The Valuation Methodologies

The external costs valuation is an appraisal procedure, both qualitative and quantitative, with the following steps (figure):
  • The framework of the analysis: objectives of the valuation and description of the activity in its context;
  • Screening of the activity impact factors and of the main impact pathways
  • Quantitative assessment of the impact pathways
  • Economic valuation of the final effects through the application of monetary values.

Impact pathway is the “chain” of cause-effect links that originate from the activity (f.e. driving in a certain way a vehicle with certain devices). In some cases the impact pathways may be very short; in other cases they may be very long and complex to model. Usually impact pathways assume a probabilistic nature at a certain stage. The first stage effects originating from the activity are called “impact factors” (f.e. pollutants emissions or accident risks). A certain activity may have many impact factors, and each impact factor may originates many different chains of effects. The chains should be reconstructed until the final “receivers” of the various damage types (risk of bronchitis, risk of simple throat pain, etc.). The economic valuation of the damages comes as the final stage of environmental impact pathways. Since the impact pathways associated to a certain activity could be dozens or hundreds in qualitative terms, but only some of them are statistically important, a preliminary screening is suggested. Environmental modelling through Geographical Information Systems (G.I.S.) is typical of impact pathway approach. For the non environmental impact pathways, economic modelling of the pathways may be relevant (for example the macro-economic effects of the transport costs increase due to persistent congestion).

Economic valuation methodologies come in the procedure’s final stage, by valuing with common criteria the final effects of the various environmental impact pathways. The aim is to evaluate the utility loss for the resources or humans impaired, in terms of willingness to pay of society to avoid the various negative effects. In valuating those assets that have an intrinsic value such as health or natural resources it is very important to take into account as much as possible all the main economic dimensions of those assets: in the case of health by including also the social value of suffering and pain; in the case of natural resources by including also the non-use value expressed by people interested in conservation. Willingness to pay of society may be measured by direct techniques (stated preferences by questionnaire) or indirect ones (revealed preferences by monitoring real markets), depending from the type of assets.

Since for a certain activity there may be hundreds of assets to be valued, when valuation meets financial constraints and literature case studies are available, the Benefit Transfer approach is suggested. In this case proper transfer and elaboration criteria should be applied to the original data, in order to consider the main environmental and social context specificities.

There is no opposition between external costs valuation and environmental impact assessment, in that the former includes the latter: in a certain sense it is its “translation” in the economic quantitative language.

© 2006 - Andrea Molocchi