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Using the budget constraint to monetarise impact assessment results

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  • Weidema, Bo Pedersen

Abstract

Recent developments in Life Cycle Impact Assessment (LCIA) provide a basis for reducing the uncertainty in monetarisation of environmental impacts. The LCIA method "Ecoindicator99" provides impact pathways ending in a physical score for each of the three safeguard subjects humans, ecosystems, and resources. We redefine these damage categories so that they can be measured in terms of Quality Adjusted Life Years (QALYs) for impacts on human well-being, Biodiversity Adjusted Hectare Years (BAHYs) for impacts on ecosystems, and monetary units for impacts on resource productivity. The monetary value of a QALY can be derived from the budget constraint, i.e. the fact that the average annual income is the maximum that an average person can pay for an additional life year. Since a QALY by definition is a life-year lived at full well-being, the budget constraint can be determined as the potential annual economic production per capita at full well-being. We determine this to be 74,000 EUR with an uncertainty estimate of 62,000 to 84,000 EUR. This corresponds well to the 74,627 EUR willingness-to-pay estimate of the ExternE project. Differences to other estimates can be explained by inherent biases in the valuation approaches used to derive these estimates. The value of ecosystems can be expressed in monetary terms or in terms of QALYs, as the share of our well-being that we are willing to sacrifice to protect the ecosystems. While this trade-off should preferably be done by choice modelling, only one such study was found at the level of abstraction that allows us to relate BAHYs to QALYs or monetary units. Stressing the necessity for such studies, we resort to suggest a temporary proxy value of 1400 EUR/BAHY (or 52 BAHY/QALY), with an uncertainty range of 350 to 3500 EUR/BAHY. The practical consequences of the above-described monetarisation values has been investigated by combining them with the midpoint impact categories of two recent LCIA methods, thus providing a new LCIA method with the option of expressing results in both midpoints and an optional choice between QALY and monetary units as endpoint. From our application of the new method to different case studies, it is noteworthy that resource impacts obtain less emphasis than in previous LCIA methods, while impacts on ecosystems obtain more importance. This shows the significance of being able to express impacts on resources and ecosystems in the same units as impacts on human well-being.

Suggested Citation

  • Weidema, Bo Pedersen, 2009. "Using the budget constraint to monetarise impact assessment results," Ecological Economics, Elsevier, vol. 68(6), pages 1591-1598, April.
    • Handle: RePEc:eee:ecolec:v:68:y:2009:i:6:p:1591-1598
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