In 2010, the Municipality of Cuenca, through its environmental management commission (EMC), and the World Bank, through the environment and natural resources department, started a collaboration targeted towards strengthening EMC’s capacity to better manage Cuenca’s environmental assets and to provide EMC with hard evidence and data that will serve as departing point for decision-makers towards the formulation of public policy. Two main areas of focus were chosen: (i) costs of environmental degradation for Cuenca; and (ii) climate change impacts and resilience measures for Cuenca. This report describes the findings of the first area of focus. This report tries to capture the main results and to describe the assumptions and input data utilized, through a detailed step-by-step description of an internationally-accepted and validated methodology, an explanation of input data needs, equations used, assumptions made, and alternative calculation streams; and through the demonstration of this methodology as it is applied to the real case of air pollution in Cuenca. Analyses about the cost of environmental degradation are often used as an environmental priority-setting tool, because it gives the estimated socio-economic costs of environmental degradation (air pollution, inadequate water supply, sanitation, hygiene, and others). In this report, the methodology was used only for air pollution; similar studies can be replicated for other areas in order to have a full description of the different sources of pollution and the subsequent costs that Cuenca is subject to. Economic analysis (cost-benefit analysis) can be applied as a useful tool to prioritize among these interventions options with respect to their efficiency and cost effectiveness. Some policy reforms may also require to understand the political economy of reforms, for example, when taxi technology or bus technology of private firms is to be changed.