Treatment of Environmental Impacts

Part of Toolkit for the Economic Evaluation of World Bank Transport Projects

(Institute for Transport Studies, University of Leeds, 2003)


Transport projects are generally intended to improve the economic and social welfare of people.  New infrastructure and services can reduce travel times and lower operating costs, while increasing access to markets, jobs, education, and health services as well as reducing transport costs for both freight and passengers.

For all the positive aspects of transport projects, they may also have significant impacts on nearby communities and the natural environment.  People and properties may be in the direct path of works and affected in a major way.  People may also be indirectly affected by projects, through the disruption of livelihood, loss of accustomed travel paths and community linkages, increases in respiratory problems due to air pollution, and injury from road accidents.  Disturbances to the natural environment may include soil erosion, changes to streams and underground water, and interference with animal and plant life.  Transport brings people, and people bring development.  New or improved transport infrastructure may induce development in previously undeveloped areas, sometimes significantly affecting sensitive environments and the lifestyles of indigenous people.  Transport investments are therefore agents of change, and can be responsible for both benefits and damage to the existing balance between people and their environment [1].

This note details the manner that environmental impacts should be treated within the context of a transport economic appraisal.  Section 1 outlines the types of environmental impacts that can occur, whilst Section 2 sets the economic context within which environmental impacts should be considered.  Section 3 presents the World Bank’s framework for inclusion of environmental impacts into an overall scheme appraisal, whilst Section 4 discusses the methods and sources of valuing them in monetary terms.  Section 5 outlines the manner that differing environmental impacts should be treated within an economic appraisal and discusses a number of ancillary issues that should also be considered during the appraisal.


1                   Environmental Impacts

The environment of a transport investment includes the surrounding objects and conditions as well as the circumstances of life in society in that area.  This definition is broad and the potential number of environmental impacts is therefore large.  However, it is possible to group environmental impacts into a number of categories.  An example of such a categorisation is presented in Box_1. 

Impact Types

Environmental impacts are also categorised by type as set out below.

Direct impacts: caused by the transport investment itself (e.g. land consumption, removal of vegetation, severance)

Indirect impacts are usually linked closely with the project, but may have more profound consequences on the environment than direct impacts.  Indirect impacts are more difficult to measure, but can ultimately be more important.  An example would include the degradation of surface water quality by the erosion of land cleared as a result of a new road.

Cumulative impacts: as a result of the process of cumulative environmental change.  A cumulative impact, in the context of road development, might be the de-vegetation and eventual erosion of a roadside layby (pullout).  The scenario might unfold as follows: a road cutting through a mountain range offers some spectacular views, and in the absence of designated rest areas, motorists stop indiscriminately.  Roadside vegetation is damaged by vehicle and foot traffic, and the soil is left unprotected.  Subsequent rainfall causes erosion and siltation of nearby watercourses.  The vegetation never has enough time to recover (because of high traffic volume on the road), and the problem is exacerbated over time [1].

Box 1: Environmental Impacts Categorisation

Biophysical environment

·                     Soil;

·                     Water;

·                     Air Quality; and

·                     Flora and Fauna.


Socio-economic environment

·                     Community life and economic activity;

·                     Land acquisition and resettlement;

·                     Indigenous or traditional populations;

·                     Cultural heritage;

·                     Aesthetics and landscapes;

·                     Noise; and

·                     Human health and safety.

Source: Roads and the Environment: A Handbook (World Bank, 1997) [1]

Additionally, it is important to recognise that both positive and negative environmental impacts may arise from the same project.  For example, the provision of extra road capacity, as part of an integrated transport strategy, may lead to a reduction in air pollution by removing the incidences of standing traffic, but may also increase severance and have safety implications for pedestrians and NMTs due to increased vehicle speeds.

Finally, environmental impacts are also characterised by their permanence and the size of the area over which they impact.  Some impacts are temporary in that they do not last, and will eventually reverse themselves though the reversal process may take weeks or even decades.  Other impacts are irreversible – that is the affected system will not return to its previous state on a human timescale.  Environmental impacts, particularly indirect impacts, are also not necessarily confined to the immediate locality of the project, but maybe felt at a national level, or across national boundaries (for example in the case of projects that impact upon watercourses) or even at a global level (for example in the case of projects that affect climate change).


2                   Environmental Impacts as externalities

Sometimes a project uses resources without paying for them.  Such a resource can be the environment.  For example in the case of the example above the degradation of surface water quality by the erosion of land cleared (as part of constructing the new road) may impact on the food chain in the area resulting in reduced fish stocks and therefore fish catches in a nearby lake.  These effects are known as “externalities,” and are real costs and benefits attributable to the project and should be included in the economic analysis as project costs or as project benefits.  The consequence of omitting externalities from the economic appraisal is that:

·                    The net benefit derived by society of providing the transport facility can be significantly under or overestimated.

·                    A sub-optimal design standard of the transport facility maybe promoted;

·                    A potentially good project or scheme maybe completely rejected; and

·                    A potentially bad project could be promoted.

Conceptually, the externalities problem is quite simple and can be described as a difference between the benefits (costs) that accrue to society and the benefits (costs) that accrue to the project entity.  Externalities occur in production and consumption and in just about every walk of life.  In principle, all we need to do to account for the externality is to work with social rather than private costs.  The main problem with externalities is measuring them: although it easy to understand how increased water pollution may lead to a reduction in fish stocks and therefore catches, it is not easy to, firstly, explicitly predict the exact level of water pollution and the full impacts on the food chain that lead to the reduced fish catches and, secondly, to place a monetary value on the reduced level of biodiversity in the locality and the impact on communities that use the lake and the surrounding area as a food source.

In some cases it is helpful to “internalise” externalities by considering a package of closely related activities as one project – that is, to draw the “project boundary” to include them.  For example, the above road project could be enhanced to prevent soil erosion through either engineering methods needed to stabilise the ground or through re-planting or a mixture of both.  In this case, the formerly “external” cost becomes an “internal” cost that is reflected in the project construction costs.


3                   Environmental Impacts and the World Bank’s Policy

Environmental Assessment (EA)

To ensure that firstly environmental impacts are considered within the project feasibility and design, and secondly to ensure projects that have a positive environmental impact are considered for investment, the Bank has an Environmental Strategy [2] and operational and procedural policies for Environmental Assessment [3]. 

Environmental Assessment forms one of 10 “Safeguard Policies” of the World Bank and, in fact, acts as an umbrella policy for some of the other “safeguard policies” such as those associated with natural habitats, forestry, pest management and cultural property.  The safeguard policies reflect the "do no harm" objective to the Bank’s operations.  An Environmental Assessment (EA) is used to identify, avoid, and mitigate the potential negative environmental impacts associated with any investment.

The EA safeguard policy emphasises the following issues:

·                    Projects should be categorised with one of three classifications A, B or C, according to the level of environmental impact.  Projects which have a large impact are classed as Category A projects and those with minimal impacts as Category C projects.  The detail and scope of the EA varies with the classification.  A 50 km expressway would generally be classed as Category A due to scale.  A port and harbour development or the construction of new rural roads would also generally be Category A projects, whilst a rehabilitation project of existing rural roads which would only raise minor environmental issues would be classed as Category B [4].

·                    The EA is to take account of the natural environment (air, water and land); human health and safety; social aspects (involuntary resettlement, indigenous peoples and cultural property); and trans-boundary and global environmental aspects as well as institutional issues pertaining to the country in question.

·                    The need for a systematic comparison and evaluation of alternatives to the proposed design, site, technology and operational characteristics of the investment [5].

·                    Measures to prevent environmental impacts are preferred over either mitigatory or compensatory measures [3].

·                    Consultation with those affected by the proposals forms an essential component of the EA process.

It is not the purpose of this Note to describe the process, framework and methods to be adopted for an EA as these are described in other World Bank publications, most notably the Environmental Assessment Sourcebook (World Bank, 1999) [6], and, within the transport sector in Roads and the Environment: A Handbook (World Bank, 1997) [1] – for rural and inter-urban roads only.  It is, however, worth considering three of the outputs from a completed EA (set out below), as these are required for any economic analysis of the environmental impacts.

Baseline data: Descriptions of relevant physical, biological, and socioeconomic conditions, including any changes anticipated before the project commences.  Also takes into account current and proposed development activities within the project area but not directly connected to the project.

Environmental impacts: Predicts and assesses the project's likely positive and negative impacts, in quantitative terms to the extent possible.  Identifies mitigation measures and any residual negative impacts that cannot be mitigated.  Explores opportunities for environmental enhancement. 

Analysis of alternatives: Systematically compares feasible alternatives to the proposed project site, technology, design, and operation—including the "without project" situation—in terms of their potential environmental impacts.


Economic Analysis and Environmental Assessment

The World Bank’s Operational Policy on EA (OP 4.01, Annex B) [3] states that “environmental costs and benefits should be quantified to the extent possible, and economic values should be attached where feasible.”  This should be done for both alternative project designs and alternative mitigation options.  Moreover, the operational policy Economic Evaluation of Investment Operations (World Bank, 1994) [7] recommends that environmental externalities are taken into account within the economic appraisal.  These externalities may arise domestically, in a neighbouring country or maybe global in nature.

There is therefore a Bank requirement to quantify environmental costs and benefits and attach economic values where feasible, particularly when evaluating alternatives (including the without project situation).


4                   the Economic costs of Environmental externalities

Internalising environmental externalities within a project appraisal requires two non-trivial problems to be addressed.  The first is the quantification of the environmental impacts of the with and without project situations throughout the life of the project, whilst the second is the conversion of those physical impacts into monetary values. 

The Environmental Assessment (see Section 3) should provide the basis for resolving the first of these problems.  This is because it should include a description of the environmental impacts and these should be quantified where feasible and described in a qualitative manner where they cannot be quantified. 

For some impacts market prices, that are good reflections of the value society places on a good (e.g. a kilo of rice or fish), will exist and can be utilised as a solution to the second problem.  However, for other impacts (e.g. clean air) there will be no market price or the market price may not reflect the full social cost. 

This situation can be conceptually summarised as in Table_1 below.

Table 1: Four conceptual cases regarding the valuation of environmental externalities

Environmental Impact

(Described in Environmental Assessment)

Market Value Exists

Market Value does not Exist


Case 1

Case 3

Described in qualitative terms only.

Case 2

Case 4

Adapted from Handbook on Economic Analysis of Investment Operations (World Bank, 1998) [8]


In situations such as Case 1 (see Table_1) the externality can be easily valued as the environmental impact has been quantified and a market price exists that reflects the social cost of that externality.  The more difficult cases are those in which the market value of the externality is not readily available, i.e. Cases 3 and 4, of which the most difficult is Case 4, where neither the market value nor the full scale of the impact is known.

Valuing Environmental Externalities

The science of Environmental Economics is broad and this Note is not the place for a complete discussion regarding the subject matter.  The reader is instead referred to three World Bank publications and their associated references: Economic Analysis and Environmental Assessment (World Bank, 1998) [9]; the Handbook on Economic Analysis of Investment Operations Chapter 7 (World Bank, 1998) [8] and Roads and the Environment: A Handbook (World Bank, 1997) [1].  However, a brief overview of the general approach and objectives of the methods is outlined in this section.

The broad concept that is adopted uses the notion of Total Economic Value (TEV) [9], whereby an impact is decomposed into a number of categories of value.  The idea behind the TEV approach is that any good or service is composed of various attributes, some of which are concrete and easily measured, while others maybe more difficult to quantify.  Thus an environmental good is made up of:

·                    Direct use value: such as the value of the timber of the forest that is to be cleared (consumed) and any non-consumption activities such as a walk through the forest;

·                    Indirect use value: derives from the services the environment provides such as a wetlands filtering water and improving water quality for downstream users;

·                    Option value: the value of maintaining something to be taken advantage of at a later date; and

·                    Existence and bequest non-use values: relating to the value that one places on knowing that something exists, whilst having no intention of making use of it, and the value placed on leaving a good for future generations.

Box_2 provides an overview of the different valuation techniques that are generally used, whilst Figure_1 illustrates how one could use those techniques to estimate Total Economic Value (TEV).  Figure_2 on the other hand provides a simplified guide to choosing an appropriate valuation technique for a given situation.  Figure_2 is only a guide and the specific choice of technique will depend on the specific conditions encountered and on the data available, other techniques maybe preferable in a given situation.


Box 2: Valuation Techniques

Valuing Changes in Outputs and Direct Costs 

Change in output of marketable goods: environmental impacts may manifest themselves in a change of marketable goods, such as less timber is available for sale after the land has been cleared.  The reduction in timber revenue is a cost.

Cost of Illness and Human Capital: many environmental impacts have repercussions for human health.  Illness or death will result in a loss of earnings, medical costs and any other out of pocket expenses

Cost based approach:

·         Replacement cost: is often used as an estimate of the cost of pollution and focuses on the replacement costs say to restore water quality to the levels before the pollution occurred;

·         Relocation cost: similar to replacement cost and uses the estimated costs of a forced relocation of a natural or physical asset due to environmental damage; and

·         Opportunity cost: in some cases it is decided to forgo other other development options to protect a particular resource.  The opportunity cost orefers to the value of these lost economic opportunities.


Valuing Environmental Amenities: Recreation, Nature and Biodiversity

Hedonic analysis: uses observed data regarding the manner that prices vary with different levels of amenity (e.g. property prices or wage data) to value that environmental amenity

Travel cost: uses observed behaviour regarding visitors’ total expenditure to a site to derive a demand curve for that site from which the total benefit that visitors obtain can be calculated.

Contingent valuation: uses direct questioning of consumers to determine their willingness to pay (WTP) to obtain an environmental good.  It is also used to determine pain grief and suffering associated with illness and death.

Adapted from: Economic Analysis and Environmental Assessment (World Bank, 1998) [9]


Figure 1: Total Economic Value and Selected Valuation Techniques

Source : Economic Analysis and Environmental Assessment (World Bank, 1998) [9]



Figure 2: Choice of Valuation Technique

Source : Economic Analysis and Environmental Assessment (World Bank, 1998) [9]



5                   Incorporation of the Economic costs of Environmental externalities into the Economic appraisal

The current state of the art regarding the valuation of environmental impacts is that even in the developed world, where data and resources are more readily available than in the developing world, these impacts are handled via a mixture of qualitative, physical and monetary measures.  Whilst in principle the Total Economic Value of the good should be included within the valuation in practice often only direct costs are included.  For example, in valuing health ideally contingent valuation techniques should be employed to capture the willingness to pay to avoid pain, grief and suffering, however, often in practice the cost of illness approach which captures the direct costs of the illness maybe used. 

Therefore within the economic appraisal it is considered that key objectives with respect to environmental externalities are to:

·                    Firstly, ensure that all environmental impacts are considered within the Environmental Assessment; and

·                    Secondly, to assign an economic cost to quantified impacts if that cost represents a reasonable proxy for the Total Economic Value.

It is also recommended that the values used within the transport economic appraisal should be equivalent to values used for appraisal within other sectors of the recipient country (e.g. the environmental values used for the appraisal of a transport scheme should be the same as those used in the appraisal of say a dam or energy scheme).  Additionally, it is also considered that the minimum acceptable level of environmental assessment for a transport project is that which would occur for projects in other sectors.

Health and Safety Environmental Externalities

The inclusion of accident (safety) costs within an economic appraisal is detailed in the Note Valuation of Accident Reduction [Link]).  These benefits and costs should be considered within the project appraisal.

Where local and global pollutant impacts are expected to be significant and attempts have been made to obtain reasonable physical estimates of these, as would be the case for large urban schemes, the economic costs of health should also be considered within the appraisal, as these can also be significant (see Box 3).  Readers are referred to the World Bank’s South Asia Urban Air Quality Management Briefing Note series and the note on the Economic Valuation of the Health Benefits of Reduction in Air Pollution (Cropper, 2003) [10].

Box 3: Annual health benefits due to ozone and pm10 reductions in mexico city

Methodology for calculation of:

Benefits from Air Pollution Reduction (in US$millions (1999)





Benefits from ozone reduction

Cost of Illness

Human Capital



Cost of Illness plus Willingness to Pay

Human Capital



Cost of Illness plus Willingness to Pay

Value of a Statistical Life



Benefits from PM10 reduction

Cost of Illness

Human Capital



Cost of Illness plus Willingness to Pay

Human Capital



Cost of Illness plus Willingness to Pay

Value of a Statistical Life



Source: Cropper (2003) [9].


Involuntary Resettlement Environmental Externalities

Involuntary resettlement is one of the 10 safeguard policies of World Bank and as such should be included within the economic appraisal.  The Note Evaluation of Resettlement Compensation Payments [Link] discusses this subject area.

Other Environmental Externalities

The application of monetary valuation techniques to environmental impacts such as noise, visual effects, biodiversity and natural and cultural heritage are still in their infancy.  Attempts should therefore be made to describe, within the Environmental Assessment, any such environmental impacts in both qualitative and quantitative terms before considering whether monetary valuations of these impacts are appropriate.

The decision regarding whether a monetary valuation is appropriate needs to consider the proximity of the economic costs that can be estimated (often only the direct costs) to the Total Economic Value of the impact and the uniqueness of the asset in question.  A number of World Bank publications exist that report on the assessment of such difficult environmental impacts, for example the economics of cultural heritage, watersheds, forestry and soil conservation and land degradation.  These publications and other information are located within the Environmental Economics knowledge base [11].

The uniqueness of some natural areas or cultural heritage assets maybe such that it is felt that they should be conserved at all costs.  In such situations the placing of monetary values on those assets may not be feasible or desirable.  In other situations there maybe great uncertainty over the level of environmental benefits or impacts provided by a project either now or in the future in addition to the difficulty in determining appropriate monetary valuations.  When losses of these goods or services maybe irreversible, cost effectiveness analysis as an alternative to cost benefit analysis maybe appropriate (see also Note - Where to Use Cost Effectiveness Techniques Rather than Cost Benefit Analysis [Link]).  A cost effective approach would choose the cheapest and most effective way of achieving the conservation objective or some other goal, it does not, however, provide any information as to whether the expected benefits justify the costs.

Discount Rate

The nature of environmental impacts is that they can last a short time (e.g. vegetation trampled during construction may re-grow very quickly), be long lasting but reversible (e.g. re-forestation) or even permanent (e.g. destruction of an archaeological site).  The discount rate is the means of converting current and future impacts arising over time into a common “present value” (see Note - When and How to Use NPV, IRR and Adjusted IRR [Link]).  If the discount rate is high most emphasis is placed on costs and benefits that accrue within the early years of a project, whilst a lower discount rate will allow future costs and benefits to have a greater influence.  Planning decisions that properly reflect impacts that have a very long life and promote environmentally sound development would tend to suggest a low discount rate and a long project life.  However, the choice of discount rate and project life are determined through consideration of many project and political characteristics and may not therefore be optimum for the inclusion of environmental impacts. 

In situations where environmental impacts maybe of significance and long lasting the following two approaches should be adopted [9]:

(i)                        Sensitivity test the economic appraisal to a lower single discount rate; and

(ii)                      Incorporate the present value of the full stream of future environmental benefits and costs into the economic appraisal, in the same way that a residual value estimate for a long lasting capital asset would be calculated (see Note: Projects with a very Long Life [Link])


Spatial Boundaries and Welfare Implications

It is important to maintain transparency in all aspects of an appraisal.  This is particularly true regarding environmental externalities as their impacts can be felt at local, national, international and global levels and their impact (positive and negative) may affect certain members of society more than others. 

It is often possible to internalise externalities that occur at a local level through adjustments to the project design (see Section 2).  Internalisation is, however, more difficult for impacts that are felt over a wider area.  For example it is difficult to internalise the following two cases: reductions in urban air pollution may improve visibility throughout a conurbation; and deforestation as an indirect result of improved accessibility may increase global levels of CO2.  Within the reporting of the economic appraisal it is therefore important to be clear as to which externalities have been internalised and which have not.  Identification of the welfare implications of the methods used for internalisation (e.g. prevention, mitigation or compensation) and the welfare consequences of not internalising certain externalities should also be made.

Double Counting

In all aspects of an economic appraisal it is important to avoid double counting and this is also the case with the treatment of the environment.  Underestimation of environmental costs (and benefits) has been discussed above, however, an overestimation through the inclusion of benefits (costs) twice can also be a danger.  For example it would be incorrect to measure the benefits of a reduction in air pollution as the sum of the health benefits (in terms of cost of illness) and a hedonic technique used to estimate the value of overall environmental quality.  Similarly, if the favoured solution to an environmental impact is to let the damage occur, tax the culprit, and then repair the damage, the cost of the project should include the environmental cost only once, either as the cost of repairing the damage or as the tax (assuming the two are equal in magnitude), but not both.


6                   Further Reading


[1]          Tsunokawa, K. and Hoban, C. (1999) Roads and the Environment: A Handbook, World Bank Technical Paper 376, World Bank, Washington DC, USA.  [Also available online at]


[2]          World Bank (2001), Making Sustainable Commitments: An Environment Strategy for the World Bank, World Bank, Washington DC, USA. [Also available online at:]


[3]          World Bank (1999) OP/BP 4.01: Environmental Assessment, Operational Manual Volume II Safeguard Policies, World Bank, Washington DC, USA.

[Also available online at]


[4]          World Bank (1993), Environmental Assessment Sourcebook Update Number 2, Environmental Screening, Environment Department, World Bank, Washington DC, USA. [Also available online at]


[5]          World Bank (1996), Environmental Assessment Sourcebook Update Number 17, Analysis of Alternatives in Environmental Assessment, Environment Department, World Bank, Washington DC, USA.  [Also available online at]


[6]          World Bank (1999) Environmental Assessment Sourcebook 1991 and Updates, Environment Department, World Bank, Washington DC, USA. [Also available online at]


[7]          World Bank (1994), OP 10.04: Economic Evaluation of Investment Operations, Operational Manual Volume II Analysis, World Bank, Washington DC, USA.

[Also available online at]


[8]          World Bank (1998) Handbook on Economic Analysis of Investment Operations, Chapter 7, World Bank, Washington DC, USA [Also available online at:


[9]          World Bank (1998) Environmental Assessment Sourcebook Update Number 23, Economic Analysis and Environmental Assessment, Environment Department, World Bank, Washington DC, USA. [Also available online at]


[10]      Cropper, M. (2003) Economic Valuation of the Health Benefits of Reduction in Air Pollution, South Asia Urban Air Quality Management Briefing Note No. 12, World Bank, Washington DC, USA.  [Also available online at :]


[11]      World Bank (2003) Environmental Economics and Indicators Knowledge Base, World Bank, Washington DC, USA.  [Also available online at:]