Background
Project Objectives
Organisation of Work
Description of Work Packages
Outputs and Results
Work Plan
References and useful materials
WP 12 - Treatment of Uncertainty in Estimates of External Costs at the National Level
Objectives
- To evaluate the uncertainties of the costs (both private and external) estimated in this project;
- To evaluate the effect of these uncertainties on policy decisions, e.g. choice of energy technologies, choice of emission limits, and the resulting emission levels;
- To evaluate the social costs if the wrong policy choices are made because of errors or uncertainties in the estimation of the costs estimated in this project;
- To evaluate the benefit of reducing the uncertainties by further research (to help identify the priorities for such research).
Description of work
Task 1: to review, update and complete the estimation of uncertainties (ECN, FEEM). This task begins by reviewing the existing uncertainty estimates and updating them as necessary. The extension of the external cost calculations to countries outside the EU entails additional uncertainties that will be evaluated, in particular with regard to monetary valuation. Uncertainties are also estimated for private costs; here both energy prices and abatement costs need to be considered.
Task 2: to assess the effect of the uncertainties on different levels of internalisation (ECN, FEEM). Tradable permits that are given away free make the polluters reduce their emissions to the social optimum, but without paying anything for the damage caused by the residual emissions. By contrast, pollution taxes and tradable permits that are auctioned by the government make the polluter pay not only the abatement cost to reach the optimum but also the residual damage; the difference in cost to the polluter is large. The monetary transfers and the effects on the economy are therefore much larger in the latter case than in the former, and so are the consequences of errors in the estimation of the external costs.
Task 3: to evaluate effect of uncertainties on energy choices (ECN, FEEM). Errors in the estimation of the external costs could lead to inappropriate energy choices, for example too low a level of renewable energy sources. Since the evaluation of energy choices is a difficult and complex undertaking, we will attempt to provide at least some initial estimates.
Task 4: to evaluate benefit of reducing the uncertainties by further research (ECN, FEEM). Previous research has evaluated how much the social cost of air pollution abatement is increased beyond the optimum if an error is made in the estimation of the damage cost or the abatement cost curve. This social cost penalty can be reduced by further research aimed at reducing the uncertainties of the respective cost estimates. By examining the relation between a measure of the uncertainty (e.g. geometric standard deviation) and the social cost penalty, the value of such research will be quantified. To help identify the priorities the various sources of uncertainties are rank ordered in terms of their contribution to the total.
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