Safety Security & Sustainability

   Methods for calculating externalities


Review of methods

D2.3.3.1-Methods for calculating externalities GPI 9July09.pdf


To understand the performance of an entire industry, it is significant to incorporate the external effects from industrial activities. Pollution, congestion, noise, accidents, health impacts are such effects from transportation services. These external effects could be classified as economic, environmental and social. A number of methods have been established for calculating them. The economic and environmental impact can be easily quantified using established methodology, but the social external costs are more difficult. The estimation of total external costs (excluding congestion) amounted to €650 billion for 2000, or about 7.3% of the total GDP in EU17. For instance, air pollution and accident costs amounted to 27% and 24% respectively. Noise and life-cycle processes each accounted for 7% of the total costs.

The theory suggests that the presence of externalities affects the optimal equilibrium and leads to overuse of some activities while others remain underestimated. Thus, incorporating externalities in sustainability reports brings a better methodology for evaluating the contribution of an industry to solve environmental problems. In the case of transport, we focus on the following external effects: pollution (carbon emissions); acidification (nitrogen and sulphur oxides); noise pollution; accidents, congestion and health impacts. To reduce these effects, the theory suggests two basic solutions – government-implemented quotas and taxes; and bargaining over externalities. 

This report has introduced all external effects of transport services subject to environmental constraints in addition to the budget constraints. The study classifies the external effects into economic, environmental and social, which follows the structure of the SKEMA Policy Index. Then it briefly reviews the existing studies in the UK and Europe that propose ways for calculating externalities. 

Finally, it develops a case study as practical guidance to illustrate the advantages of the coastal service to the alternative road service. The case study also demonstrates that major differences, in comparison, can be obtained using different methods and different statistical data.


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   Glossary Terms


EXIOPOL (2007)
EXIOPOL is an Integrated Project aimed to develop a New Environmental Accounting Framework Using Externality Data and Input-Output Tools for Policy Analysis
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HEATCO (2006)
Unit Cost Figures for Externalities - HEATCO's primary objective was the development of harmonised guidelines for project assessment on EU level. Also it had a number of further objectives: stated-preference surveys were carried out in 6 countries to help fill the most significant gaps in monetary values and add knowledge on the issue of transferability and comparability of values between countries. The proposed harmonised guidelines were applied to 4 TEN transport infrastructure projects to illustrate applicability of the guidelines and the differences to existing CBA evaluations.
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IMPACT (2007)
Internalisation Measures and Policies for All External costs of Transport - the main recommendation from IMPACT is an amendment of the Eurovignet Directive on infrastructure charging for heavy goods vehicles. This Directive turns out to be a major obstacle for charging transport users for the external cost. The European Commission has followed this recommendation by presenting an amendment to the Directive at 8 July 2008. Together with the legislative proposal, the European Commission presented a strategy for internalisation the external cost of all transport modes. Also this strategy is partly based on the results of IMPACT.
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UNITE (2003)
Transport accounts and External cost estimates for most western European countries - UNITE had three core objectives: 1) to develop pilot transport accounts for all modes, for the EU15 and additional countries; 2) to provide a comprehensive set of marginal cost estimates relevant to transport contexts around Europe; 3) and deliver a framework for integration of accounts and marginal costs, consistent with public finance economics and the role of transport charging in the European economy.
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  Additional Information for Methods for calculating externalities
  Environmental Science and Policy
Journal of Environmental Economics and Management
Review of Environmental Economics and Policy
Environmental Policy and Governance
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   Lessons Learned
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   Information Sources
  DG Environment
Institute for Environment and Sustainability (IES), EU
Institute of Sustainability Science (ISS), Kyoto University
Institute for Sustainability Study, Reykjavik
OECD Environment Directorate
The Grantham Research Institute on Climate Change
Centre for Climate Change Economics and Policy, UK
Environmental Benefits Calculator, DfT UK
UN Department of Economic and Social Affairs
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