None of the world’s top industries would be profitable if they paid for the natural capital they use

  • With truths like this laying about on the ground around us, is it any wonder some of us get discouraged about our prospects.
  • dennis

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The notion of “externalities” has become familiar in environmental circles. It refers to costs imposed by businesses that are not paid for by those businesses. For instance, industrial processes can put pollutants in the air that increase public health costs, but the public, not the polluting businesses, picks up the tab. In this way, businesses privatize profits and publicize costs.

While the notion is incredibly useful, especially in folding ecological concerns into economics, I’ve always had my reservations about it. Environmentalists these days love speaking in the language of economics — it makes them sound Serious — but I worry that wrapping this notion in a bloodless technical term tends to have a narcotizing effect. It brings to mind incrementalism: boost a few taxes here, tighten a regulation there, and the industrial juggernaut can keep right on chugging. However, if we take the idea seriously, not just as an accounting phenomenon but as a deep description of current human practices, its implications are positively revolutionary.

To see what I mean, check out a recent report [PDF] done by environmental consultancy Trucost on behalf of The Economics of Ecosystems and Biodiversity (TEEB) program sponsored by United Nations Environmental Program. TEEB asked Trucost to tally up the total “unpriced natural capital” consumed by the world’s top industrial sectors. (“Natural capital” refers to ecological materials and services like, say, clean water or a stable atmosphere; “unpriced” means that businesses don’t pay to consume them.)

It’s a huge task; obviously, doing it required a specific methodology that built in a series of assumptions. (Plenty of details in the report.) But it serves as an important signpost pointing the way to the truth about externalities.

Here’s how those costs break down:

The majority of unpriced natural capital costs are from greenhouse gas emissions (38%), followed by water use (25%), land use (24%), air pollution (7%), land and water pollution (5%), and waste (1%).

So how much is that costing us? Trucost’s headline results are fairly stunning.

First, the total unpriced natural capital consumed by the more than 1,000 “global primary production and primary processing region-sectors” amounts to $7.3 trillion a year — 13 percent of 2009 global GDP.

(A “region-sector” is a particular industry in a particular region — say, wheat farming in East Asia.)

Second, surprising no one, coal is the enemy of the human race. Trucost compiled rankings, both of the top environmental impacts and of the top industrial culprits.

Here are the top five biggest environmental impacts and the region-sectors responsible for them:

UNEP: top five environmental impacts
Click to embiggen.

The biggest single environmental cost? Greenhouse gases from coal burning in China. The fifth biggest? Greenhouse gases from coal burning in North America. (This also shows what an unholy nightmare deforestation in South America is.)

Now, here are the top five industrial sectors ranked by total ecological damages imposed:


UNEP: top five industrial sectors by impact
Click to embiggen.

It’s coal again! This time North American coal is up at number three.

Trucost’s third big finding is the coup de grace. Of the top 20 region-sectors ranked by environmental impacts, none would be profitable if environmental costs were fully integrated. Ponder that for a moment: None of the world’s top industrial sectors would be profitable if they were paying their full freight. Zero.

That amounts to an global industrial system built on sleight of hand. As Paul Hawken likes to put it, we are stealing the future, selling it in the present, and calling it GDP.

This gets back to what I was saying at the top. The notion of “externalities” is so technical, such an economist’s term. Got a few unfortunate side effects, so just move some numbers from Column A to Column B, right?

But the UNEP report makes clear that what’s going on today is more than a few accounting oversights here and there. The distance between today’s industrial systems and truly sustainable industrial systems — systems that do not spend down stored natural capital but instead integrate into current energy and material flows — is not one of degree, but one of kind. What’s needed is not just better accounting but a new global industrial system, a new way of providing for human wellbeing, and fast. That means a revolution.

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2 Responses to “None of the world’s top industries would be profitable if they paid for the natural capital they use”

  1. Joel says:

    Is this your idea of Holiday Cheer? Boooooooo.

    What you posit here is that we — consumers — are getting a free-ride, because the corporations / industrial sectors are unaware of and/or avoiding true costs, and that 20 sectors would be belly up if they paid all the REAL costs. I can poke a lot of holes in this (e.g., how does one manage global sectors when regulations are applied at smaller political levels; deconstruction of entire sectors would have devastating effects on many poor populations), but choose to be hopeful.

    That as these costs sloooooowwwwly become recognized, and the health effects of misuse/abuse of our physical resources become increasingly visible and impactful, the populations will be demanding more oversight. Corporations will ALWAYS be behind the population’s awareness and interest in this. However, the incredibly slow pace of people, esp. political and business leaders, the become aware of and respond to the fact that THIS IS OUR ONLY WORLD, is highly disappointing.

  2. Dennis says:

    Joel, you are not thinking cynically enough. Corporations, by their inherent nature, are out to maximize the returns on their shareholder’s investments.

    Pragmatically, that translates into maximizing profits and minimizing costs.

    If you study the concept of “full Cost Accounting”, you’ll see that the true full cost accounting of producing a thing is very often not dealt with by the producer. And why would they? They are not “doo-gooders”. They are here to maximize profits.

    What I think you are missing is that corporations are not causing havoc because they simply haven’t seen the error of their ways yet. They don’t care. Large board-of-director publicly held corporations do not care about anything other than maximizing profits. And, if they look like they care and you look into the matter, you’ll see that their ‘caring’ is generally motivated by a PR problem that they’d like to mitigate.

    You said, “…how does one manage global sectors when regulations are applied at smaller political levels; deconstruction of entire sectors would have devastating effects….”

    The problems are not arising because we cannot get at the problem because “regulations are applied at smaller political levels”. They are arising because they are inherent in Capitalism and in corporate goal structures.

    There is no need to do “deconstruction of entire sectors”. We just need to corral Capitalism and Corporations within a higher set of priorities. It is not impossible. Look at Sweden and Denmark. They are happy and prosperous places even though they keep a tight leash on Capitalism and corporations so that they do not transgress into the greater good of all.

    So long as you believe that the “…incredibly slow pace of people, esp. political and business leaders, the become aware of and respond….” is due somehow to their inattention, lack of understanding or lack of education, then you will be completely missing the central problem.

    Their highest goals, by and large, is their own profit and advancement.

    Don’t take my word for it. I know you are a trusting and idealistic person. But do this, if you will. One day a week, tell yourself that you are going to open yourself to trying to see the world through the lens I am presenting. Just try it. Try to see the world cynically.

    And, after you’ve looked awhile, see if the cynical explanations don’t seem to be a better fit for the data flowing by than the ideas and explanations you’ve been expressing. It isn’t a matter of wishing and manifesting. It is a matter of dispassionately seeing the truth – wherever it lies.