Abstract
Economic activities often result in external costs which are not included in the current pricing system. Due to these external costs, the standard market mechanism fails to maximize social welfare.
Therefore, it is necessary to provide decision makers with proper indicators which enable them to make decisions which reflect proper consideration of the total costs of economic activities and amelioration of social welfare. In recent years recognition and responsibility for the external costs and their internalization have become an important policy issue.
The external costs of electricity generation are mainly caused by the acidifying substances, airborne particles and greenhouse gas emissions. Impacts of these pollutants on the environment and society should not be overlooked.
A quantification of these impacts in monetary terms has become the core of many research projects and their results provide relevant indicators for policy. In this article, we build upon the current ExternE method in order to quantify the external costs of electricity generation and transform the results into the external costs of electricity consumption.
In our case study of 21 European countries we show that the currently used indicator of the external costs of electricity generation is not appropriate for communicating and monitoring the external costs of electricity due to the international trade in electricity. As an alternative we propose and quantify the external costs of electricity consumption, which deals with the effect of international trade in electricity.