Journal of Power and Energy Engineering, 2014, 2, 86-93
Published Online April 2014 in SciRes.
How to cite this paper: Han, W.C., Liu, D.N., Fan, Y.H., Hu, Y., Xu, Y.J. and Liu, X.M. (2014) Methods Research to Calculate
Equivalent of Environmental Cost in Power Industry. Journal of Power and Energy Engineering, 2, 86-93.
Methods Research to Calculate Equivalent
of Environmental Cost in Power Industry
Wenchang Han1, Dunnan Liu2, Yuhong Fan1, Yu Hu2,Yujie Xu2, Xinming Liu2
1Electric Power Research Institute of Economics and Technology, Hubei Electric Power Company, Wuhan, China
2School of Economics and Management, North China Electric Power University, Beijing, China
Received December 2013
Power industry as an important means of primary energy consumption, occupies an important
position in coal consumption and pollutant emissions, and causes a great impact on the environ-
ment. It is particularly important to define environmental costs while Environmental costs
account for a heavy weight in the total cost of generating after the introduction of the Clean
Development Mechanism (CDM) This paper analyzes the composition of environmental cost and
its calculation methods, three cost equivalent pricing methods and its scope in environmental
costs we r e proposed, there are Government pricing, market pricing and cost accounting, then ana-
lyses the cost of equivalent effect on electricity trade.
Environmental Costs; Cost Equivalent; Pricing
1. Introduction
During the 11th Five-Year Plan to the 12th Five-Year plan, industrial energy conservation as a top priority, the
power industry has a high standard of energy-saving emission reduction targets. Power generation plants will be
limited under the constraints of energy-saving emission reduction [1]. In order to make coordination between
emission reduction and power efficiency, the emission intensity of power generation companies should be re-
stricted based on the CDM that the larger yield, the more emissions requirements. On the other hand, limits
emissions of power plants have affected production decisions, or if mitigation measures are not taken to reduce
production, it would spent more abatement costs. Therefore, before the power companies make a maximized
benefit decisions. The pollutants emissions trading price and abatement costs need to be taken into account. This
part of the costs not only provides reference for the cost of electricity in the power generation sector, but also
has a significant impact on electricity trading.
Some calculation methods on abatement cost of emissions currently exist. Usually using the control costs di-
vided emissions [2], but the mixing of pollutants will lead to an excessively high calculation results. Currently
the Kyoto Protocolprovides six kinds of anthropogenic greenhouse gases. In calculating the cost of these six
gas, put them converted into CO2 according to a certain proportion [3]. But there is no specific calculation me-
W. C. Han et al.
thod for CO2 abatement cost.
In summary, there are no relevant studies on the cost for each pollutant equivalent calculation methods. This
article based on electricity trading background, classifies the pollutants according to the characteristics of the
major environmental pollutants, and then proposes different solutions for each equivalent of pollutant cost.
2. Cost Equivalent Description
2.1. The Origin of the Cost Equivalent
In the electricity trading process, the transaction price is mainly derived from the total cost of electricity produc-
tion. After the introduction of CDM, the total cost of power production includes production costs and environ-
mental costs, as shown in Figure 1.
Environment abatement cost reflected with the passage of time. It will take some time that will affect trading
decisions of the purchase and sale of electricity. Therefore, it’s necessary to establish standards for the determi-
nation of environmental costs. In the power generation process, due to the differences between units, there will
be a variety of different pollutants emissions. However, emissions of pollutants can be monitored in real time, so
long as we know the cost of each pollutant equivalent, will be able to come to the environmental cost of the unit.
This paper will define cost equivalent as the compensation paid which emission per unit to deal with environ-
mental pollution.
2.2. Environmental Cost Classification
In this paper, environmental costs would be divided into resource consumption costs and the cost of pollution
control, shown in Figure 2.
In this paper, resource consumption is mainly coal consumption. Coal consumption and water consumption
costs are included in the cost of production, and therefore do not consider as constitute of environmental costs.
Environmental costs mentioned in this article refer to the outside of this part of the production costs. In the en-
vironment of scarce resources, resource consumption will reduce part of the part, other companies are not able to
use the resources while plants are using, so such plants need to pay an additional fee for the resources as oppor-
tunity cost.
Pollution category refers to affect the environment, including CO2, SO2, NOx, solid particles and sewage. Ac-
cording to the scope of influence, the pollutions can be divided into three categories, namely global control, re-
gional control and local control, shown in Figure 3.
Total cost(Yuan/kWh)
emission factors
production costs
(Yuan / kWh)
Cost Equivalent
Environmental costs
Yuan / kWh
Figure 1. Composition of total costs.
environmental costs
resource consumption
costs pollution control costs
Figure 2. Composition of environmental costs.
Scope of influence
Larg er
solid particles
sewage SO
local controlregional controlglobal control
Figure 3. Composition of pollutant control.
W. C. Han et al.
Where sewage and solid particles precipitated in the communication process, resulting in a small scope; SO2
and NOx emissions are gases, spread range farther; while CO2 emissions is huge, is the main greenhouse gases,
have the largest of scope. According to the policy in different countries for the emission of pollutants will have
certain restrictions and punishment. In order to limit emissions, it is necessary to take a series of measures,
which spend a certain costs, and the costs constitute cost equivalent of pollutant control.
3. Cost Equivalent Pricing Method
According to the classification characteristics of the environmental costs, the paper proposes three pricing me-
thods, and discusses the applicability analysis of the three pricing methods.
3.1. Government Pricing
Herein government pricing method can also be called analogy estimation method, principle of analogy estima-
tion method is based on the resource tax, carbon taxes and emissions trading schemes that have been imple-
mented at home and abroad, consider Chinas economic development, determined the emissions cost equivalent
of resource tax and variety of pollutants by analogy estimation.
China only have resource tax levied, carbon tax policy has been not implemented. Then the carbon tax should
be compared to determine, CO2 costs equivalent fluctuate around the carbon tax, and other pollutants estimate in
accordance with the standard management for collecting the fee of discarded sewage.
1) Estimates of resource consumption cost equivalent
China has a corresponding resource tax regulations, the coal resource tax is between 0.3 and 5 Yuan/t, mainly
based on the specific degree of contamination of the environment.
The degree of pollution is calculated in the region API (Air pollution Index) as follows:
minmax min
max min
Tax TaxTaxTax
=+ ×−
In Equ ation (1) ,
is the maximum API value of nearly a year,
is the minimum API value of
nearly a year,
min max
[, ]Tax Tax
is corresponding floating range of resource tax,
is the API value for the
calculation period.
2) Estimates of CO2 cost equivalent
Because CO2 is the most important factor of global warming, carbon cost equivalent can be considered as a
global pollutant, the cost can be equivalent to a carbon tax as the standard of other countries, he U.S. carbon tax
fee is 50 - 80 Yuan/t, Japanese carbon tax charges of 150 - 250 Yuan/t, the European Union is 200 - 300 Yuan/t
[4], the standard of cost equivalent need to be based on the specific circumstances. In this paper, take GDP as an
analog standard, combined with Chinas national conditions, the carbon tax fee is 50 Yuan/t.
3) Estimates of other pollutants cost equivalent
For SO2 and NOx, according to The Regulation of Effluent Fees Collection, Usage and Management to calcu-
late [5], SO2 and NOx pollution equivalent is 0.6 Yuan each. Calculation of pollution equivalent number is as
In Equation (2), Ni is the equivalent number of corresponding pollutants, Qi is emissions of pollutants, Ei is
the pollution equivalents.
Because water and the solid particulate material comprise a contaminant, sewage and solid particles need to
determine which according to the type and quantity of pollutants. Specifically, there is no policy to estimate cost
equivalent, calculated as follows:
sewage i
(3 )
In Equation (3),
represent the equivalents of top three pollutants. Calculation results are shown in Ta-
ble 1.
W. C. Han et al.
3.2. Market Pricing
In the context of emissions trading, there is a certain total emissions limit each region, the total amount of emis-
sion rights directly affects the power generation, thus affecting their economic interests. The using of new ener-
gy, will not produce pollutants, so there will be no emission constraints, but due to higher new energy grid tariff,
under the constraints of market trading mechanisms, the use of new energy sources to replace coal-fired power,
need to meet the following constraints as follows:
new coalenvironment
The meaning of Equation (4) is that, the new energy grid tariff should be lessen or equal to sum of coal power
grid tariff and environmental costs. Pnew is calculated by the following formula:
112 2newn n
PPR PRPR=⋅+⋅ ++⋅
(5 )
In Equation (5), n represent for the new types of energy generation, Rn represent for the proportion of the cor-
responding new energy, Pn represent for correspond ing benchmark price, the Table 2 shows the benchmark
price of each new energy.
Above all, the results of environmental costs of 0.18 Yuan/kWh, based on AHP, come in the environmental
cost factors weighting coefficients in Ta ble 3.
By pushing emission factors inversely, the results of the each cost equivalent as shown in Table 4.
3.3. Cost Accounting
During generation scheduling, power generation needs to be allocated according to the amount of power plant
emissions, and whether the increasing benefits are greater than the additional cost of purchasing emission rights
is the key to power business decisions. By calculating the discounted value of the difference in the initial in-
vestment and operating costs to install environmental equipment. Calculate the corresponding equivalent pollu-
tants cost is calculated as described below.
1) The cash flows difference operations is calculated based on input and output values in the environmental
protection installed around.
2) Obtained emission reductions corresponding to different types of environmental pollutants by measure-
Table 1. Cost equivalent results based on government pricing.
Tax CO2 SO2 NOx PM Sewage
3 50 631 631 1832.1 28
Unit: Yuan/t.
Table 2. Benchmark price.
Thermal Hydro Wind Solar Nuclear
0.39 0.3 0.61 1.1 0.43
Unit: Yuan/kWh.
Table 3. Weighting coefficients.
Tax CO2 SO2 NOx PM Sewage
0.22 0.0003 0.2026 0.2046 0.37249 0.00001
Table 4. Cost equivalent results based on market pricing.
Tax CO2 SO2 NOx PM Sewage
3.5 57 137 137 1023 3
W. C. Han et al.
3) Different types of costs equivalent = cash flows difference/corresponding emission reductions.
3.3.1. Benefit Analysis before Installation of Environmental Equipment
Do not install the power plant environmental protection device (desulfurization, stock, dust, etc.), that is in the
power generation process, the first emission of pollutants, the latter further treatment. In calculating the benefit,
cash income is income from electricity sales; cash outflows include operating costs, and pollution control costs.
3.3.2. Benefit Analysis after Installation of Environmental Equipment
Power plants in the power generation process are in state of pollution control. After the installation of environ-
mental equipment, cash inflows include sales income, national tariff compensation; cash outflows include
fixed-asset investment, operating costs [6] during the period of initial operation, the supplies for environmental
device desulfurization, denitrification. After desulfurization and denitrification, there are still emissions, so pol-
lution control costs still exist, but reduce emissions.
3.3.3. Comparative Analysis
This section describes the NPV calculation among these two programs for one year, Table 5 is the basic data for
calculation, use desulfurization unit as an example. The following calculation does not consider the generators
fixed investment, investment lending rates.
The calculation period is 1 year, average total generation monthly, and the internal rate of return is 8%.
Therefore, the residual value of fixed assets a year later converted to a year ago counted as cash inflows. Using
average depreciation as depreciation with 20-year life. The depreciation equivalent to the first year of invest-
ment, as in.
desulfurization (8%,12, )IPV E=
In Equation (1),
is the initial investment for the environmental unit minus the amount of deprecia-
tion for 12 months. Tables 6 and 7 respect for the statement of cash flows before and after installation of envi-
ronmental equipment, because the average monthly generation, then the latter 11 months, have same cash flow.
The difference of NPV between the Tabl es 6 and 7 is the cumulative cost of sulfur equivalent. Cost equiva-
lent for sulfur is 116.7 Yuan/t. According to the same method estimates, the cost of equivalent results obtained
for each pollutant show in Table 8.
4. Scope of Application
The method described above has a different scope, shown in Figure 4.
1) Resource consumption. For the environmental costs of resource consumption costs equivalent class, be-
cause there is a clear national policy resource tax regulations, the coal consumption corresponding to the carbon
tax by the government pricing, i.e. the carbon tax as a standard resource.
2) CO2 cost equivalent. Due to the large range impact of CO2, and in the European Union, the United States
Table 5. Basic data table.
before installation installation
Unit power (MW) 300 300
Generating hours (h) 5000 5000
Pool purchase price (Yuan/kWh) 0.48 0.48
Price subsidy (Yuan/kWh) 0 0.015
Invest (180 Yuan/kW) 0 54,000,000
Operating costs (Yuan/kWh) 0.089 0.095
Running costs (Yuan/kWh) 0 0.009
Abatement costs (Yuan/kWh) 0.087 0.025
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Table 6. Cash Flow before installation.
Cash inflows 60,000,000
Generation(MWh) 125,000
1. Electricity sales 60,000,000
Cash outflows 22,000,000
2. Abatement costs 10,875,000
3. Operating costs 11,125,000
Net cash flow 38,000,000
NPV 286370964.64
Table 7. Cash Flow after installation.
1 2-12
Cash inflows 82246935.82 61,875,000
Generation(MWh) 125,000 125,000
1. Electricity sales 60,000,000 60,000,000
2. Price subsidy 1,875,000 1,875,000
3. Residuals 20371935.82
Cash outflows 70,125,000 16,125,000
4. Unit Investment 54,000,000
5. Operating costs 11,875,000 11,875,000
6. Running costs 1,125,000 1,125,000
7. Abatement costs 3,125,000 3,125,000
Net cash flow 12121935.82 45,750,000
NPV 313638472.81
Table 8. Cost equivalent results based on cost accounting.
SO2 NOx PM sewage
116.7 272 915.7 1.8
Unit: Yuan/t.
and other developed countries, the carbon tax system is more perfect, so pricing is determined by the govern-
ment, also be based on Chinas national conditions through cost accounting method, market pricing can also be
carried out in accordance with the carbon emissions trading market. In short, CO2 is one of the most common
pollutants, and therefore the cost of equivalent can choose different pricing methods depending on the circums-
3) SO2, NOx cost equivalents. Because there are more comprehensive measures for SO2, NOx pollutants, so
we can calculate the cost equivalent of using cost accounting method, but with the gradual improvement of
emissions trading market, we can also determine the cost of equivalent through market pricing through competi-
tive bidding.
4) Solid particles, sewage cost equivalents. Solid particles and sewage contains many contaminants, which are
also different levels of pollutants, so only through cost accounting method, depending on the classification of
generators to develop solid particles and sewage costs equivalent standards.
Table 9 shows the results of the three methods.
W. C. Han et al.
Method (1) is related to macroeconomic policies, scope for all industries, the performance of a standard pollu-
tion control costs. Consider these three methods comprehensively, we can derive a pricing scope of cost equiva-
lent for carbon tax and CO2, shows in Table 10.
But for the type of pollution control that have industry differences. It should be measures based on the method
(2) and method (3) that approved for the power industry. The range of the results is shown in Table 11.
After obtaining cost equivalent by the above method, it is possible to calculate environmental costs, and then
come to the total cost of generation. Usually in the purchase and sale decisions are costing method by calculat-
ing the cost of pollutants. In the part of purchase, we can subtract a series of cost because the purchase of elec-
tricity from other provinces and reduction in the amount of pollution generated locally; in the multilateral trad-
ing auction, the purchase price may declare this part of the cost equivalent to improve the successful rate. While
Government Pricing
Market Pricing
Cost Accounting
solid particles,
coal resource
Quote decision basis
Figure 4. Pricing methods and scope.
Table 9. Results summary.
Method Tax CO2 SO2 NOx PM Sewage
(1) 3 50 631 631 1832.1 28
(2) 3.5 57 137 137 1023 3
(3) 3 50 116.7 272 915.7 1.8
Table 10. The pricing scope of Tax and CO2.
Carbon Tax (Yuan/t) CO2 (Yuan/t)
3 - 3.5 50 - 57
Table 11. Range of pollution control pollutants.
SO2 NOx PM Sewage
116.7 - 137 137 - 272 915.7 - 1023 1.8 - 3
Unit: Yuan/t.
W. C. Han et al.
part of the sale of electricity, the province belongs to the sale of electricity side, due to the pollutants of local
power generation also needs conversion costs equivalent, in the sale of electricity required to add this part of the
cost equivalent to ensure their maximum benefit.
5. Conclusions
This paper proposes three calculation methods for cost equivalent, the method that analogy to estimate the car-
bon tax method is relatively simple, but it’s mainly based on national policy and specific circumstances of the
The market bidding method suitable for CO2, SO2 and NOx, which are all spread farther. In the bidding
process needs to take into account the impact on adjacent or similar cause cross contamination between areas, in
order to ensure the equivalent accuracy, the cost of price bidding needs to be taken into account.
The cost is determined by costing equivalent calculation method which is at the source of the emissions esti-
mates, estimates more accurate. Calculation in this paper is based on the available data, if there is enough data to
support able to calculate the difference between the whole generators set emission reduction benefits within a
certain period, the data can be more accurate. Depending on the different geographical units to get different sta-
tistics for the purchase and sale of electricity cost equivalent decision-making, can maximize the benefits.
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