How Are Externalities Assessed?
Externalities are not easily assessed because, in some cases, the full extent of their impact is unknown. Environmentalists and economists have struggled with externalities, and the following methods of assessment are now available:

Qualitative Treatment This method requires environmental impacts to be described in descriptive terms like no impact, moderate, or significant impact.

Weighting and Ranking A cross between qualitative and quantitative methods, weights and ranks are assigned to externalities to assess their relative environmental impacts.  

Cost of Control  A simpler method which quantifies an externality by how much it costs to control or prevent it.

Damage Function The approach aims to determine the amount individuals are willing to pay to avoid a damage that results from a pollutant or the compensation individuals are willing to accept in lieu of the damages (climate change, biodiversity loss, etc.).

Percentage Adders A predetermined fixed percentage is added to (or subtracted from) the avoided cost of a source option. The percent amount to be added may be determined by law, judgment, or estimates of control or damage costs.

Monetization by Emission Used mostly for air pollutants, an actual cost per unit amount of pollutant is estimated from its known environmental impacts.

Multi-Attribute Tradeoff Analysis This method attempts to analyze the tradeoff between costs and benefits of different strategies and may use qualitative and quantitative measures.

If all of the above is not sufficiently complicated, it should be recognized that the whole process of assessing externalities is highly political, and the best science does not always win the day. Nevertheless, the notion that externalities are to be avoided or minimized to protect the environment and quality of life is admirable, and has produced enlightened environmental regulations in many parts of the world. Refer to the Related Resources + References page for further information on externalities.

Economic Impact of Externalities
Examples of monetized externalities are reproduced in the table below to provide a quantitative estimate of their impacts. Environmentalists have long argued that these monetized externalities must be added to the cost of purchased energy, and the premiums directed towards remediation/compensation. If this approach was extended to all forms of purchased energy and associated extraction/manufacturing processes (i.e., building materials), it is further argued that "green" buildings would be more economically viable.

To put the issue of externalities into perspective, if the pollution generated by energy sources serving a typical new house in the Toronto area were monetized according to the average of the values listed in the previous table, this would add approximately $250 to the annual energy bill. Using the same values, the externalities associated with the embodied energy of the house at the time of purchase would result in a premium of about $6,200.

At present, the environment is footing the bill for externalities and it is conceivable that a farmer in the Prairies may be impacted by climate change associated with urban sprawl in Eastern Canada. With respect to sustainable architecture, externalities are important considerations even if they are difficult to quantify and apply in day-to-day practice.

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