Pricing environmental externalities in the power sector: ethical limits and implications for social choice

During the last decade, a series of valuation studies have made attempts at estimating the external environmental costs of various power generation sources. The purposes of this paper are: (a) to explore some of the ethical limits of the economic valuation of environmental impacts; and (b) to analyze what the implications are of these limits for the social choice between different electric power sources. Environmental valuation based on welfare economic theory builds on restrictive behavioral foundations and can only partly model moral values, although such values are an essential part of people’s preference towards the environment. In addition, public preferences are seldom exogenously given as is commonly assumed in economic theory, but are instead formed in public discourse. For this reason, the range of electricity externalities where economic valuation (and thus cost /benefit analysis) should be applied is likely to be narrower than often assumed. After analyzing the scope, methodology and the results of the so-called ExternE project, the paper concludes that many power generation externalities are either inherently ‘new’ or inherently ‘complex’. In these cases, the initial challenge lies not in ‘discovering’ private preferences, but in specifying the conditions for public discourse over common ways of understanding what the pertinent issues are about. This implies that research on the environmental externalities of power generation must, in addition to refining the theory and the applications of existing non-market valuation techniques, also address the instruments and content of political and moral debate. # 2003 Elsevier B.V. All rights reserved.