9. Step 9: Estimate externally benefits and costs


9.1 Apply default values.

9.2 Estimate externalities specific to the initiative (if required).

9.3 The benefit (or disbenefit if negative) is the Base Case externality costs minus the Project Case externality costs.

Externalities can be thought of as side effects of an initiative on third parties. Examples include noise, atmospheric and water pollution, climate change caused by greenhouse gas emissions, and severance (barrier effects). Since these effects are outside the price system, they are difficult to value in monetary terms. Nevertheless, significant progress has been made in recent years in the development of statistical and survey techniques to elicit people’s valuations of environmental externalities (hedonic pricing, contingent valuation methods). However, these techniques are far from perfect and are resource intensive.

9.1 Apply default values

In rapid CBAs and in detailed CBAs where particular externality costs are not critical (that is, small in relation to total benefits and costs), use default values.

Default values are standard unit costs that can be applied across the board to obtain an estimate of externality costs. The level of approximation can be reduced if default values vary with population density (for example, rural and urban locations) and for different intensities of the externality. Although only a rough guide, employing a default value for an externality is usually preferable to the alternative of giving it a zero value.

The default values represent broad average values applicable to initiatives in all Australian jurisdictions. The list is not complete due to data inadequacies. The valuation of externalities is an evolving area of expertise, and the values should therefore be treated with caution. If these values are considered to be inappropriate for the initiative being appraised, use other values, providing a justification for their use and a sensitivity test using the Guidelines values.

The default values are expressed in common units of monetary value per vehicle-kilometre (vkm) travelled (cents/vkm) or per net tonne-kilometre (cents/ntk). Values are disaggregated for private cars, light trucks, medium trucks, heavy trucks and buses, and some are further disaggregated by location (urban and rural).

In order to employ default values in a CBA, use estimates of vkm for each vehicle type and location for the Base Case and Project Case for each year of the initiative’s life. Multiply these by the default externality values.

9.2 Estimate externalities specific to the initiative (if required)

If, after using the default values, some externalities are of sufficient magnitude to make a significant difference to the summary results of the CBA, then - as part of a detailed CBA - consider undertaking modelling or survey work to identify externalities specific to the impacts of the initiative being appraised.

The first step will be to estimate the quantities of the externalities in physical terms for the Base and Project Cases.

The second step is to value the externalities. When valuing an externality, the aim is to find out how much the affected people are willing to pay to avoid the externality, or how much they are willing to accept to put up with it. Techniques to do this include hedonic pricing, stated preference surveys, and estimation of mitigation costs or damage and avoidance costs.

9.3 The benefit (or disbenefit if negative) is the Base Case externality costs minus the Project Case externality costs

If it is not possible to value an externality with default values or site-specific research, then describe the nature, size and impacts of the externality quantitatively in physical units, where applicable, and then qualitatively.