Putting a price on clean air?

BY SANDRA ROUSSEAU. Flight taxes, road pricing, and carbon pricing are often named as policy options to tackle climate change and urban air pollution. The concept of pricing undesirable effects is simple and sensible. If market prices reflect the economic damages from emissions, the market forces will work for our planet and help to protect it. Internalising external costs is a way to reflect the total impact of our actions. But how do we know what the correct price is? Ideally, such a price should reflect the social value of reducing emissions and incorporate the benefits of better air quality.

Written by Sandra Rousseau, Associate Professor at CEDON (Center for Economics and Corporate Sustainability, or ‘Centrum voor Economie en Duurzaam Ondernemen’ in Dutch). Her research focuses on environmental policy design and the transition to a circular economy.

Sandra Rousseau

First, I want to draw your attention to the difference between ‘value’ and ‘price’. This quote of Warren Buffet may help: “Price is what you pay and value is what you get”. When environmental economists put a monetary value on clean air, we focus on value and not on price. After all, if there is no market for clean air, there is no price, but there still is value.

Economic valuation helps us determine how much clean air is worth and how we can value it. It is not about putting a price tag on clean air, nor about creating a market where the person who pays can do whatever he or she wants with our environment. The main reason for valuing clean air is to determine the best actions and policies to optimise the use and management of natural resources. As we economists like to say, it maximises social welfare. If we want polluters to pay, then we need to determine what damages they cause and what the value is of protecting our environment from pollution.

Managers, not owners of natural resources

The economic valuation of nature and the environment goes beyond money. It should reflect the importance of nature for human welfare and wellbeing. The total economic value of natural resources is defined as the discounted sum of the values of all service flows generated by natural capital now and in the future. This means it includes the benefits we get from the environment, such as food, recreation or clean air, as well as values related to our responsibility to maintain and protect natural resources. The reasoning here is that nature is important in itself, and not only because we can use it. As such, the concept of total economic value includes the value of our environment for future generations and takes into account that we are managers, rather than owners, of natural resources.

Determining the total economic value is not an exact science. It depends on wealth patterns, available information, and timing. As such, it will never represent the true value of our natural environment. It can, however, give us a good sense of this ‘true’ value and provide us with lower limits of value for which there is a consensus that policymakers can use. For example, there is a general consensus that carbon prices in the European tradeable permit market are too low. Using these prices to value carbon reductions is not optimal, but may be better than using a zero value. Moreover, it is unlikely to lead to heavy debates.

Life expectancy

We measure value in monetary terms because it allows us to compare the benefits of various goods and policy options. Also, most people are already familiar with money as a unit of measuring value. Therefore, it can be useful for policymakers to express relative preferences, for example between economic development and environmental protection, in terms of monetary values. You can compare this with the monetary valuation of art. Even if you paid thousands of euros for a work of art, it is still not socially acceptable to destroy it.

In 2015, exposure to fine particles cost Flanders 4 billion euros as a result of lost life years.

I think we can all agree that clean air is valuable, not only for ourselves, but also for our family and friends, for future generations, and for plants and animals. One important benefit of clean air is that it improves health. A WHO study about cities in high-income countries in Europe has shown that air pollution lowers the average life expectancy by 2 to 24 months, depending on pollution levels.

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How can we put a monetary value on this? First, we should look at the reduction in life expectancy and quality of life due to illnesses related to exposure to air pollution. This is expressed in DALY’s (Disability Adjusted Life Years). The most recent Environmental Report for Flanders states that each inhabitant of Flanders would lose nine healthy months on average if they would be exposed to the current pollution levels throughout their lives. In a second step, we need to value the loss of one life year. For example, the Environmental Report for Flanders uses a value of 40.000 euros per DALY. This leads to an external health cost of approximately 4 billion euros in Flanders in 2015 as a result of exposure to fine particles.

Protecting the environment for its own sake

To obtain these values, one approach is to look at people’s behaviour when they are confronted with health risks. When we use the example of the job market, each job is associated with certain health risks and a certain wage. Wages are determined by factors such as education, age, and sector, but they also include compensation for the risks that we take while working. There are some downsides to this method. For example, it only takes into account the choices of people with a job and a wage. Also, it is difficult to separate actual and perceived risks: what people think is not necessarily the same as what is actually true.

We need to value clean air to incorporate it into the price levels of polluting activities.

Another option is to look at markets for products that reduce or eliminate mortality risks as a result of exposure to polluted air. These products include air purifiers or air pollution masks. The fact that people are willing to invest in these tools reveals something about the value they put on clean air. Their willingness can be used as a proxy for the statistical value of a life year.

These two valuation methods are based on actual choices made by people. An alternative approach is based on stated choices of people – things they say they would do or would prefer. This alternative approach relies on surveys and interviews to learn about people’s intended behaviour. An important criticism of this method is that it is not because someone tells you he (or she) will do something, that he actually will. Nevertheless, this approach does allow us to include the value of clean air for future generations and of protecting air quality for its own sake. Studies have shown that these so-called ‘non-use’ values can be several times more important than ‘use’ values, so they are crucial to include. As a result, efforts are being made to develop guidelines and quality checks to make estimates based on surveys more reliable and more useful.

While valuing clean air is challenging, it clearly is worthwhile when we want to determine optimal price levels for polluting activities, subsidies for mitigation, and other policy measures.


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