PUTTING A PRICE TAG ON EXTERNAL COSTS AND
BENEFITS
Putting a price on environmental harms can be hard to do—especially if there is no “market” to offer a guide. To provide a
starting point, the British Standards Institution partnered with two UK sustainability-oriented consultancies, Forum for the
Future and AccountAbility, to develop “Sustainability Integrated Guidelines for Management.” The effort identified the
following two methods for assigning value to external environmental costs:
1. Demand-side methods based on estimating stakeholders’ “willingness to pay” to obtain environmental benefits
(e.g., improvement in local air quality) or “willingness to accept” compensation to suffer an environmental loss (e.g.,
degradation in local air quality) including:
Hedonic Pricing: Uses information from a surrogate market to estimate the implicit value of an
environmental good or service (e.g., differential housing prices used to estimate how much extra people are
willing to pay for residential property in areas free from pollution).
Travel Cost Method: Uses surveys and surrogate markets to estimate willingness to pay for environmental
goods and services based on the time and expense involved in traveling to them. Used mainly to derive
values for recreational sites.
Contingent Valuation Method: Uses surveys, questionnaires, or experimental techniques to obtain
environmental preference information directly from individuals. Based on hypothetical behavior inferred
from surveys or experiments rather than on actual observed behavior (and therefore the most unreliable of
the three demand-side methods because it is subject to inherent bias).
2. Supply-side methods based on the costs of supplying resources or services to prevent environmental damage,
restore a place to its original state, or replace something lost, including:
Preventive Expenditure (also known as Avoidance Cost) Method: Based on actual expenditure incurred to
prevent, eradicate, or reduce adverse environmental effects.
Replacement (also known as Restoration) Cost Method: Estimates costs once environmental damage has
taken place (e.g., expenses needed to neutralize soil and water acidity from agricultural runoff).
Productivity Approach: Based on costs to productivity and production due to environmental damage (e.g.,
costs of soil erosion connected to lost agricultural yields).
Source: Adapted from Sigma Project. The Sigma Guidelines—Toolkit: Sustainability Accounting Guide (London:
Sigma Project, September 2003), www.projectsigma.co.uk/Toolkit/SIGMASustainabilityAccounting.pdf.