Comparative Analysis of Monetary Estimates of External Environmental Costs Associated with Combustion of Fossil Fuels

Many analysts have attempted to quantify societal costs of pollution and other externalities associated with fossil fuel combustion. A few regulatory bodies have even made first attempts to incorporate externality costs into the resource planning process (Burkhart 1989, Cohen et al. 1990). Unfortunately, estimates of externality costs are often based on quite different assumptions, making comparisons difficult. This paper calculates comparable estimates of external costs for power plants (1989 ¢/kWh) and direct fuel combustion (1989 $/MMBtu), based or, consistent assumptions about heat rates, emissions factors, and resource costs, from ten different analyses and regulatory assessments of the importance of externalities in fossil fuel combustion. This paper makes explicit the effects of various assumptions, illustrates pitfalls in such calculations, and derives lessons for design of policies to incorporate externalities into resource planning.