IEA Training Manual - Module 5

5.3 Advanced analysis: An introduction to identifying economic costs and benefits of impacts on ecosystem services and human well-being 4

It is possible to assess costs associated with changes in ecosystem services, some more readily than others. This is typically referred to as environmental valuation. Costs and benefits in such an analysis are commonly referred to as environmental externalities (i.e., costs or benefits that are not reflected in the prices of goods and services in our regular markets).

The most commonly analyzed externalities tend to be negative (e.g., if a factory or a farm pollutes a river which negatively impacts users of the water downstream, but does not pay to clean up the pollution, there is a negative externality). The polluter gains an economic advantage because it can sell its product at a price that does not include the cost of dealing with the pollution; that cost is borne by downstream (or offsite) users. An example of a positive externality is the possible value of pollination by honeybees for fruit production in a region.

Figure 18: Examples of impact pathways
for a change in river water quality,
including potential economic costs.

Some externalities can be quantified directly from market prices. For example, a change in water quality of a river could impact the magnitude of fish catches; the decline in fish catches could be quantified economically by considering the loss of income from commercial fishing, or by estimating the cost of a food substitute (Figure 18). Similarly, if drinking water quality is affected, economic costs might be equated to increased health costs for treating water-related sicknesses, or also to the costs of improved water treatment. 

Footnotes

4. Based on Barg, S. and D. Swanson (2004). Full Cost Accounting for Agriculture. Prepared for Agriculture and Agri-food Canada. Available at http://www.iisd.org/ (Accessed July 2006).

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Module 5 - Integrated analysis of environmental trends and policies
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