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Externalities in South Africa's Energy Sector

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Externalities in South Africa's Energy Sector THE COST OF POWER: EXTERNALITIES IN SOUTH AFRICA'S ENERGY SECTOR CLIVE RICHARD VAN HOREN Thesis Presented for the Degree of DOCTOR OF PHILOSOPHY in the School of Economics UNIVERSITY OF CAPE TOWN February 1996 C v,--, '°ft{'t, l '· .,. .. ~· Abstract The long-awaited birth of political democracy in South Africa in 1994 has led to a fundamental re-assessment of policy in most sectors of society. Although the energy sector has witnessed a clrar shift away from the self-sufficiency concerns of the apartheid era, to more universal goals of economic efficiency, social equity and environmental sustainability, there has, as yet, been very little analysis of problems at the energy-environment interface. In this context, this thesis investigates environmental externalities arising in South Africa's energy sector. Two questions are posed: first and foremost, which environmental problems give rise to the most significant social costs? Secondarily, how helpful is an environmental economic analysis in this context? With respect to the first question, it is hypothesised that the external costs arising from two sectors are significant: the electricity generation sector, and the low-income, unelectrified household sector. Of these two, it is suggested that externalities in the latter are most serious. After reviewing the literature on externalities and environmental valuation, the thesis undertakes an empirical investigation of external costs in both energy sub-sectors. A classification system is developed and used to select those externalities in each sector which are potentially serious and regarding which there is sufficient information for quantification purposes. After reviewing a larger number of impacts, data are collected from both published and unpublished sources for four environmental externalities in the electricity sector, and six in the household sector. The results include quantitative estimates of total external costs, average external costs and marginal external costs for each external effect. These empirical results show that the external costs in the household sector are far in excess of those in the electricity sector, especially if damages attributed to greenhouse gas emissions are excluded. With respect to the second question posed, a number of limitations inherent in an analysis of this kind are pointed out. It is suggested that an environmental economic approach can make an important contribution to sound policy in South Africa (and developing countries, more generally), but that limitations of the approach need to be taken explicitly into account. An important conclusion is that strategies which are aimed at mitigating external costs in the household sector may bring about significant improvements, measured against both economic efficiency and social equity objectives. This convergence is especially pertinent in the context of South Africa's new development imperatives. Acknowledgements Of all the people whose efforts and thoughts are, in some way, reflected in this thesis, I would like to single out a few. Above all, thanks are due to my supervisor in the School of Economics at the University of Cape Town, Nicoli Nattrass, both for her confidence and trust in the early stages of the work, and for granting it her undivided attention when the material came at her thick and fast. I would also like to thank Tony Leiman, from the same department, for reading the entire manuscript and providing his comments, which were invaluable. Much of the material contained in this thesis was accumulated whilst I was working at the Energy and Development Research Centre (EDRC) at the University of Cape Town, and so I wish to thank all my friends and colleagues for their contribution to what is invariably a busy, interesting and enriching environment. I hope that something of EDRC will be reflected in this thesis. Two people assisted in specific ways in this thesis: Tim James helped with the production of two graphics using CorelDraw (Figures 3.1 and 3.2), and Paul Hatfield assisted with the collection of data and literature related to the incidence of paraffin poisoning and bums - this was used in Chapter Five. I wish to acknowledge their assistance, and thank them for it. I was fortunate to receive generous financial assistance from the Foundation for Research Development (FRD), through their 'Resource and Environmental Economics Programme', and for this I am extremely grateful. Also, thanks again to Nicoli for her role in securing this support and for managing the funds as stipulated by the FRD. Finally, it is obvious to economists that few things in life come without a cost; unfortunately, a thesis is no exception. It is perhaps ironic - given the subject of this thesis - that some of the costs of my own efforts were borne also by others, most notably by Michelle. For her, the word 'extemality' took on a less-than-welcome, personal connotation at times during the completion of this thesis. So, as some measure of compensation, I wish to dedicate this thesis to her. Table of contents ABSTRACT ....................................................................................................................................... i ACKNOWLEDGEMENTS ............................................................................................................. ii TABLE OF CONTENTS ................................................................................................................ iii LIST OF TABLES .......................................................................................................................... vi LIST OF FIGURES ......................................................................................................................... ix LIST OF ABBREVIATIONS AND ACRONYMS .......................................................................... x CHAPTER ONE: INTRODUCTION .............................................................................................. 1 1. THE CHANGING POLICY CONTEXT IN SOUTH AFRICA .......................................................................... l 2. THE RESEARCH QUESTIONS AND HYPOTHESES ................................................................................... 6 3. ORIGINALITY AND METHODOLOGY ................................................................................................... 9 4. OUTLINE OF THE THESIS ................................................................................................................. l 0 CHAPTER TWO: EXTERNALITIES AND ENVIRONMENTAL VALUATION: A LITERATURE REVIEW .............................................................................................................. 12 I. INTRODUCTION ................................................................... ··········· ............................................... 12 2. THE THEORY OF EXTERNALITIES AND ENVIRONMENT AL REGULATION ............................................... 14 2.1 Externalities, private and social costs..................................................................................... 14 2.2 Achieving the optimal rate of pollution ................................................................................... 18 2.2.1 Coasian bargaining options .............................................................................................................. 19 2.2.2 Environmental standards .................................................................................................................. 20 2.2.3 Pollution taxes and subsidies ........................................................................................................... 21 2.2.4 Marketable emissions permits .......................................................................................................... 23 3. THE VALUATION OF ENVIRONMENTAL SERVICES AND DAMAGES ....................................................... 25 3.1 The debate over whether environmental valuation is appropriate ........................................... 25 3.2 Environmental valuation: theoretical measures of utility and welfare ..................................... 27 3.3 Environmental valuation in practice ....................................................................................... 29 3.3.1 Direct valuation approaches ............................................................................................................. 29 3.3.2 Indirect valuation methods ............................................................................................................... 33 3.4 internalising environmental costs into accounting systems ..................................................... 34 4. INTERNATIONAL STUDIES OF EXTERNALITIES IN THE ENERGY SECTOR ............................................... 37 4.1 Externality studies in the electricity generation sector............................................................ 38 4.1.1 Externality studies in industrialised countries .................................................................................. 39 4.1.2 Developing country studies of external costs ................................................................................... .43 4.1.3 A summary of international externality values in the electricity generation sector ............................ .45 4.2 Externality studies in the household consumption sector......................................................... 48 4.2.1 US EPA studies in California, 1979 ................................................................................................
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