H. Scott Matthews

Executive Summary

"Environmental Valuation and External Costs"

NATO Advanced Research Workshop

Green Engineering and Management Methods and Tools for Central and Eastern Europe

Decision makers at government and corporate levels need to have useful information to determine the levels of environmental management necessary for particular scenarios. This information should include details about spatial and temporal issues, as well as life-cycle inventories for products and processes.

After inventory type data is collected, it is often necessary to consider the implications across the spectrum of effects to determine the optimal decision. For example, if a certain product produces more pollution of type A but less of type B, it is generally unclear whether it is better than a product producing more pollution of type B and less of type A. In this case, comparative valuation methods must be used to estimate an answer.

The costs associated with pollution and environmental damage are known as external costs, since they are external to the production and management costs of the product. Existing literature on the damages associated with pollution can be used to compare external costs with the internal production costs seen by businesses. This is useful since industries and products with high external costs are often targets of regulation and government action. If such decisions can be foreseen, then significant savings could result by voluntarily reducing emissions before mandates are created.

This talk discusses these issues and shows some estimated external cost analysis results in the U.S. economy. External cost analysis in this example shows the comparative effects of producing all goods and services in the United States, and what methods could be put in place to reduce these external costs.