value estimates are most advanced.2 The committee advocates applying valuations to emissions of air pollutants but not to other types of pollutant emissions.

Damage Function Models

The Phase Two methodology results in an estimate of the quantitative change in the level of air pollutants resulting from the technology being studied. Turning this change in emission levels into an economic value requires two additional steps. The first step in evaluating the benefits of pollution abatement is to estimate the impact of pollutants on things society values, e.g., health, visibility, outdoor recreation, quality and availability of raw materials, ecosystem services, and other measures of environmental quality. Damage functions must be estimated for the most important effects of environmental pollution. In particular, the impact on human health of air pollution includes days lost due to restricted activity, increases in the incidence of asthma and bronchitis, and even premature deaths. The second step is to place a monetary value on the damages (or reductions in damage) to health, visibility, outdoor recreation, materials deterioration, and the natural environment. Both steps present significant problems.

In published studies, the various physical effects are modeled to determine the quantitative effects of changes in ambient levels of pollution. For example, how does the incidence of asthma or bronchitis change as air pollution levels change? Despite decades of damage research, however, both the qualitative and quantitative effects of such pollution are uncertain. One reason for this uncertainty is that our understanding of how the damage is incurred improves over time. For example, the Environmental Protection Agency’s (EPA’s) benefit-cost analysis of the fine particulate matter (PM2.5) and ozone standards for 1970-1990 ascribed all premature mortality associated with air pollution to PM2.5, assuming that the contribution of other pollutants was negligible (EPA, 1997a). A further uncertainty surrounds the extent of life shortening associated with a premature death due to PM2.5. In addition, estimating damage functions is complicated by interactions with other factors and the changing nature of air pollution across areas and over time. The spatial and temporal variations greatly complicate the task of predicting environmental impacts in a generic manner suitable for application in a prospective planning study. Most of the existing damage functions for water pollution apply to specific sites; there is only a limited ability to produce reliable generic damage functions for waterborne pollutants. Hence, where generic regional or national damage functions have been developed, these have typically been for air rather than water pollution.3 In addition, water availability is a growing issue in many parts of the country. This can often be linked to energy resource recovery, production, and use or to the production of hazardous wastes as part of energy systems’ life cycles. Other impacts are more difficult to quantify and include those related to land use, ecosystem impacts, and aesthetics. This complexity and regional specificity hamper efforts to monetize environmental benefits related to water.

Willingness-to-Pay Studies

Once the type and the extent of physical damage due to increased air pollution are known, the next step is to place a monetary value on this damage. However, there is no direct market valuation of a reduced incidence of asthma attacks or of being able to see a landmark from 30 miles away rather than only 10 miles away, because there are no markets for asthma attacks or visibility.

To appraise things like this, economists employ techniques from the field known as nonmarket valuation. Nonmarket valuation seeks to measure in monetary terms the value that people place on items they care about, regardless of whether the item is a conventional marketed commodity (e.g., a loaf of bread, a new car) or something that the person cares about but that cannot be purchased in a market (e.g., a beautiful view at sunset, a pristine wilderness, a historic monument, an excellent public school system, or a healthy body). Conceptually, these nonmarket items are measured in monetary terms by considering the change in income that is equivalent to them, in terms of its impact on the individual’s well-being. Thus, while the items themselves are not monetary in nature and they cannot be obtained by the individual through the


The valuation of pollutants in environmental media other than air is not discussed here. Conceptually, such valuations would be similar to that of air pollutants. In practice, the damage functions apply to specific sites, and data are difficult to elicit.


There are two major contexts in which generic damage functions have been developed, oriented mainly to airborne emissions. One is “environmental costing” by public utility commissions (PUCs). The other is the EPA’s retrospective assessment of the effects of the Clean Air Act on the “public health, economy and environment of the United States,” mandated by Section 812 of the Clean Air Act Amendments of 1990. EPA’s assessment, The Benefits and Costs of the Clean Air Act, 1970 to 1990, was published in October 1997. In addition, prior to the adoption of deregulation in the late 1990s, the PUCs in 29 states had adopted or were considering adopting some form of environmental costing for the purpose of comparing electricity generation alternatives in the context of utility planning and regulation. In most cases, this took the form of an approved schedule (or spreadsheet model) of “adders” designed to keep score of the environmental costs associated with different methods of electricity generation under the specific conditions applicable to that state. These adders were not actually used in setting prices nor were they charged to electricity users, but they were used in identifying the least-cost source of electricity generation, based on a consideration of the total social cost, including environmental externalities, rather than just the private cost to the particular utility. The model used by New York State and the issues generally involved in environmental costing are described and discussed in papers presented to a symposium on environmental costing, edited by Shogren and Smulders and published in Resource and Energy Economics 18(4) (December 1996).

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