Professor Anil Markandya and Dr Alistair Hunt from our Department of Economics have developed methods to calculate a monetary valuation of the risks and socio-economic damage caused by environmental damage and the costs and benefits of adapting to these risks.
The costs and benefits of adapting to environmental risk
Both academics were lead partners in the research programme, bringing their economic expertise in developing methods for valuing the health costs of air pollution and climate change.
Funded by the European Commission’s Directorate-General for Research, the External Costs / Externalities of Energy (ExternE) project was a €10 million programme that ran until 2005.
The programme involved a multidisciplinary research team of engineers, economists and epidemiologists to develop an original methodology. The Impact Pathway Approach was a way of estimating, monetising and analysing socio-environmental damages caused through the production and use of energy.
As part of ExternE, Professor Anil Markandya and Dr Alistair Hunt helped develop the concept of green accounting. This approach improves on conventional economic accounts by quantifying the environmental damage resulting from economic activities.
Traditional measures of economic activity, such as Gross Domestic Product (GDP) which look at monetary value of goods and services made within a country, take no account of the damage done to the stock of natural capital by environmental change. These measures also fail to account for the loss of welfare that economic activity causes through increased pollution.
Green accounting attempts to address this, allowing companies to weigh profitability against environmental goals.
Key factors and a new standard approach
Professor Anil Markandya and Dr Alistair Hunt also implemented a framework to measure a person’s willingness to pay to reduce the risk of premature death associated with air pollution.
They applied this by conducting a contingent valuation survey in the UK, Italy and France. This examined whether the Value of Prevented Fatality is lower for the elderly to reflect their fewer remaining life years and the mostly elderly lives saved by environmental policies. The Value of Prevented Fatality gives a proportion of deaths and is based on people’s willingness to avoid risk of premature death from air pollution.
Through this research they discovered that a person’s health status and a country’s income have a greater effect on Value of Prevented Fatality than a person’s age.
The ExternE methodology, including the contributions of Markandya and Hunt at Bath, has become the standard approach for valuing the costs of air pollution.
Impacting European Union policy
In 2016, the application of the ExternE methodology underpinned the development of a new National Emissions Ceiling (NEC) Directive. This directive set 2020 and 2030 emission reduction commitments for five main air pollutants.
Each EU Member State was now required to produce a National Air Pollution Control Programme and to set out the measures they would take to ensure compliance with the reduction commitment for the next 10 years.
Impacting on industry
The global accounting firm PricewaterhouseCoopers (PwC) has adapted the Impact Pathway Approach from the ExternE programme to produce Environmental Profit and Loss Accounts for companies.
Environmental Profit and Loss Accounts
Environmental Profit and Loss Accounts are a method of estimating the value of environmental impacts associated with a company’s activities, including its supply chain. These monetise the costs to the environment of business activities. They have gained popularity over the past decade and are seen as a first step towards ensuring that the prices of goods reflect the use of environmental goods and services
Some companies that have produced Environmental Profit and Loss Accounts include:
- the Kering Group
- Novo Nordisk
- the Taiwan Semiconductor Manufacturing Company
In the UK, companies are required to factor in the effects on air quality when evaluating projects. The Department for Environment, Food & Rural Affairs (Defra) describes the Impact Pathway Approach developed by ExternE as the ‘best practice approach to valuing changes in air quality’.
On 17 March 2020, they released new guidance which advises firms to use the Impact Pathway Approach if the impact is more than £50 million or the main objective of the policy or project is changes in air quality. For projects where the impact is less than £50 million, Defra has provided a toolkit which provides firms with more approximate damage costs. These are calculated using the Impact Pathway Approach.