Methods for calculating externalities  

Review of methods


To understand the performance of an entire industry, it is significant to incorporate the external effects from industrial activities. Pollution, congestion, noise, accidents, health impacts are such effects from transportation services. These external effects could be classified as economic, environmental and social. A number of methods have been established for calculating them. The economic and environmental impact can be easily quantified using established methodology, but the social external costs are more difficult. The estimation of total external costs (excluding congestion) amounted to €650 billion for 2000, or about 7.3% of the total GDP in EU17. For instance, air pollution and accident costs amounted to 27% and 24% respectively. Noise and life-cycle processes each accounted for 7% of the total costs. 

The theory suggests that the presence of externalities affects the optimal equilibrium and leads to overuse of some activities while others remain underestimated. Thus, incorporating externalities in sustainability reports brings a better methodology for evaluating the contribution of an industry to solve environmental problems. In the case of transport, we focus on the following external effects: pollution (carbon emissions); acidification (nitrogen and sulphur oxides); noise pollution; accidents, congestion and health impacts. To reduce these effects, the theory suggests two basic solutions – government-implemented quotas and taxes; and bargaining over externalities. 

This report has introduced all external effects of transport services subject to environmental constraints in addition to the budget constraints. The study classifies the external effects into economic, environmental and social, which follows the structure of the SKEMA Policy Index. Then it briefly reviews the existing studies in the UK and Europe that propose ways for calculating externalities.  

Finally, it develops a case study as practical guidance to illustrate the advantages of the coastal service to the alternative road service. The case study also demonstrates that major differences, in comparison, can be obtained using different methods and different statistical data.