In energy markets across the world, market prices for fossil fuels are often lower than the prices of energy generated from renewable sources, such as solar, wind, and biofuels. These market prices, however, do not take into account the “true costs” of the energy being sold, because they ignore the external costs to society caused by the associated pollution and its resulting burdens, including damages to public health and the environment. Accounting for these externalities can as much as double the cost of some fossil fuels and, in some cases, make them more expensive than renewables. The challenge, of course, is determining those “true costs.”
In a new RFF report, The True Cost of Electric Power, with an accompanying Summary for Policymakers, Darius Gaskins Senior Fellow Dallas Burtraw and Senior Fellow and Director of the Center for Energy Economics and Policy Alan Krupnick examine the various methods that have been used to measure true costs. They look at how such estimates can be used in company decisionmaking and public policy to ensure that investments are directed at the electricity generation methods with the lowest true costs to investors and society. In some geographic areas, adequate data and methods exist to make a solid estimate of the total social costs of energy production. And, the authors note, in those places where the data or methods (or both) are less robust, it is possible to use a type of study known as a benefits transfer approach, which still gives stakeholders important guidance about the scale of the true costs of their investments—an important first step to begin formulating policies to incorporate those costs into the market price.