Economics of Polluter Pays Principles for Mitigating Social Costs of Electricity: A Search for an Optimal Liability Share

Abstract

To deal with externalities associated with electricity generation, under the Polluter Pays Principles (PPP), companies can be made to pay the compliance costs and then pass these costs incurred on to the end-users by charging a higher price per kWh of electricity used. However, there is a need for an optimal liability scheme, in terms of economic efficiency, equity and ethics in a world of favor seeking politics. With implicit weighting of welfare gains and losses to society, we developed supply-demand models. By incorporating plausible parameter values into the models, the optimal liability shares fell to less 100 percent (full) liability. However, the model is very sensitive to changes in the parameter values.

Keywords: Economics of PPP, Emissions, Electricity generation