The Use of Monetary Valuation of Environmental Impacts in Life Cycle Assessment: State of the art, strengths and weaknesses
Weidema B P, Pizzol M, Brandão M (2013)
SCORE-LCA report Nb 2012-03, Date: 10/2013
Monetary valuation, or monetarisation, is the practice of converting measures of social and biophysical impacts into monetary units so that they can be compared against each other and against the costs and benefits already expressed in monetary units. The fundamental question that monetarisation seeks to answer is how to valuate (impacts on) non-market goods (i.e. goods for which no market, and hence no price, exists, such as a clean atmosphere).
Monetary valuation is not a new idea. Since 1936, monetary valuation has been a common and essential practice in Cost Benefit Analysis (CBA) of public and private projects with economic, environmental and social impacts. Monetary valuation allows for the overall assessment of a project, when the total monetarised and discounted environmental, economic and social impacts are aggregated into a single score (Net Present Value, NPV). If NPV>0 the project is worth carrying out. Alternative projects can, hence, be compared and the one with the highest NPV is deemed superior to all others.
Monetary valuation methods have been developed within the utilitarian paradigm of welfare economics inherent to both neoclassical and ecological economics. Welfare economics is the study of economic efficiency, i.e. how to maximise social wellbeing. When this wellbeing is maximised among equal and autonomous agents in and across generations, the goal of welfare economics becomes identical to the goal of sustainable development.
Some LCIA methods already include aspects of monetary valuation, notably LIME, EPS, EcoIndicator and Stepwise.
The main objectives of the study has been:
- To review systematically, analyse critically, and evaluate the existing methods available for converting (LCA) results quantified in physical units into monetary units and assess the applicability of the different methods in LCA;
- To assess the use and barriers associated to the use of monetary valuation by the LCA community;
- To provide recommendations for the use of monetary valuation in the context of LCA.
The study includes a literature review and benchmarking of both monetary valuation methods and their applications in LCA, as well as a web-based survey of the extent of use and opinions on monetary valuation methods among LCA practitioners.
The literature review identified a lack of uniformity in both classification and nomenclature and a general absence of consistent definitions of the different methods for monetary valuation. The study therefore includes a new classification with definitions of monetary valuation methods.
The benchmarking encompasses 8 monetary valuation methods and 12 applications for LCA. Each method and application is benchmarked according to 6 criteria:
- Scientific foundation
- LCA relevance & compatibility
with in total 50 sub-criteria, specifically developed for this purpose. Each sub-criterion is scored on a scale from 1 to 5 for compliance. Each score has been documented and justified with a text description.
Each method is described in terms of its application areas and the strengths and weaknesses of each method. Based on the evaluation of these features, LCA impact categories for which the method is recommendable are identified.
In general, conjoint analysis is identified as the most appropriate method for the majority of LCA impact categories, when directly observable market prices are not available. The budget constraint method can be used to minimise the uncertainty on the monetary value of a human life year and thereby for anchoring the values obtained by the conjoint analysis. The hedonic pricing method is recommended for impact categories where the impacts are directly observable and only use values are involved, such as the nuisance from odour, noise, traffic, or living in a crime-prone neighbourhood, and job-related nuisances such as psychological and ergonomic stress. All other monetary valuation methods are not recommended for LCA, except in very specific situations.
In practical LCA applications, conjoint analysis has unfortunately only been scarcely used in LCIA methods, pointing to the need for more studies to confirm the practical usability of conjoint analysis for monetary valuation in LCA. In contrast, there are many LCA applications of the abatement cost method, which is not recommended by our assessment, mainly because it does not provide valuation of damages.
The web-based surveys among LCA practitioners show a large interest in and support for monetarisation in LCA, but also a smaller group of respondents with legitimate objections to monetarisation. However, the majority of objections do not fundamentally reject monetary valuation, but rather criticize bad practice in its application. Also, stakeholder involvement and acceptance is stressed as important.
The different points of criticism identified in the surveys are addressed in the “Good practice recommendations” from the study. A decision tree is suggested, which takes into account both the scientific and procedural aspects identified as important in the surveys and in the literature review.
The surveys reveal a need for education and information to correct some misunderstandings about what monetarisation is and does:
- How monetary valuation is distinct from other economic tools, such as Life Cycle Costing, Material Flow Cost Accounting, Ecoefficiency, etc., and how these tools relate to each other.
- How abatement cost methods are different from monetary valuation methods seeking to assess utility losses, and clarifying their application fields and relations to Life Cycle Inventory.
- The relative merits of monetary valuation in relation to other methods to weight or compare different impacts.
- The monetary valuation methods available, their applicability and recommendations on their use. Some modern and new approaches to monetarisation (Conjoint analysis and the budget constraint) are still not well-known among practitioners.
- The good practice and limitations of monetary valuation.