Internalisation of External Effects in Environmental Policy

The damage to the economy and the environment caused by external effects is estimated at about 4% of the Gross Domestic Product (GDP). This is reason enough for the European Commission to propose instruments for the internalisation of external effects. This working document shows the economic basis for this policy and describes how it can be introduced in practice, followed by some recommendations. This paper is intended to help readers without an economic background to understand how people in Europe would benefit from the external effects measures although they would have to pay significantly more e.g. for transport services. We have tried to keep the text intelligible, with sparing use of unexplained economic terms. The statements are explained through graphs without complicated equations or derivations.