What’s the damage? Monetizing the environmental externalities of the Dutch economy and its supply chain

The environmental externalities of economic activities, such as anthropogenic climate change and pollution, have major social, environmental and economic consequences. Monetary valuation of these externalities is a widely acclaimed approach to better account for them in economic decisions, as it provides an appropriate price level for charging a Pigouvian tax. Yet, little research exists on the monetary valuation of the environmental externalities associated with Dutch economic activities and the impact of pricing them on the profitability of different sectors. To address this gap, this paper estimates the monetary value of 30 environmental externalities associated with the activities of 13 sectors and 163 subsectors for the year 2015, based on a global environmentally extended input-output model. It then compares these environmental costs with the financial performance of the sectors to provide an appraisal of potential profit at risk. The findings show that total environmental damage costs associated with the Dutch economy amount to EUR 50 Bn or 7.3% of Dutch GDP in 2015. They also demonstrate that some sectors (energy production, waste and sewage treatment, manufacturing, transport and agriculture) do not generate sufficient profit to cover their natural resource use and pollution costs. These sectors are particularly exposed to the transition risks associated with the internalization of these costs through, for instance, taxation or stricter regulation. It is especially important for financial institutions to be aware of the presence of these risks. The analysis within this research could help to introduce and improve standards and systems, including relevant regulations aimed at internalizing the external costs of production, extraction and consumption. Moreover, these tools can also support financial institutions to inform their heat mapping exercises, the assessment of materiality and/or measurement of environmental transition risks more broadly.

Keywords: Externalities, Environment; Environmental Taxes and Subsidies; Valuation of Environmental Effects; Environmental Accounts and Accounting
JEL codes H23; F64; Q51; Q56

Working paper no. 719