The Main Applications

Environmental Impact Assessment (EIA) and Strategic Impact Assessment (SIA)

External costs valuation should be distinguished from non-economic appraisal methodologies such as Environmental Impact Assessment (EIA), referred to projects, and Strategic Impact Assessment (SIA), referred to programmes. External costs valuation can integrate EIA and SIA with an economic measurement of environmental, health and third party damages, adding valuable information to the scope of these procedures.

In fact, neither EIA neither SIA assure a systematic economic valuation of the damages linked to the various impacts and to the environmental dimensions analysed with these methodologies. Moreover these methodologies are not finalized to a complete impact pathways reconstruction (i.e. reconstruction of the functional links between the driving forces, the environmental impact factors and the final receptors of the damages: human health, economic assets, natural habitats, etc.). Therefore external costs integration in EIA or SIA methodologies implies the calculation of the final economic effects of environmental media modifications due to the analysed project or activities: a measurement phase generally not requested by non economic methodologies.

Cost Benefit Analysis (CBA)
External cost valuation may have an essential part in some of the cost and benefit cathegories considered by CBA. Usually external costs should be valued on the side of cost components (the social costs of a project are the sum of internal costs paid by the beneficiaries of the projects –through project expenses- and of the external costs falling on society); sometimes they are to be valued also on the side of expected benefit calculations (external costs avoided by a project as compared to the alternative scenario). When performing CBA the most reliable perspective is to consider a project under a Life Cycle approach (LCA), in order to consider all the main project phases generating social costs: production/construction, use and end of life phases. It is important to understand the specificity of external costs valuation in terms scope, for a proper consideration within cost-benefit analysis:

  • While CBA assumes the perspective of the whole society and, therefore, it must preliminarily find out the single social groups that pay the costs or gain benefits from the project (users of the infrastructure, workers, citizens, etc), external costs valuation assumes the perspective of the specific actors that generate costs but do not pay for them. In the case of transport infrastructures, the actors generating external costs are essentially two: the promoter of the project (external costs of the construction) and the users of the infrastructure (external costs of mobility). The external costs generated by activities of these two type of actors should be integrated in the traditional CBA of the project.
  • In the past CBA met some limits in valuating intangible assets like natural resources and human life. It succeeded to consider the costs and benefits falling back on the State and on the users of the infrastructure, but there were obstacles to assess cost and benefits for all the citizens (when exposed to risk factors due to the users of the transport infrastructure). The development of research and methodologies of the last decade (with the modelling of the main impact pathways), are opening new opportunities for a comprehensive and reliable CBA. A scientific reference on these methodological developments is the 2006 OECD book “Cost-Benefit Analysis and the Environment. Recent Developments” authors D. Pearce, G. Atkinson and S. Mourato.
  • Integration of external costs in CBA meets practical difficulties that should not be underestimated, as the various uncertainties in making projections within the project life time (difficulties in the scenarios construction, in the modelling of future technologies and their diffusion, in forecasting demand, etc.), or the complexity of the valuation of impacts to habitats and natural resources… but in many cases these problems are due to financial constraint rather than to lack of valuation methodologies.

Cost Benefit Analysis of technological innovation
External costs valuation could be successfully applied in the valuation of new technologies. This application is particularly suggested when public resources should be allocated for the development and diffusion of the technologies, in order to avoid public spending on technologies that will generate externalities. Allocation criteria based on the gap of the internal cost of technologies (from competitiveness) risk to undermine the positive social benefit of innovations.

The innovation process is not completed by the development of commercial and competitive technologies. Technologies must be developed under an integrated sustainable development perspective, this means to consider and to optimise through further innovations also the possible external costs linked to the technology.

© 2006 - Andrea Molocchi