This paper presents a review of existing approaches to estimate the costs of inaction, as well as the benefits of policy action, for air pollution. It focuses primarily on health impacts from air pollution. The paper presents the “impact pathway approach”, which includes various steps in the analysis of the costs of air pollution. These include quantifying emissions, calculating the concentrations of the pollutants, applying epidemiologic studies to calculate the physical health effects and applying valuation methods to calculate the economic costs of the health impacts. The report also reviews applications of the impact pathway approach to applied economic studies that aim at calculating the macroeconomic costs of air pollution. It proposes possible approaches for including the feedbacks from the health impacts of air pollution in an applied economic framework. While ideally this requires serious modifications of the modelling frameworks and an improvement of the available empirical results, some impacts, such as changes in health expenditures and labour productivity, can easily been incorporated, following the literature on the economic costs of the health impacts of climate change.
