Constant regulatory evolutions have led many industrialized countries to introduce measures aimed, at least in part, at the internalization of environmental costs such as the imposition of taxes and fees (e.g. carbon tax or a fee based on the amount of municipal solid waste to be disposed of). The issue of quantifying externalities has long been the subject of study and various techniques have been developed for their measurement. Leaving aside social externalities (e.g. costs related to unemployment or road accidents), the main externalities that directly impact environmental aspects are:
- impacts on natural resources;
- impacts on human health;
- impacts on ecosystems;
- impacts on agricultural crops;
- impacts on biodiversity;
- impacts on civil structures and infrastructure;
- damage caused by climate change.
The traditional mechanism of market prices is not always able to identify the amount and origin to which such externalities should be attributed, especially since the monetary evaluation of some environmental impacts is not economically straightforward, due to the direct and indirect ethical implications that characterize goods that are difficult to trade. However, in order to provide a numerical and plausible quantification of these costs, various methodologies have been developed for the indirect evaluation of environmental impacts:
1. Contingent valuation: a method that, based on surveys or interviews, allows estimation of how much people would be willing to pay to prevent environmental degradation or other negative impacts on the environment.
2. Hedonic pricing policy: a method that examines market behavior in relation to the environmental impact in question. It is based on the assertion that non-market prime resources, such as clean air or water, influence what people are willing to pay for tangible goods. For example, economic values of certain types of properties may reflect the environmental conditions of the land and their location: differences in the market value of two properties, located respectively in a degraded environmental area and in a much more welcoming area, can be attributed to the willingness to pay for differences in local environmental quality.
3. Revealed preferences: an empirical method that identifies specific instances where control measures have been requested to determine the cost that society is willing to pay to avoid environmental damage. For example, some regulations require facilities using fossil fuels to be equipped with a selective catalytic reduction (SCR) device to reduce nitrogen oxide emissions; by dividing the cost of the SCR device by the tons of nitrogen oxide treated, an estimate of the cost that society is willing to pay to avoid the damages caused by an excess ton of nitrogen oxide is determined.
4. EPS (Environmental Priority Strategy): a Swedish method that integrates LCA measurements with contingent valuation techniques. In practice, LCA results can be converted directly into economic units by equating 1 ELU (Environmental Load Unit), that is, the unit of environmental impact, with 1 EURO, the monetary unit needed to restore the environmental state degraded by that same environmental impact. The EPS system covers a wide range of environmental impacts that affect five so-called "safeguard subjects", namely: Biodiversity, Human Health, Agricultural Productions, Natural Resources, and Landscape Values.
Next Lesson: Calculating Life Cycle Costing Methods
