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Hidden Costs of Energy: Unpriced Consequences of Energy Production and Use

Research or Whitepaper
The purpose of this study was to define and evaluate external effects of energy production, use, and consumption, which refer to costs and benefits not taken into account in making decisions (such as the siting of a power plant) or not reflected in market prices (for example, the price of gasoline at the pump). Under such conditions, the actions that follow might be suboptimal—in the sense that the full social costs of the actions are not recognized—resulting in a loss of social welfare. When market failures like these occur, there is a case for government intervention in the form of regulation, taxes, fees, tradable permits, or other instruments that will cause economic agents to recognize the external effects in their decision making.  Before such public policies are pursued, the external effects of energy and their monetary values should be known. Thus, Congress directed the U.S. Department of the Treasury in the Energy Policy Act of 2005 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.”