Review of internalization of externalities and dynamics of atmospheric emissions in energy sector of Baltic States

The existence of external costs can lead to market failure. This is because the free market generally ignores the existence of external costs. Pollution taxes and other flexible market instruments are being applied to internalize external costs of atmospheric emissions. Subsidies to renewable energy technologies are also being applied to internalize positive external benefits of renewables as these technologies have lower life-cycle emissions of classical pollutants and GHG emissions in comparison with fossil fuel based energy generation technologies.The paper applies “context-mechanism-outcome” (CMO) theoretical framework based on realistic evaluation theory for review and assessment of the level of internalization of externalities and their impact on atmospheric emissions of classical pollutants in Baltic States. The paper aims to compare external costs of atmospheric pollution and pollution taxes and other measures to internalize externalities in Baltic States and to relate them to the trends of emission of classical pollutants in these countries. The external costs of atmospheric pollution were compared in Baltic States together with atmospheric pollution taxes and other policy measures used to internalize external costs of atmospheric pollution in Baltic States. The analysis of trends of atmospheric pollution by classical pollutants in Baltic States indicated positive trends since 2004 in all analysed countries. Though review of internalization of externalities in Latvia indicated the lowest levels of external costs internalization in terms of pollution taxes, excise taxes and feed-in tariffs and subsidies from EU Structural Funds for renewables, the atmospheric emission reduction trends for classical pollutants are very favourable in Latvia except air pollution by ozone. This indicates that the degree of internalization of external costs related to specific pollutants does not necessary imply emission reduction of these pollutants as other factors as well as country context also play very important role and further investigations of this problem are necessary.