m/m; 11.7 MEuro (7.6 MEuro financed by EC)

22. Overall objective To evaluate the full costs and benefits (i.e. direct + external) of energy policies and of future energy systems, both at the level of individual countries and for the enlarged EU as a whole

23. Objectives and targeted innovation Life Cycle Assessment (LCA) of energy technologies analysis of new energy technologies options for which the current LCA knowledge is insufficient Monetary valuation of externalities associated to energy production, transport, conversion and use, targeting major innovation in terms of: methods impacts so far insufficiently addressed the availability and reliability of quantitative evidence Development of a consistent and robust analytical platform allowing to integrate the full range of information and data on LCA and external costs into a Pan-European modelling framework

24. Objectives and targeted innovation (2) Acceptability and stakeholders perspective To identify the terms and conditions for an effective formulation and implementation of long term strategies based on the internalisation of external costs To examine the robustness of the research results under various stakeholder perspectives Transferability and generalisation to develop a simple way of calculating, transferring and present the uncertainty of default values for average/aggregate external costs Integration To develop a structured “protocol” to facilitate the widespread use of the integrated analysis framework

25. 1c Externalities associated to extraction and transport of energy 1b New and improved methods to estimate external costs 1a LCA/costs of new technologies 3a Transferability & generalisation 2a Modelling internalisation strategies and scenario building 3b Communication & Dissemination 2b Stakeholders acceptability and assessment & Energy technology roadmap and forecast 1d Extension of geographical coverage Integration

26. For further information Andrea Ricci: aricci@isis-it.com www.isis-it.com