Modern civilization is heavily dependent on energy from sources such as coal, petroleum, and natural gas. Yet, despite energy’s many benefits, most of which are reflected in energy market prices, the production, distribution, and use of energy also cause negative effects. Beneficial or negative effects that are not reflected in energy market prices are termed “external effects” by economists. In the absence of government intervention, external effects associated with energy production and use are generally not taken into account in decision making.
When prices do not adequately reflect them, the monetary value assigned to benefits or adverse effects (referred to as damages) are “hidden” in the sense that government and other decision makers, such as electric utility managers, may not recognize the full costs of their actions. When market failures like this occur, there may be a case for government interventions in the form of regulations, taxes, fees, tradable permits, or other instruments that will motivate such recognition.
Recognizing the significance of the external effects of energy, Congress requested this study in the Energy Policy Act of 2005 and later directed the Department of the Treasury to fund it under the Consolidated Appropriations Act of 2008. The National Research Council committee formed to carry out the study was asked to define and evaluate key external costs and benefits—related to health, environment, security, and infrastructure—that are associated with the production, distribution, and use of energy but not reflected in market prices or fully addressed by current government policy. The committee was not asked, however, to recommend specific strategies for addressing such costs because policy judgments that transcend scientific