A damage cost is the monetary valuation of harm or loss resulting from an activity or impact, expressed in economic terms to enable comparison and decision-making in Life Cycle Assessment and Cost-Benefit Assessment. Damage costs quantify the reduction in human wellbeing, environmental quality, or resource availability caused by production, consumption, or disposal activities.
Damage costs can be classified into three categories based on who bears the financial burden and how the costs are accounted for within economic systems. Internal, or private, damage costs are those directly borne and paid by the economic actor causing the damage. These costs are reflected in the actor's accounts and influence their economic decisions through conventional market mechanisms. Examples include costs of equipment damage, workplace injuries covered by the company, or degradation of owned assets.
External damage costs represent the negative externalities that are experienced by other economic actors or society at large without being reflected in market prices. These costs occur when one actor's activities cause harm to others who are not compensated for that harm through market transactions. Classic examples include air pollution affecting public health, ecosystem degradation reducing agricultural productivity, or climate change impacts on coastal communities. External damage costs are particularly important in Life Cycle Impact Assessment, as they represent the environmental and social burdens that would otherwise remain hidden in conventional economic accounting.
Internalised damage costs are external costs that have been brought into the economic system through policy mechanisms such as taxes, regulations, insurance schemes, or liability rules. Internalisation adjusts prices to reflect the true social costs of activities, creating economic incentives for actors to reduce damages. Understanding which damage costs are internalised versus external is essential for Environmental Life Cycle Costing, as it helps avoid double-counting costs that may appear in both market prices and impact assessments.
The comprehensive assessment of all three categories of damage costs forms the foundation of Cost-Benefit Assessment and Life Cycle Sustainability Assessment, enabling decision-makers to understand the full economic implications of their choices across the entire life cycle of products and services.
