On the necessity to internalize costs in a true cost economy

An excerpt from chapter 10 of Sacred Economics:

Charles Eistenstein:

“Externalized costs are costs of production that someone else pays. For example, one reason vegetables from California’s Central Valley are cheaper to buy in Pennsylvania than local produce is that they don’t reflect their full cost. Since producers are not liable to pay the current and future costs of aquifer depletion, pesticide poisoning, soil salinization, and other effects of their farming methods, these costs do not contribute to the price of a head of lettuce. Moreover, the cost of trucking produce across the continent is also highly subsidized. The price of a tank of fuel doesn’t include the cost of the pollution it generates, nor the cost of the wars fought to secure it, nor the cost of oil spills. Transport costs don’t reflect the construction and maintenance of highways. If all these costs were embodied in a head of lettuce, California lettuce would be prohibitively expensive in Pennsylvania. We would buy only very special things from faraway places.

Many industries today can only operate because their costs are externalized. For example, statutory caps on liability for oil spills and nuclear meltdowns make offshore drilling and nuclear power profitable for their operators, even as the net effect on society is negative. Even if BP goes bankrupt trying, there is no way the company will, or can, pay the full costs of the spill in the Gulf of Mexico. Society will pay the costs, in effect transferring wealth from the public to the company’s investors.2 Any industry with the potential for catastrophic losses is essentially enacting a transfer of wealth from public to private hands, from the many to the few. Those industries operate with free insurance. They get the profits, we assume the risks. It is also so in the financial industry, where the largest operators can take huge risks knowing that they will be bailed out if those risks fail. Externalized costs render economical things that are actually uneconomical, such as deep-sea oil drilling and nuclear power.

The elimination of externalities thwarts the business plan of the ages: “I keep the income and someone else pays the costs.” I fertilize my field with nitrogen fertilizer, and the shrimp fishermen pay the cost of eutrophication downriver. I burn coal to make electricity, and society pays the medical costs of mercury emissions and the environmental costs of acid rain. All of these strategies are variations on a theme I’ve already described: the monetization of the commons. The capacity of the earth to absorb various kinds of waste is a form of commonwealth, as is the richness of the soil, the seas, and the aquifers. The collective leisure time of society might be considered a commons as well, which is depleted when polluters make messes for everyone else to clean up.

“I keep the income, and someone else pays the costs” reflects the mind-set of the separate self, in which your well-being is fundamentally disconnected from mine. What does it matter what happens to you? If you are poor, or sick, or in prison, what does that matter to me, as long as I sufficiently insulate myself from the social and environmental toxicity out there? What does it matter to me if the Gulf of Mexico is dying under an oil slick? I’ll just live somewhere else. What does it matter to me that there is a thousand-mile-wide gyre of plastic in the Pacific Ocean? From the perspective of separation, it doesn’t matter — in principle we can insulate ourselves from the effects of our actions. Profiting by externalizing costs is part and parcel of that perspective. But from the perspective of the connected self, connected to other people and to the earth, your well-being is inseparable from my own because you and I are not fundamentally separate. The internalization of all costs is simply the economic embodiment of that principle of interbeingness: “As I do unto others, so I do unto myself.”

Internalizing costs also reflects the perceptions of a gift culture. In the circle of the gift, your good fortune is my good fortune, and your loss is my loss, because you will have correspondingly more or less to give. From that worldview, it is a matter of common sense to include damage to society or nature on the balance sheet. If I depend on you for the gifts you give me, then it is illogical to enrich myself by impoverishing you. In such a world, the best business decision is the one that enriches everybody: society and the planet. A sacred economy must embody this principle, aligning profit with the common weal.

Understanding this principle, some visionary businesspeople have attempted to realize it voluntarily through concepts like the “triple bottom line” and “full-cost accounting.” The idea is that their company will act to maximize not just its own profits, but the aggregate of people, planet, and profit — the three bottom lines. The problem is that these companies must compete with others who do the opposite: export their costs onto people and the planet. The triple bottom line and full-cost accounting are useful as a way to evaluate public policy (because they include more than just economic benefits) but when it comes to private enterprise, the first two Ps often run counter to the third. If I am a fisherman trying to fish sustainably, competing with industrial trawlers with hundred-mile-long nets, my higher costs will render me unable to compete. That is why some means is needed to force the internalization of costs and integrate the triple bottom line into a single bottom line that includes all three. We cannot merely hope that people “get it.” We must create a system that aligns self-interest with the good of all.

One way to bring externalized costs (and externalized benefits) onto the balance sheet is through cap-and-trade systems and other tradable emissions allowances.3 Although such systems have borne mixed results in practice (sulfur dioxide ceilings have been relatively successful, while the EU’s carbon credits have been a disaster), in principle they allow us to implement a collective agreement on how much is enough. “Enough” depends on the capacity of the planet or the bioregion to assimilate the substance in question. For sulfur dioxide, Europe and America might have separate ceilings to control acid rain; Los Angeles might have its own ozone or nitrous oxide ceiling; the planet might have a single CO2 and CFC ceiling. Enforcing aggregate ceilings circumvents Jevon’s paradox, which says that improvements in efficiency don’t necessarily lead to less consumption but can even lead to greater consumption by reducing prices and freeing capital for yet more production.”

The author add that such an attitude is an integral part of a ‘sacred economy’:

“A sacred economy is an extension of the ecology and obeys all of its rules, among them the law of return. Specifically, that means that every substance produced through industrial processes or other human activities is either used in some other human activity or, ultimately, returned to the ecology in a form, and at a rate, that other beings can process.1 It means there is no such thing as industrial waste. Everything cycles back to its source. As in the rest of nature, our waste becomes another’s food.

Why do I call such an economy “sacred” rather than natural or ecological? It is because of the sacredness of gifts. To obey the law of return is to honor the spirit of the Gift because we receive what has been given us, and from that gift, we give in turn. Gifts are meant to be passed on. Either we hold onto them for a while and then give them forward, or we use them, digest them, integrate them, and pass them on in altered form. That this is a sacred responsibility is apparent from both a theistic and an atheistic perspective.

From the theistic perspective, consider the source of this world we have been given. It would be a grave error to say, as some evangelicals have told me, that it is fine to use nature destructively, because after all God gave it to us. To squander a gift, to use it poorly, is to devalue the gift and insult the giver. If you give someone a present and he trashes it right in front of your face, you might feel insulted or disappointed; certainly you’ll stop giving gifts to that person. I think that anyone who truly believes in God wouldn’t dare treat Creation that way but would instead make the most beautiful use possible of life, earth, and everything on it. That means we treat it as the divine gift that it is. In gratitude, we use it well and give in turn. That is the theistic reason why I call a zero-waste economy sacred.

From an atheistic perspective, a zero-waste economy is the economic realization of the interconnectedness of all beings. It embodies the truth that as I do unto the other, so I do unto myself. To the extent that we realize oneness, we desire to pass our gifts forward, to do no harm, and to love others as we love our selves.

On a very practical level, this vision of sacred economy requires eliminating what economists refer to as “externalities.” Externalized costs are costs of production that someone else pays.”

3 Comments On the necessity to internalize costs in a true cost economy

  1. AvatarMichel Bauwens

    Kragen Javier Sitaker, via facebook:

    Increased energy costs and reduced externalities will not cause a relocalization of agriculture. Eisenstein’s reasoning seems very weak to me, as if Eisenstein had a preconceived conclusion that food production should relocalize, and was seeking reasons to justify it. The reason he suggests is not at all plausible.

    This reasoning seems very weak to me, as if Eisenstein had a
    preconceived conclusion that food production should relocalize, and
    was seeking reasons to justify it. The reason he suggests is not at
    all plausible.

    ### Non-transport costs are irrelevant to buying local. ###

    First, if we’re trying to figure out whether Pennsylvanians will eat
    Pennsylvanian lettuce or Californian lettuce, the externalized cost of
    the farming practices is mostly irrelevant. If those costs are fully
    internalized, perhaps food production will become centralized in areas
    where environmental impacts are lower, so Pennsylvanians might eat
    lettuce grown in Cuba and Venezuela rather than California. But it
    certainly won’t cause Californians to eat Californian lettuce and
    Pennsylvanians to eat Pennsylvanian lettuce. So we are left with only
    the shipping costs.

    ### Transport costs are very small because transport is very efficient. ###

    Second, the shipping costs are currently minuscule. A kilogram of
    lettuce costs perhaps US$15 at retail, according to netgrocer.com, but
    different grades of lettuce vary in cost by more than a factor of 3.
    Trucking, the least fuel-efficient form of transportation in common
    use, costs [2400 kJ per tonne-kilometer] [1] in the US. At an
    approximate rate of [42 GJ per tonne of oil] [2], that’s 5.7 × 10?? kg
    of oil per kg-meter. Transporting each kilogram of lettuce the
    4400 km from California to Pennsylvania thus costs about 250g of oil.
    At an approximate rate of [6120 MJ per barrel] [3], that’s 3.9 × 10??
    barrels per kg-km, or 0.0017 barrels per kg for 4400 km. At US$81 per
    barrel (currently reported by [Bloomberg] [4]), that’s US$0.14 per kg,
    about 1% of the retail price.

    [1]: http://en.wikipedia.org/wiki/Fuel_efficiency_in_transportation#US_Freight_transportation
    [2]: http://en.wikipedia.org/wiki/Ton_of_oil_equivalent
    [3]: http://en.wikipedia.org/wiki/Barrel_of_oil_equivalent
    [4]: http://www.bloomberg.com/energy/

    Some figures from truckers say it cost them about [US$1 to US$2 per
    mile to operate] [5] in early 2008, of which about US$0.75 per mile
    was fuel. That’s for a truck with a gross weight of 80 000 pounds,
    which might carry 26500 kg of cargo (the [typical capacity] [6] of a
    forty-foot cargo container). That works out to US$0.001 per kg-km, or
    US$0.12 per kg for the 4400 km from California to Pennsylvania. This
    is quite close to the figure derived above from energy efficiencies
    and oil prices.

    (Most, though not all, of the costs of road maintenance, are included
    in the fuel costs paid by the truckers.)

    [5]: http://www.truckersforum.net/forum/f6/how-much-does-cost-per-mile-you-operate-2396/
    [6]: http://en.wikipedia.org/wiki/Teu#Equivalence

    #### Energy costs will not go so high that transport costs dominate. ####

    So suppose oil prices — as a result of shortages or internalization
    of currently-externalized costs — increase by a factor of 5, to
    US$400/bbl. This raises the cost of shipping a kilogram of lettuce
    from Pennsylvania to California from US$0.14 to US$0.70, raising its
    retail price by 56¢, from about US$15 to about US$15.60.

    Given that many people already pay US$45/kg or more for better-quality
    lettuce at retail, it seems implausible that an increase from US$15 to
    US$15.60 would cause a mass shift from buying cross-country trucked
    produce to buying local produce.

    So, how much might full internalization of costs raise the prices of
    oil? Eisenstein doesn’t attempt to consider the issue. I think it’s
    implausible that removing pollution, cleaning up oil spills, and
    maintaining roads would increase the price of oil by a factor of 5.
    And wars, of course, do not produce oil, nor are they a result of its
    consumption; they simply determine who benefits from the oil and who
    does not, at a terrible, useless cost in human life and economic

    My best guess is that internalizing all transport costs would increase
    the cost of transportation by 50% or so, a factor of 1.5.

    ### Higher energy costs would make transport more efficient. ###

    Third, if energy costs were to increase greatly, a market economic
    system would shift toward using more energy-efficient means of
    long-distance transport, such as trains and ships, so lettuce prices
    would rise even less than the figure I’ve listed above.

  2. AvatarMichel Bauwens

    Charles Eistenstein, via facebook:

    Well, Kragen is right about one thing — I do have a predisposition in favor of local agriculture!

    However, his arguments are flawed. Shipping costs for lettuce (along with most other vegetables) are not calculated by weight. It is not a bulk commodity. It is per carton. In 2008, when fuel was slightly more expensive than it is now, shipping costs to the East Coast from California were about $10 per carton — more than the cost of production. See this article in “American Vegetable Grower,” for example. It is true, as per Kragen’s accusation, that I didn’t perform calculations to back up my assertion. I was basing it off of news articles I’d been reading about how shipping costs were affecting supermarket food prices.

    I also disagree with Kragen’s second main point, that internalization of costs wouldn’t affect shipping costs by more than 50%. The ecological costs of the petrochemical and transport industries are huge. Concrete, for example, requires about 1.7 million BTUs of energy per yard to produce (including hauling of raw materials but not transport to site), most of which (at least 60% not including electricity) is produced with coal, whose burning has high ecological costs (mercury, SO2, etc.), not to mention the CO2. BTW, cement production generates CO2 beyond the fuel combustion used to make it — the calcining of limestone makes lots of Co2 also. Cement production also makes lots of water pollution. (see here for documentation of the environmental impact of cement and concrete.) Most of these costs are socialized or passed onto future generations. Consider also the true cost of oil spills. It is incalculable, actually, since we really don’t have a way to measure the long-term impact of ecosystem disruption.

    Another way to see the hidden costs of our energy system is to imagine what would happen to fuel prices if we set a total CO2 limit in line with the scientific consensus on what it will take to prevent a climate change disaster, and then instituted a strict auction-based cap-and-trade system for emissions allowances. Or a carbon tax. Various authorities disagree on how high a carbon tax should be — small ones have no appreciable effect. Consumption growth was barely impacted when fuel prices quadrupled from 1998 to 2008. To cut down on consumption by the amount needed, we would probably have to double them again, at least, probably much more. And remember that fuel costs affect road-building costs, vehicle manufacture costs, etc. Moreover, there are other costs unrelated to CO2. I would guess that on a truly sustainable and healing planet, we should use about one-tenth the amount of fossil fuel we do today. In that case, long-distance transport will be many times more expensive than today, not just 1.5 times as Kragen says.

    But even at 1.5 times, the impact on vegetable growers is significant.

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