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Analysis

Impact of Externalities

Wed, 02/19/2014 - 09:41

Being able to effectively determine the cost of externalities is crucial to increasing the competitiveness of renewable energy when compared to fossil fuels. However, this is no easy task as calculating externalities goes beyond simply measuring the amount of CO2 emissions released into the atmosphere. The factors that need to be considered vary tremendously depending on location, source, installed capacity and short, medium and long-term effects. The problem inflates with an apparent contradiction in legal texts. The LSPEE states “the production of energy that results in the lowest short and long-term costs for CFE should be used for the provision of the electricity public service, considering environmental externalities for each technology.” However, the General Climate Change Law sets a clear mandate to diminish emissions and increase clean energy production. CRE Commissioner Rubén Flores García stresses the importance of such a contradiction. “We would like change that mandate because you cannot establish the priorities of a company over that of a nation. The cost of electricity should be the cheapest for Mexico, not CFE. The costs of externalities were calculated mathematically, taking future expansion into account, but this law distorts the problem.” According to Francisco Barnés de Castro, another CRE Commissioner, the issue is passed on to various government agencies in charge of establishing Mexico’s energy policy, tariffs, prices and permitting processes. “SENER is in charge of establishing the rules of our longterm planning. It has to work with other ministries to make sure these rules consider the specific characteristics of various forms of renewable energy and the costs associated with the externalities of electricity generation from fossil fuels.” Nevertheless, he adds that confusion in the law should not be left unattended. “First you need a proper legal framework, or there will be contradictions. CFE has to produce, transmit and distribute electricity at the lowest possible cost. If CRE does not recognize the externalities that CFE does not pay, clearly there is a contradiction in CFE having to pay the lowest price.”

Currently, there are no clear incentives to implement less polluting but more expensive energy sources in the Mexican energy mix. The methodology used to calculate externalities plays an important role in effectively estimating long term costs and consequently making renewables more competitive. According to Flores García, the methodology used by SENER and developed by the Mario Molina Center to calculate externalities lacks precision, “determining the cost of externalities is complicated as the problem presented by climate change is a global issue.” This issue could be partly solved by forcing private companies to calculate externalities while considering how many of these are reflected in carbon emission taxes. According to Barnés de Castro, “we must begin to distinguish between the estimated costs, what methodologies have been validated by the academic community, and how much of this has been reflected in taxes on fossil fuels.”