and their monetary values should be known. Thus, Congress directed the U.S. Department of the Treasury in the Energy Policy Act of 2005 (P.L. 109-58), Section 1352, to commission a study by the National Academy of Sciences that would “define and evaluate the health, environmental, security, and infrastructure external costs and benefits associated with the production and consumption of energy that are not or may not be fully incorporated into the market price of such energy, or into the Federal revenue measures related to that production or consumption.” Funding for the study was later provided through the Consolidated Appropriations Act of 2008 (P.L. 110-161).


In response to this mandate from Congress and the request from the Department of the Treasury, the National Research Council (NRC) established the Committee on Health, Environmental, and Other External Costs and Benefits of Energy Production and Consumption (see Appendix A). The Statement of Task (Box 1-1) was developed and served as the point of departure and guide for the committee’s work. In the remainder of this chapter, we define key terms in the Statement of Task and explain the general procedures followed in executing the task.

This study is one of many related to energy that the NRC has recently undertaken. In the next section, we briefly discuss those NRC studies that have informed our work, especially the America’s Energy Future (AEF) initiative, which is identified in the Statement of Task. We also briefly review previous studies on the external costs of energy.

Also in this chapter, we provide the definition of an externality—the focus and core concept of this study—and provide some examples.

The Statement of Task directed us to evaluate the externalities “associated with the production, distribution and consumption of energy from various selected sources.” We explain how we selected the sources and the particular elements of the energy system on which we focused.

The approach that we took for identifying, quantifying, and evaluating externalities “in economic terms” is explained. A discussion of “appropriate metrics from each externality category” is included.

Although the committee was not asked to “recommend specific strategies for correcting observable externalities, because those choices will entail policy judgments”—a position with which we agree—it is important to understand and to keep in mind the policy contexts in which our results may be used.

The Statement of Task anticipated some of the methodological challenges of evaluating externalities. We discuss the particular difficulties of

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