Quantifying environmental externalities with a view to internalizing them in the price of products, using different monetization models
Resources, Conservation and Recycling
In this paper, we first conduct an exhaustive literature review on how environmental externalities in a life cycle model could be valued and, through a case study, we check the consistency of the results obtained based on different monetization models. Then we compare the two approaches for internalization of externalities in the price of products: (1) to introduce a corrective tax equal to the externalities and (2) to apply reduced value added tax rates on environmentally friendly goods based on their relatively low externalities compared to less friendly alternatives. A typical product category is selected for the case study, i.e., electrical energy derived from the two distinct primary energy sources, renewable and non-renewable. The results comparing the three monetization methods illustrate that the choice of method used can influence not only the resulting monetary value of the externalities, or marginal social costs, of a single product but also the relative ranking among alternatives in the same product category. Our results also show that internalizing externalities by means of either a corrective tax (approach 1) or a reduced value added tax rate (approach 2) eliminates the price disadvantage of green products like electricity from biomass, making them a preferable choice over cheap conventional ones like coal.