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Whitepaper on the Monetization of Externalities in an Integrated Resource Planning Process to State
of Michigan Clean Power Plan Technical Advisory Committee
Billscurrentlyintroducedinboththe state Senate andthe House are poisedto determineMichigan’s
energy policywellintothe future. Asresidents,andconsumers,Michigandersmustensure their energy
policy providesefficientandreliable electricityforresidentsandbusinesses. Furthermore,itmust
guarantee compliance withairquality standards,aswell asensure electricutilitycompaniesare making
the bestdecisionswhenitcomestime to expandcapacityorupdate facilities. Thisprocessrequires
rigorousreviewandforecastingof energygeneratingunit(EGU) emissions profiles,offeringanexcellent
opportunity forexternal costsestimations. Anaccurate costanalysis,whichincludes external cost
estimations,canhelplevelthe fieldwhencomparingdifferenttypesof EGUs,such as alternative and
fossil fuel plants.
Numerousairqualitymodelshave beendeveloped, improved,andrepeatedlytested,forestimating
external costsfromemissions,whichincludebothhealthandenvironmental impacts. Healthand
environmental impactsare importantconsiderations whenanalyzinglife-cyclecostsof electricfacilities,
but are oftenoverlooked. These modelscanbe tailoredtoMichigan-specificcriteria,andincluded asa
componentof a comprehensive IntegratedResearchPlan(IRP). Thiswouldprovideutilitycompany and
energyplantrepresentatives,aswellasthe MichiganPublicService Commission,the information
required toapprove the necessity,including full social costs,of utilityenergyportfoliosinthe state of
Michigan.
Background/Problems
Despite increasing regulation and control,air pollution standardsdo not fully eliminate damagesand
impacts, and societysuffersunduecosts and burden fromEGU emissions. Failure to assessexternalcosts
of EGU emissionsartificially overpricesrenewableenergy sources,relativeto fossil fuelsources.
Fossil fuel combustioncreatesemissions,includingpollutantssuchasozone (O3) ,particulate matter
(PM),and lead (Pb),whichare harmful tohumanhealthandthe environment. The Environmental
ProtectionAgency(EPA) istaskedwithidentifying levelsof criteriapollutantsthroughthe CleanAirAct,
but theyare not considered “zero-risk,”andcontinually undergoreevaluation.1
There are social and
environmental costsassociatedwith ambientPM, O3,nitrogenoxides(NOx),andotherEGU emissions,
despite stricterEPA standards. These costs are incurredonthe population throughdisease,including
stroke,asthma,andlungcancer; premature mortality;andmisseddaysof school andwork.
Furthermore, there are environmental impacts,includingdecreasedcropyield; mercurydepositionin
waterways,affectingfoodsafety;decreasedlandvalue inhighsmog andpollution areas;andglobal
impacts,suchas climate change. These social andenvironmental impactsare externalcosts,or
externalities,of EGUemissions.2
In Michigan’scurrentenergypolicy,the external costs of EGU emissions are notwholly considered as
part of the decisionmakingprocessfor EGU construction,capacityexpansion,orevenwhenpurchasing
energy fromanothersupplier. Therefore,the marketisnotoptimallypriced,andthe decisiontoutilize
fossil fuelsisgenerallyover-demanded,andconsequently, oversupplied. Despite more competitive
renewable energycosts,these sources donothave external costs tothe extentof those causedbyfossil
fuel combustion. Thisartificiallyoverpricesrenewable energy,causingittobe under-demanded,and
undersupplied,relativetofossil fuelsources.

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Energy PolicyFramework in MI
SenateBill 437 and HouseBill 4278 could shapeMichigan’senergy policy long into the future. Thesebills
provideusto with the opportunityto ensureMichigan residentsaresupplied with the mostefficient and
affordableenergy possible. An IRPprocesswhich includesthe externalcostsof energy production will
providethe PublicService Commission theinformation necessary to allow Michigan to bea leader in
energy policy.
Withthe billscurrentlymovingthroughboththe Senate andthe House, Michigandecisionmakersare
challengedwithconstructingadequateenergypolicythatmaydrive ourstate’sdecisions well intothe
future. Michigan’senergypolicy mustsatisfy currentairqualitystandards, aswell asprepare for
updated, andpotentiallymore stringentstandards inthe future.
Senate Bill 437, introducedby ChairmanNofs,setstoestablishparametersforintegratedresource plans
(IRPs),orlongtermplanningtoolsthatforecastnecessity,costs,andemissionsintothe future. Thiscan
ensure thatthe utility isefficientlyandeffectively planningforMichigan’sfuture energydemands, while
keepingall coststoa minimum. These costs canalso include the external costsof energygenerating
unit(EGU) emissions,includinghuman impactssuchasmorbidityandpremature mortality,aswell as
environmental damages. Inthe proposedbill, Sec.6s(1) states:
“…establish statewide parameters for integrated resource plans…(E) establish the
modeling scenarios and assumptions each electric utility must use in developing its
integratedresource plan…including…(vi)the projectedcostsof differenttypes of fuel…”
ChairmanAricNesbitthasalsointroducedHouse Bill 4278, which providesapotential placeholderfor
external coststobe evaluated. Inthe bill, Sec.6s.(5) states:
“The commission may consider any other costs or information related to the costs
associated with the power that would be supplied by the existing or proposed electric
generationfacilityorpursuanttothe proposedpurchase agreementoralternativestothe
proposal raised by intervening parties.”
At thistime,monetizedexternalcosts of EGU emissions donotneed tobe incorporatedintothe costof
electricity suppliedtoconsumers. A benefitof external costsanalysesisforensuringthe most
reasonable andprudentdecisionsare beingmade,when expanding,constructing,orupdatinganenergy
generatingfacility. These costs providethe properfootingforaccurate comparisonof EGUs with
differentfuel source technologies. Forexample, withlow natural gas costs, itmay appearmore
economical toconstructa natural gas plantup front,butthiscan be challengedbythe costsassociated
withthe emissions,whichare oftenoverlooked. If comprehensivelife-cycle costs,including
externalities,are considered, alternativefuel sourcesmayactually be more cost-effective. AnIRP
provides the PublicServicesCommissionwithanaccurate cost-benefitanalysis, soapprovedplans
ensure the lowestassociatedlifespancosts. The verbiage forassessingmonetizedexternalitycostsis
alreadywithineachof these bills,theyjustneedtobe estimated.
Robustnessof Modeling
There are multiple considerationswhen modeling airquality:modelinputs,whatmodel(s) to use,and
howthe modelscan be adapted forMichigan-specificEGU emissionsand dispersion.
There are numerousquestionsthatmustbe answeredwhenestimatingthe monetaryvaluesof external
costs fromEGUs. For starters,howdo we know whichpollutantsshouldbe modeled,andsubsequently
monetizedfortheirassociateddamagesandimpacts? Researchisplentifulinregardstothe impacts

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February,2016
differentemissionshave onhumans andthe environment. The EPA has identifiedcriteriapollutants,or
those foundtohave the mostprofoundeffectonpublichealthandthe environment. Criteriapollutants
include:PM,O3,carbonmonoxide (CO),nitrogendioxide (NO2),lead(Pb), andsulfurdioxide (SO2).
Requiredby the CleanAirAct,the EPA hasestablished National AmbientAirQualityStandards (NAAQS)
for these pollutants,whichshould be updatedeveryfiveyears. Facilitiesmustabide bythese standards,
or be subjectedtopenalties fornoncompliance.3
Continued research andimproved knowledge hasled
to betterunderstandingof these pollutants’impacts onhumanhealth. Moreover,the currentstandards
are expectedtobecome increasingly more stringentinthe future.
Thisopensan opportunitytobe a leaderinthe U.S. Assessingexternalities aspartof the IRP process
will notonlyhelpnormalizecomparisonsbetweendifferentenergysources,butwill ensure forecasted
emissionsmeetNAAQS. Providingthe PUCwiththisinformationcanencourage improvementof
Michigan’semissionsprofile,aswell as helpforesee future violations, especially if the NAAQS are
furtherreduced.
Additionally,we mustconsiderhow EGU emissions disperse acrossthe region,away fromthe point
source. Otherstateshave utilizedmethodsthatapplyvaluestodifferentregions,basedonpopulation,
agriculture,andothereffects. For example,Minnesotahasanexemplary IRPprocessthatrequires
applicationof established, monetized externalityvalues,andthese valuesare differentforrural,urban,
metropolitanfringe,as well aswithin200milesof Minnesota’sborders. Windpatternscandistribute
emissionsspatially,aswell asreactwithsunlightandothercomponentsinthe atmosphere.4
The
impactsthese pollutantshave will change astheydisperse,andhighconcentrationsof airpollution
components(PM,O3,NO2,etc.) nearan EGU will have agreater effectonnearbyresidentsandthe
environment,comparedtomilesaway. Therefore,accurate monetaryestimationsof theirimpactsmust
considerthe geospatial dispersion of pollutants.
Furthermore,there issome level of uncertainty inmonetized external costs estimations. Minnesotahas
addressedthisissue byestablishinga range of monetizedvaluesforconsideration byfacilitiesand
utilitieswhenassessingexternalitiesintheirIRPs. Althoughanumberof experttestimoniesand
literature were addressedwhen the MinnesotaPublicUtilitiesCommission(MNPUC) establishedtheir
initial external costvalues, acomprehensive reportbyAndrew GoodkindandStephenPolasky provides
great detail onthisprocess.5
Thisstill leavesuswithasignificant question:how dowe estimate the impactspollutantshave on
humansand the environment,while consideringall of these variables? The answerliesin geospatial air
quality models. The accuracy of modellingemissions,namely frompointsource emissions,has
dramaticallyimprovedovertime,andanumberof differentmethodshave beenemployedfor
developingthesedifferentmodels.
These modelscanbe adapted to characterize the impactsof EGU emissions inMichigan,usingstate
emissionsprofiledata, populationdistribution,geography,andmeteorological data. Airemissionsdata
ismandatedto be reportedtothe MichiganAirEmissionsReportingSystem(MAERS) bypermitted
facilities,includingEGUs,and then forwardedtothe EPA. Thisdata is publiclyavailable onAirData,and
can be used inanalysisandestimationprocedures,suchasfor airemissionsimpactmodelling.6
Distributionandscenario dataprovidedbysome of the models canthenbe used withMichigan-specific
emissionsdatatoestimate the monetaryvalueof the impact(s), orthe external costs.

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February,2016
Air Quality Modeling
There are numerousmodelsadapted foranalyzing airquality and theimpact on human health and the
environment. Thisrequires theidentification of spatialimpactsof emissions, changeson human health,
and then, translating thesechangesinto monetized values. Photochemicalairquality modeling,
reduced-formmodeling,and established valuesareall potentialapproaches.
External costscan be estimatedusingamarginal damage approach,whichseekstoidentifythe social
costs of emittingone more incrementof the pollutant,oftendescribedin tons,givencurrentconditions.
The conditionsconsideredinclude: currentairquality,populationdensity,andpopulationdistribution.
There are three fundamentalstepsforestimatingmarginal damage costsof EGU emissions,as
highlightedbythe MNPUC:
1. Identify how agivenemissionimpactsairquality,spatially
2. Monitor howair qualitycanimpact humanhealth
3. Translate these changesinhealthimpacts intoestimatedmonetaryvalues
Three methodsof estimatingmarginaldamage costsforcriteriapollutants,and/orothercomponents of
air pollution, include:i. Photochemical airqualitymodels, ii. Reduced-formmodels, andiii. Previously
established(modeled)estimations. Eachof these methodscomeswith strengthsandlimitations,most
notably,resources.
i. PhotochemicalAir Quality Modeling
Photochemical airqualitymodelshave beendevelopedtosimulate how pollutantconcentrations
change in the atmosphere,characterizingthe chemical andphysicaltransformationsthatoccur. This
type of modelingalsoincludesmeteorological data,suchas windandtemperature,whichisanalyzed
concurrentlywiththe photochemical data. Therefore,the entire model estimateshow pollutionis
formed,accumulates,anddissipatesfromthe source. There are anumberof photochemical models
available foruse,includingthe EPA’sCommunityMulti-scale AirQualityModel (CMAQ),Comprehensive
AirQualityModel withExtensions(CAMx), andUrban AirshedModel Variable (UAM-V),amongothers.7
These modelshave beeninuse since the 1970s, andhave evolvedfromsimpletocomplex analytical
models,providingaccurate estimates,withnotable credibility acrossthe globe.8,9,10
Despite the
strengthsof photochemical airqualitymodeling,these modelsmay notdirectly estimate healthor
environmental impacts frompollutants,orthe economicvalue of these impacts.7
Additional software
has beendevelopedforthis,including Environmental BenefitsMappingandAnalysis(BenMAP).
BenMAPcan use scenariosgenerated fromphotochemical airqualitymodelingtoestimate,and
monetize, the human healthimpacts. BenMAPutilizespeer-reviewedepidemiological literature and
economicvaluationliterature to estimatetheseimpacts,butadditional consultationmaybe still be
necessary toestimate non-humanimpactsfrompollution,suchasmaterialsandagricultural damage.11
Thismethodislaborand time intensive,andmayrequire outside consultation,butthe external
valuationestimates are producedwithlessuncertainty.
ii. Reduced formModeling
Keylimitationsof rigorousmodels,suchasphotochemical airqualitymodels, are the amountof time
and resourcesnecessaryforbuilding the model,aswell asapplicationand/ormanipulationof specific
data (e.g.EGU emissionsinMichigan). Reducedformmodelsrepresentthe relationshipsbetweenthe
environmentanddifferentpollutantsinasimplifiedform. Despite increaseduncertaintyof the

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estimations,reducedformmodelingrequiresmuchlessmanipulation,providinganairpollutionmodel
that requireslesstime foranalysis,andtherefore less expensivetorunacross multiple scenarios.
Additionally,the simplermodelingrequireslesseffortfor updatingexternality valuesproducedbythe
model,which maybe of interesttogroupswhich may nothave the most appropriate modelingexpertise
on staff.
An example of awidely usedreducedformmodelincludesthe AirPollutionEmissionExperimentsand
PolicyAnalysis,orAP2(formerlyAPEEP).12
AP2wascreatedusingemissionsinputsfromall point
sourcesinthe UnitedStates,andlinksthemtoexposures,physical effects,andmonetarydamages. It
has beenusedina numberof peer-reviewedreports,providingcredibility,despite the simpler
calculations. Althoughthismodel wascreatedtoestimate overall damagesfrom all airemissionsinthe
U.S., itcan be adjustedtoinclude onlydamagesinaspecificregion,suchasthe state of Michigan. This
model canalso be usedto estimate damagesfromgeographic regionswithinMichigan,asacounty-by-
countyanalysiswasperformed, andcanhelpidentify impactdifferences inrural versusurbanareas (due
to factors suchas populationdensityandemissionsdispersion).
iii. Previously Modeled Costs
Additionally,existingstate-specificmodelingandcostanalyses maybe usedto assessthe impactof
anthropogenicemissions. In2011, the EPA developedastate-by-stateeconomicanalysisof the
damagesassociatedwithSO2 andnitrogenoxides(NOX) onthe formationof secondaryPMandO3.13
Since these valueshave already beenestimatedandestablished,thismethodwouldrequire the least
amountof time andresources, butitdoeshave limitations.
The EPA analysis example isnotspecifictoEGUs, as it was developedforthe Final TransportRule in
2011, issimplisticin form, lacksdamage valuationsforotheremissions, andmay not have the credibility
of othermodels. Therefore,these valueswouldneedtobe furthermanipulatedtoprovideimpacts
directlyfromEGUs alone,aswell asutilize outsidemodellingtoestablisheconomicvaluesof these
impacts(e.g. BenMAP),aspreviouslydiscussed. Similarlyestablishedmodelsandreportsmayidentify
the impact of emissions withgreateruncertainty,buttheymaybe able tobe usedas a startingpoint,or
amendedtoinclude informationpertinenttocalculatingEGUemissionsexternalcosts.
CONCLUSION
There are multiplemethodsthatcanbe utilizedwhen estimatingthe externalcostsof energy
production,andfailure torequire thisanalysisinIRPsseverelyunderminestheirimpactonMichigan’s
residents,environment,and neighbors. Boththe Senate Bill 437 and House Bill 4278 language permits
for the monetizationof externalcosts,althoughnotexplicitly statedorrequired. The MichiganPublic
Service Commission shouldencourage thisprocessaspart of IRP developmentforEGUs, as it
contributestothe commongood of all Michiganders andthe environment.
The process for estimatingexternal costsfromEGUs will requiresubstantial planningandeffort,butwe
can learnfromothers(e.g.MNPUC), and buildon theirknowledge. Thiswill ensureutilities provide the
PublicService Commission withthe informationtheyneedtomake the mostreasonable andprudent
decisions,whenitcomestoenergygeneration. The MinnesotaPublicUtilitiesCommissionhas
established,andrequired,monetizedexternalitiestobe incorporatedinIRPsforovertwodecades,
helpingfostera70% decline inEGU emissionsfrom1990 to 2013.14
Michiganneedstotake note of this

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February,2016
accomplishment. Itistime forMichigan to take the leadinenergypolicy,andensure residentsare
suppliedsafe,affordable,andhealthyenergy,well intothe future.
Preparedby: BrentonSpiker,MPHCandidate
NicholasOcchipinti,Directorof Policy andCommunityActivism
WestMichiganEnvironmental ActionCouncil
Grand Rapids,MI

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February,2016
References
1 United States Environmental Protection Agency. (2015). Environment and Contaminants: Criteria Air Pollutants.
http://www.epa.gov/sites/production/files/2015-10/documents/ace3_criteria_air_pollutants.pdf
2 World Health Organization. (2014).Ambient (Outdoor) Air Quality and Health.
http://www.who.int/mediacentre/factsheets/fs313/en/
3 United States Environmental Protection Agency. (2016). National Ambient Air Quality Standards.
http://www3.epa.gov/ttn/naaqs/
4 Centers for DiseaseControl and Prevention. (2013).Air Contaminants.
http://ephtracking.cdc.gov/showAirContaminants.action
5 Goodkind, A. L., Polasky,S. (2013).Health and Environmental Costs of Electricity Generation in Minnesota.
https://www.minnpost.com/sites/default/files/attachments/Polasky%20report%20on%20externality%20costs.pdf
6 United States Environmental Protection Agency. (2016). AirData.http://www3.epa.gov/airdata/
7 United States Environmental Protection Agency. (2015). Photochemical Modeling.
http://www3.epa.gov/scram001/photochemicalindex.htm
8 Federal Register. (2015). https://www.federalregister.gov/articles/2015/07/29/2015-18075/revision-to-the-
guideline-on-air-quality-models-enhancements-to-the-aermod-dispersion-modeling
9 CAMx. (2016). Featured Publications. http://www.camx.com/publications/default.aspx
10 Untied States Environmental Protection Agency. (2015). 11th Conference on Air Quality Modeling.
http://www3.epa.gov/scram001/11thmodconf.htm
11 United States Environmental Protection Agency. (2015). Environmental Benefits Mappingand Analysis Program.
http://www.epa.gov/benmap
12 Muller,N.Z. (2011).AP2 (APEEP) Model. http://sites.google.com/site/nickmullershomepage/home/ap2-apeep-
model-2
13 United States Environmental Protection Agency. (2011). Air Quality Modeling
Final RuleTechnical SupportDocument http://www3.epa.gov/airtransport/pdfs/AQModeling.pdf
14 Minnesota Pollution Control Agency. (2015). Air quality in Minnesota:2015 report to the legislature.Retrieved
from http://www.pca.state.mn.us/index.php/view-document.html?gid=22170