Externalities
Is your life really worth nothing?
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In my third year of engineering, I took a course called Engineering Economy. It focused on how to evaluate capital projects: comparing alternatives, calculating payback periods, doing break-even analyses, and estimating life-cycle costs. At the time, I remember wondering what economics had to do with engineering. I would later learn that it had everything to do with it.
Throughout my career, economic analysis became inseparable from technical work. Projects rose or fell not just on whether they could be built, but on whether the numbers justified building them. Costs were tallied, benefits estimated, risks compared. The process felt rigorous — almost objective.
Only much later did I realize that something essential was missing. Entire categories of consequence were routinely excluded from the analysis, not because they were unimportant, but because they were hard to measure. Our textbooks didn’t have a name for this omission. Economists do. They call it externalities.
Externalities are the consequences — positive or negative — of an economic activity that affect someone who did not choose to be involved in it. A defining feature is that these costs or benefits are not reflected in the market price of the activity. In practice, this means the externality is often assigned no monetary value in an analysis and is therefore ignored, even when it is acknowledged.
Positive externalities include vaccination, which reduces disease spread in a community, or a homeowner maintaining their property in a way that raises neighbourhood values. Negative externalities include a factory that emits pollution affecting nearby residents, or smoking that exposes others to second-hand smoke.
Nature and the environment are among the most common — and most consequential — externalities excluded from economic analysis. There are several reasons for this, but the primary one is difficulty: it is hard to assign prices to ecological and health impacts. What is the cost of a collapsed salmon run, the loss of a wetland, or a child developing asthma? These are real losses, but translating them into defensible dollar values is challenging. "Value," once declared author Richard Powers, "is the one thing that can't be looked up."1
When costs cannot be reliably priced, regulation is often used as a surrogate. Regulation can take several forms: pricing mechanisms (taxes, fees, permits), limits (standards, caps, bans), or outright prohibition. Most commonly, it takes the form of limits. Regulation acknowledges that even when harm cannot be priced precisely, it cannot be treated as zero. In this way, regulation brings externalities back into decision-making — not by monetizing them, but by constraining behaviour.
Regulation is a thankless task. Any limit set will be criticized as either too restrictive or not restrictive enough. The values chosen inevitably reflect judgment calls about what society believes is worth protecting. Few people dispute that clean air and water matter, that ecosystems matter, and that human health matters. The controversy lies in the details — and, increasingly, in the accounting.
Ideally, we would assign values to all relevant impacts so they could be incorporated into economic analyses of projects and policies. The difficulty of doing so becomes especially clear when we attempt to value human life. What is a human life worth? Philosophers, poets, and economists have debated this question for centuries.
For decades, U.S. federal agencies have assigned a monetary value to reductions in mortality risk when conducting cost-benefit analysis. This is known as the value of a statistical life, a construct used to compare regulatory costs with expected health benefits.2 While estimates vary by agency and methodology, recent federal guidance places this value in the range of several million dollars per life. The purpose of this valuation is not to price the life of any specific individual, but to ensure that health benefits are not implicitly treated as zero in regulatory decisions.
In January 2026, however, the EPA published a report on stationary combustion turbines that marked a significant departure. When evaluating the health impacts of ozone and fine particulate matter (PM2.5), the agency stated it would no longer monetize the benefits of lives saved. In effect, those benefits are no longer included in the economic ledger. This represents a clear methodological break from past practices. Notably, the report elsewhere acknowledges that where markets fail to account for such externalities, federal intervention may be warranted.3
Philosophers may debate what it means to exclude the value of human life from economic analysis, but the practical consequences are straightforward. If the costs of regulation remain monetized while the benefits are set to zero, protections become far easier to weaken or to eliminate. This is not an abstract concern; it is an accounting choice with real-world consequences.
The EPA justified this shift by arguing that monetizing health benefits created “a false sense of precision” and more confidence than the underlying science could support. Yet the same report goes on to describe the very real harms caused by air pollution. In this case, uncertainty does not remove harm; it removes harm from the balance sheet. When benefits cannot be priced with confidence, regulation becomes the only remaining mechanism to prevent those harms from being treated as externalities—or worse, as if they do not exist.
This example illustrates a broader pattern. When rivers, air, land, ecosystems, and human health are excluded from decision-making, the resulting decisions are systematically flawed. Even imperfect estimates are better than silence; at least they acknowledge that these impacts matter.
Climate change
Climate change represents the largest and most consequential externality of all. In most project-level or policy-level analyses, it remains largely external to the decision. The questions required to include it — what is the cost of sea-level rise, the value of intact ecosystems, or the loss of future stability — are vast and difficult to price. Breaking climate change into smaller components helps, but valuation remains contested and uncertain.
Efforts have been made to address this through the Social Cost of Carbon, which attempts to quantify the economic damage caused by an additional tonne of greenhouse gas emissions. Studies ask whether the avoided damages, valued using this metric, exceed the costs of reducing emissions.4 These analyses rely on Integrated Assessment Models, which combine climate science and economics.5 Not surprisingly, different assumptions produce different results.
Two assumptions matter most: the use of discount rates and the treatment of non-market, irreversible damage.
A discount rate reflects the time value of money — the idea that a dollar today is worth more than a dollar in the future. At a commonly used discount rate of 3 percent, a $100 benefit or harm occurring fifty years from now is valued at about $23 today. The math is straightforward. The implication is not. Applied to climate change, this means harms experienced by future generations are systematically weighted less — not because they are smaller, but because they occur later.
Discounting makes sense for comparing financial flows that can be invested, recovered, or redirected. It becomes ethically fraught when applied to human lives or irreversible losses that cannot be repaid or deferred. In those cases, discounting reflects not economic reality, but an implicit choice about whose interests matter.
Many of the most significant harms from climate change also fall outside traditional markets. Economists refer to these as non-market damages: losses to ecosystems, health, culture, and social stability that do not appear in wages, prices, or GDP. When a species disappears, a coastline erodes, or a community is displaced, the loss is real — but rarely priced. When analysis relies solely on market signals, invisibility is easily mistaken for insignificance.
Externalities persist not because we lack knowledge, but because our accounting systems reward what is easy to count and discount what is hard. Climate change exposes the limits of this approach at a global scale. When we exclude future lives, non-market losses, and irreversible harm from our calculations, we are not being neutral. We are choosing to treat those impacts as if they do not matter.
History suggests that reality is less forgiving than our spreadsheets.
Reading
- Powers, Richard. The Gold Bug Variations. New York: William Morrow, 1991.
- US EPA, OA. “Mortality Risk Valuation.” Overviews and Factsheets. April 20, 2014. https://www.epa.gov/environmental-economics/mortality-risk-valuation.
- US EPA, Economic Impact Analysis for the New Source Performance Standards Review for Stationary Combustion Turbines: Final Rule. EPA-452/R-26-002, January 2026.
- “Social Cost of Greenhouse Gas Emissions.” April 20, 2023. https://www.canada.ca/en/environment-climate-change/services/climate-change/science-research-data/social-cost-ghg.html.
- “Integrated Assessment Models (IAMs) and Energy-Environment-Economy (E3) Models | UNFCCC.” Accessed February 8, 2026. https://unfccc.int/topics/mitigation/workstreams/response-measures/modelling-tools-to-assess-the-impact-of-the-implementation-of-response-measures/integrated-assessment-models-iams-and-energy-environment-economy-e3-models?utm_source=chatgpt.com.