Decisions to produce and consume useful forms of energy will better reflect society＇s desires for environmental quality by internalizing the external costs of production. Internalization of external environmental costs may significantly affect decisions regarding selection of the type of the energy system for a particular application, as well as design and operation of the system. In the present work, main classes of economic approaches for environmental protection are presented and critically reviewed. A procedure is proposed in order to take into consideration the environmental impacts in the economic analysis of energy systems. The analytical formulation of the procedure is followed by a numerical example. Application of the method reveals the critical values of environmental penalties that result in a break-even operation of the particular system. Also, it is shown that the proposed procedure can be used as a proxy method to calculate environmental externalities for a particular system in a given environment. In addition, by assessing the unit cost of reducing pollutants by abatement technologies, the method can turn into a useful tool at the hands of those seeking a sound basis to set environmental charges and incentives. If, on the other hand, the environmental and social cost of a pollutant is known, then the method can be used to reveal the type and level of the incentive that the national economy would be willing to provide.