Valuation of water and emissions in energy systems

Highlights: • Monetizing externalities provides limited control of environmental impacts. • Propose an approach to determine marginal prices for emissions and water. • Found that carbon and water prices must increase by two-three orders of magnitude. - Abstract: Price incentives and economic penalties (monetization) are common approaches to control water usage and total direct greenhouse gas emissions (externalities) of industrial systems. We argue that homogenous pricing of externalities provides limited flexibility for mitigating environmental impacts as systems are affected quite differently by externalities. We use trade-off analysis and scalarization techniques to determine marginal prices for water and carbon by taking into account the actual physical and technical limits, stakeholders, and real-time conditions of individual systems. A combined heat and power (CHP) system providing hot water and electricity to a real residential building complex is undertaken as case study to demonstrate and describe these concepts. For this CHP system, we found that carbon prices should be increased by a factor of 14 and water prices by a factor of 217 to achieve an optimal compromise between cost, water use, and emissions. Our results point towards the need to consider alternative pricing schemes such as resource bidding (as is done with electricity) that better capture technology trade-offs and push systems towards their efficiency limits. Therefore, this approach can help stakeholders identifying more effective incentive-based environmental protection instruments.