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Introduction to Externalities

Analyses of the economics of wind energy have shown that it is increasingly competitive with conventional electricity generation technologies. However, in present market conditions the gap towards full competitiveness has to be covered by economic support instruments such as feed-in tariffs, and tradable green certificates.

While wind energy and other renewable energy sources have environmental benefits compared with conventional electricity generation, these benefits may not be fully reflected in electricity market prices, despite a fledgling CO2 Emission Trading Scheme. The question therefore is: 'Do present electricity market prices give an appropriate representation of the full costs to society of producing electricity?'. In other words, are externalities included in the price mechanisms?

The externalities of electricity generation deal with such questions in order to estimate the hidden benefit or damage of electricity generation not otherwise accounted for in the existing pricing system. The costs are real and 'external' because they are paid for by third parties and by future generations, and not directly by the generators or consumers. In order to establish a consistent and fair comparison of the different electricity generation technologies, all costs to society, both internal and external, need to be taken into account.

The following sections of Chapter 4 explain the basic economic concept of external cost, the policy options to internalise external cost and the present knowledge of the external costs of different electricity generation technologies. Finally, empirical results on the specific and total emissions, and on the external cost of fossil fuel-based electricity generation in the EU27 are presented for the Member State level for  2005. Chapter 5 continues with quantitative results on the environmental benefits of wind energy in terms of avoided emissions and external costs for different wind deployment scenarios in the EU-27 Member States up to  2020 and 2030.

>> The economic concept of external effects

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