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The Cost of Pollution:
A Survey of Valuation Methods and their Uses for Policy

Draft
March 20, 1998
World Wildlife Fund
Macroeconomic Program Office

Jennifer Myers

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Executive Summary

Pollution continues to increase with the consequences affecting growing numbers of people
and ultimately the global environment. The effects of pollution manifest themselves in
deterioratingair and water quality around the world, resulting in increased cases of respiratory
illness, water-borne disease, acid rain, and the increasing global threat of climate change.
From an economic perspective, the forces behind pollution are related to the inability of
markets to properly “price” the goods and services whose production and consumption
processes cause pollution, as well as theecosystems which serve to absorb the residuals of
these processes. One way to address the problem of pricing is to estimate the costs that
pollution imposes on society. Then, regulatory and economic instruments can be used in an
attempt to alter prices as well as societal and industry behavior in order to reduce pollution.

A wide range of valuation methodologies to account for both the costs ofpollution and the
benefits of pollution prevention have been developed over the past twenty years. The methods
discussed in this paper, as well as others, have been and continue to be utilized and
experimented with in both industrialized and developing countries around the world.

Four methods for valuing the costs and benefits of environmental pollution are presented here,
in addition to afifth technique that is used primarily for identification of pollution expenditures
and separating them from other expenditures included in national accounts. Market valuation
demonstrates to what extent pollution has caused a decrease in the market value of the
resource, or another item with market value that is impacted by environmental pollution.
Maintenance cost estimates the cost ofpollution prevention or environmental remediation.
Dose-response provides a type of impact assessment by estimating the cost of the impact of
environmental pollution on ecosystems and human health. Contingent valuation estimates

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society’s ‘willingness-to-pay’ for the reduction of environmental pollution. Defensive or
environmental protection expenditures are actual expenditures distinguishedfrom other
expenditures in the national accounts.

The major categories of information derived from these methods - physical emissions, sectoral
pollution sources, the types of impacts pollution has on society and the environment, and
ultimately the monetary cost estimates - all provide information that can be used for policymaking purposes. Physical emissions indicate the magnitude of theproblem, sectoral
categories of pollution identify those responsible for contributing to the pollution, the different
types of pollution effects categorize and identify the variety of ways that pollution manifests
itself in society and the environment. Monetary estimates provide the figures necessary to
determine the costs of pollution and the benefits of pollution prevention. The results canbe
used to help identify, design, and evaluate policies for addressing environmental pollution.

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Chapter One
Pollution and Prices

1.1 The State of Pollution
The current state of pollution in the world today is such that a large portion of the world’s
population lacks access to clean air and water. The World Health Organization (WHO)
recommends exposure levels of less than 60 to 90micrograms per cubic meter per day for
total suspended particulates, a major threat to human health. But in the mid-1980s, about 1.3
billion people - mostly in developing countries - lived in towns or cities that did not meet these
standards1. Data from 1989-1994 indicate that eight of the eleven cities in Asia for which data
was compiled exceeded the WHO recommended exposure levels for...