Implementation in Portugal of the ExternE accounting framework
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Implementation in Portugal of the ExternE accounting framework

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Α. Martins, Μ. Fernandes, V. Rodrigues and T. Ramos Implementation in Portugal of the ExternE accounting framework ^^ Research funded by THE EUROPEAN COMMISSION on the framework of the Non Nuclear Energy Programme JOULE ΙΠ and by the Directorate-General for Energy (Portugal) •3 C E E E 1 A THE NATIONAL IMPLEMENTATION IN THE EU OF THE EXTERNE ACCOUNTING FRAMEWORK Contract JOS3-CT95-0010 A. Martins, M. Fernandes, V. Rodrigues and T. Ramos CEEETA (Centro de Estudos em Economia da Energia, dos Transportes e do Ambiente) Implementation in Portugal of the ExternE accounting framework EUNA18273ENC Research funded by THE EUROPEAN COMMISSION on the framework of the Non Nuclear Energy Programme JOULE III and by the Directorate-General for Energy (Portugal) ACKNOWLEDGEMENTS The authors are especially grateful to the European Commission for the financial support granted to this research project in the framework of the JOULE Programme, and to Mr. Pierre Valette from Directorate General XII of the European Commission, for his enthusiastic support. We offer our thanks to the co-ordinators of the national implementation project, namely Mr.Pedro Linares and Mr.Julio Montes of CIEMAT, Mr.Leo de Nocker and all members of said project, for their unfailing help in seeing it through to completion.

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Α. Martins, Μ. Fernandes,
V. Rodrigues and T. Ramos
Implementation
in Portugal of the ExternE
accounting framework
^^
Research funded by THE EUROPEAN COMMISSION
on the framework of the Non Nuclear Energy Programme
JOULE ΙΠ and by the Directorate-General for Energy (Portugal)
•3
C E E E 1 A THE NATIONAL IMPLEMENTATION IN THE EU
OF THE EXTERNE ACCOUNTING FRAMEWORK
Contract JOS3-CT95-0010
A. Martins, M. Fernandes, V. Rodrigues and T. Ramos
CEEETA
(Centro de Estudos em Economia da Energia, dos Transportes e do Ambiente)
Implementation in Portugal
of the ExternE accounting framework
EUNA18273ENC
Research funded by THE EUROPEAN COMMISSION
on the framework of the Non Nuclear Energy Programme JOULE III
and by the Directorate-General for Energy (Portugal) ACKNOWLEDGEMENTS
The authors are especially grateful to the European Commission for the financial support
granted to this research project in the framework of the JOULE Programme, and to Mr.
Pierre Valette from Directorate General XII of the European Commission, for his
enthusiastic support.
We offer our thanks to the co-ordinators of the national implementation project, namely
Mr.Pedro Linares and Mr.Julio Montes of CIEMAT, Mr.Leo de Nocker and all members
of said project, for their unfailing help in seeing it through to completion.
We gratefully acknowledge the Portuguese Directorate General for Energy for their
commitment and co-funding, as well as all Portuguese institutions and individuals who
contributed to this project (or to previous ones) by providing data or technical assistance,
notably Ms.Gabriela Prata Dias, Mr.Nuno Ribeiro da Silva, Mr.Pedro Oliveira and
Mr.Pedro Serra Ramos.
CEEETA also records the support received from so many people, either being directly
involved in the project or doing work for other related projects that benefited the present
document. We are obliged for the data provided and many helpful discussions held in the
course of the project. LIST OF CONTRIBUTORS
CEEETA Research Team:
Prof. Alvaro Martins (Scientific co-ordinator)
Manuel Fernandes (Economist and technical co-ordinator)
Valdemar Rodrigues (Environment engineer)
Tomás Ramos (Environment engineer)
CEEETA - Centro de Estudos em Economia da Energia, dos Transportes e do Ambiente
Rua Gustavo de Matos Sequeira, n° 28 - l°Dto. 1200 Lisboa. Portugal
Tel:+351-1-3956019/20
Fax: +351-1-3952490
Email: ceeeta@.ceeeta.pt
Web site: http ://www.ceeeta.pt PREFACE
What is this book about?
Methods for the economic analysis of projects developed in the 1970's, aimed at directly
incorporating resource scarcity in the decision-making process, placed great emphasis on
the social cost problématique and financial flow correction. The objective of these methods
was to supply the elements needed forg whenever project development
involved public intervention, either because said project was public or it required the
allocation of public resources (directly, or via the awarding of financial incentives).
Little and Mirrless (1974)1 asked the following question: "What assumptions do we
need to make about the real world, if the theory that actual costs measure social cost is to
be exactly true?" (p. 19). According to the same authors (p. 349), one of the alternatives
would be precisely to discard externalities: "There will no doubt sometimes remain
possibilities of strong external effects, which nevertheless defy any attempt at plausible
quantification. There is, finally, no alternative to mentioning such possibilities in a qualitative
or literary manner".
Environment emerged as an issue from the 1960's onwards, as a result of growing
industrialisation and construction of major industrial compounds, also underscored by
phenomena of expanding urbanisation and growth of the services sector. Energy use based
on fossil fuel consumption put a strong pressure on air quality. Simultaneously the
development of intensive farming increased pressures on soil and water. In turn, the growing
amounts of solid and liquid waste generated by urban concentration required the creation
of processing and recycling plants.
As a consequence, the sector of environment began to take up large amounts of financial
resources for investment and infra-structure maintenance, mainly in developed countries.
The environmental sector is currently one of the most dynamic at the European level, with
a scheduled annual growth of 11%.
As environmental constraints require a strict regulation of the economic activity, the
polluter-payer principle and the allocation of a market value to environmental services
must prevail.
Although economic theory defined a framework for these issues, some measurement
problems linked to the assessment of externalities associated with those activities that
cause environmental impacts are not easy to solve in practical terms.
1 Little I.M.D. and Mirrless J.A. (1974). Project Appraisal and Planning for Developing Countries, Ed.
Heinnemann Educational Books. ί
It is a well-known fact that externalities occur when an activity performed by an economic
agent causes other agents to incur gains or losses that are not directly accounted for by
the market. A good example of such externalities is the impact on public health or
agricultural crops induced by air emissions from the energy system (ranging from thermal
power generation to the use of fuels by the transport system).
Economic efficiency, according to Pareto, requires that the levels of supply and demand
of a given commodity be determined by matching the marginal value attributed by the
individuals to said commodity and their marginal willingness to pay for its use, on the
one hand, with the respective marginal social cost, on the other - the latter being established
by adding the market value to the external cost. In the case of undesirable commodities,
like certain air pollutants for example, the enunciated result may be expressed as follows:
economic efficiency is achieved whenever the marginal social cost required to control
the emission of a pollutant (i.e. securing either its non-emission or its reduction) equals
the marginal loss caused by said emission.
A number of difficulties immediately arise of the previous enunciation. Firstly, although
the investment required to control emissions at acceptable levels may be quantified, the
damage to third parties resulting from the emission of air pollutants is hard to quantify,
due to the uncertainty and complexity of the variables involved. Not only do air emissions
have multiple effects on public health but their source may also be widely diversified
(local, national and/or global). Secondly, emissions to air, water or soil do not account
for all externalities. In fact, the same activity may impact negatively on the quality of a
service provided by other infra-structures (e.g. thet on the road network caused by
the transport of biomass to a power plant, in terms of road wear and traffic bottlenecks)
and, simultaneously, contribute to the preservation of forest resources (the cleaning of
forests associated with biomass-fed power plants may impact positively on the reduction
of forest fire risks). More often than not our main objective, when we try to take stock
(in consistent and global terms) of the most significant externalities associated with a
given economic activity, is to assess variables such as the value of human life, the value
of time, the value added by collective equipments in the leisure sector, and other impacts
whose effects are frequently undetermined. Hence the degree of uncertainty linked to
the estimates, which constitutes one of the weak attributes usually identified in this type
of studies. This is clearly reflected in the wide range of the intervals proposed for the
reference external costs. In our view, however, only by means of a continued research
effort in this field can the reference values provided be more unanimously accepted by
decision-makers and economic agents, in a more or less near future.
The emission efficiency level (E*) may then be deduced as shown in graph 1, through
the MCC - the marginal cost of pollution control (determined from the total compound
cost, to which contribute both the corporate and the public sector) and the MD - the
curve of marginal damage cost.