The production and consumption of energy and its derived services have raised the living standards of billions.Energy is traded in markets, and its price in most cases does not reflect the full cost of its use to society.Absent regulation, only the private cost of producing, for example, a kilowatt hour (kWh) of electricity is paid for by consumers through their electricity bills.These private costs, however, fail to account for a variety of external costs from this production activity in the form of, for example, present-day health damages from increased air pollution or potentially lower grain yields due to global warming halfway around the world and almost a century into the future.Economists argue that regulators should make producers “internalize” the external costs, preferably through flexible market mechanisms such as pollution taxes or cap-andtrade systems.Although qualitatively this can be easily explained to an undergraduate student in a 45-minute lecture, the exact magnitude of the full external costs is impossible to determine.The difficulty in determining the damages is caused by the significant degree of uncertainty in our understanding of the source-to-dose relationship combined with an even more limited understanding of the dose–response relationships for the vast variety of pollutants and potentially affected populations and systems.Monetizing the damages (and, in rare cases, benefits) is further complicated by the fact that many affected “receptors” of the pollution are not traded in markets and therefore do not carry a price.
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