The world’s top industries would be unprofitable with externalities priced in

http://grist.org/business-technology/none-of-the-worlds-top-industries-would-be-profitable-if-they-paid-for-the-natural-capital-they-use/

by AndrewDucker • 13 years ago

94 80 13 years ago

grist.org

iwwr• 13 years ago

How are "natural capital costs" calculated?

praptak2• 13 years ago

This is complicated and will probably always be the area that is most prone to critique. The authors of the report put some effort to explain their methods - see p. 3.2.2, Valuation, pages 18-27 of the report.

They seem to have used abatement costs (how much for removing the damage?) where available. For other factors like air pollution, estimates on increased health costs, crops, water, increased corrosion, etc. were used.

IMHO the most tricky is the part on "opportunity costs" of things like land use - it's hard to put an uncontroversial price tag on the fact that you cannot go hiking on parts of land used by some industries.

ams61102• 13 years ago

Whoever is doing it makes up a number to support their narrative.

rayiner12• 13 years ago

See, e.g. http://www.esa.org/ecoservices/comm/body.comm.fact.ecos.html

In this case, New York avoided $6-8 billion in costs for constructing filtration plants by actively managing the Catskills watershed. Like with any "free" service, you can price it by asking: what would I have to pay to replace it?

robryan• 13 years ago

If they were forced to price all this in things would just cost more and they would go on being profitable.

Also there would be a ton of innovation in negating these costs.

praptak2• 13 years ago

> things would just cost more and they would go on being profitable

Unless they got replaced by something other that is currently unprofitable due to the de facto dumping prices of those industries.

dagw• 13 years ago

Food and Electricity aren't really things that can be replaced. Sure the details of the particular methods currently used to produce them would change, as would the level at which their consumed, but the underlying companies and industries would simply adapt to these new realities.

sbanach• 13 years ago

Sensationalist headline. "Top industries" - when ranked by environmental impact. Kinda renders the article a tautology?

podperson• 13 years ago

True, although measuring industries by environmental impact is just as valid as using, say, revenue or profit or number of people employed.

oroup• 13 years ago

I wonder if there's some economic equivalent to the second law of thermodynamics. If entropy is always increasing, perhaps the environmental costs of a system can never be non-positive. Entropy can only increase. I haven't fully thought it through but it's an intriguing idea.

geon• 13 years ago

Entropy can/will decrease in a system with a flow of energy.

RyanMcGreal6• 13 years ago

Bear in mind that the earth isn't a closed energy system. We get a constant input of energy from the sun.

bornonmars• 13 years ago

Wait a second, we need a revolution?

We all agree on the negative effects of those externalities, but pricing them in before completing the transition to sustainable systems would only make resources MUCH less affordable for the end-consumer - you, me and everyone else, given the basic needs those goods fulfill.

AndrewDucker• 13 years ago

Except that other, more sustainable, systems would be financially viable _now_ if they were competing with the true cost of the current ones.

rayiner12• 13 years ago

That's the point. When people in rich parts of states can get artificially cheaper power through coal plants that poison the poor people in the state, the incentive to move to alternatives is diminished.

ams61102• 13 years ago

If you are going to try to account for the costs of "externalities" you also need to make at least the same effort to account for the benefits. How many people live longer, healthier lives due to the availability of cheap, abundant energy?

spenrose• 13 years ago

The benefits are accounted for by GDP. You are right that GDP doesn't measure well-being directly, but if anything it is normally over- rather than under-credited for well being.

rayiner12• 13 years ago

The difference is that the benefits of electricity are generally priced in, either through taxes (for public lights and whatnot) or through utility bills.

Here is an illustration. Would you rather live next to a coal plant or a solar farm? Would you rather get electricity from a coal plant at 2 dollars, or a solar plant at 3? Note how in the first case, the price of electricity is irrelevant because the external effect of the plant on you is the same no matter the price of electiricty. You can't decrease it by using less. In the second case, price is the only relevant consideration. The coal electricity doesn't have any positive benefit to you not accounted for in the price.

"cheap" by definition can't be a positive externality because the definition of externality is costs and benefits not accounted for in price.

robrenaud• 13 years ago

I pay $50/month for electricity in my apartment. If I had no other options, I am pretty sure I'd be willing to pay something like $5000/month for that electricity. The economic surplus for electricity is enormous, the price comes no where near measuring the utility it provides.

crusso8• 13 years ago

benefits of electricity are generally priced in

The societal benefits of cheap electricity are no more "priced in" than the negative environmental externalities of coal use.

You can't put a benefits dollar value to society on all the women in the work force who would otherwise be preparing a lot more meals from scratch. You can't put a benefits dollar value to society on the productivity gains from all the people who would have died of childhood diseases that we have cures for thanks to western medicine.

You're obviously in favor of accounting for one factor in the cost/benefit analysis of coal power and ignoring the others. I think it's hubris and folly to do so.

gamblor956• 13 years ago

Externalities are economic items that are not reflected in the market price of a good or service. Thus, there are both negative and positive externalities.

A proper discussion of externalities discuss both types, however, positive externalities are usually factored into the cost of goods or services relatively easily and quickly, and so are generally not ripe for discussion in mature markets.

RyanMcGreal6• 13 years ago

There's quite a bit of evidence for induced innovation from energy prices. As the cost of energy goes up, so does the rate of innovation in finding more economical ways to use it.

Of course, a corollary is the Jevons paradox: as energy efficiency goes up, demand for products that use energy also goes up when energy price is held steady. A popular example is the home refrigerator, which has gotten bigger at about the same rate that it has gotten more efficient.

One way around this is to ensure that energy prices continue to increase so that efficiency gains don't lead to increased overall energy consumption. That means some kind of green tax - preferably something designed to be revenue neutral via equivalent cuts to, say, income tax.

crusso8• 13 years ago

ensure that energy prices continue to increase

Why? There are huge benefits to society from allowing things like energy to become dirt cheap.

The mother of 100+ years ago had no option to pursue a career beyond keeping the house and making meals because she had to venture out every day to get fresh food because she had no way to store it.

She had no options for flash frozen meals that she could prepare quickly. Every dish had to be painstakingly prepared from scratch, which dominated her day.

That's just one example. There are thousands of others out there. Those thousands of other advancements have built upon each other in a cascade that has changed human existence for the better in most measurable ways.

RyanMcGreal6• 13 years ago

Cheap energy without negative externalities is great. Unfortunately, the cheap energy sources we have available to us today come with horrible negative externalities - not only air pollution that causes 50,000 premature deaths a year in the United States, but also greenhouse gas emissions that are producing global warming and the devastating climatic changes that are already starting to happen.

AnthonyMouse• 13 years ago

>One way around this is to ensure that energy prices continue to increase so that efficiency gains don't lead to increased overall energy consumption. That means some kind of green tax - preferably something designed to be revenue neutral via equivalent cuts to, say, income tax.

The key is that it doesn't have to be "energy prices" but only "unsustainable energy" prices, i.e. fossil fuels. And then you have your method of making the tax revenue neutral: Tax fossil fuel, use the money to subsidize non-fossil energy. Result is that net energy prices don't rise by very much, but they shift away from fossil fuels and toward sustainable energy.

You can control how fast this happens just by adjusting the amount of the tax. And yes, imposing an immediate 10000% tax on oil would get people to stop using it very quickly indeed, but a somewhat more gradual phase out may be less disruptive -- a 50% tax, for example, with a promise to raise it even more as time passes to encourage people to buy electric cars and corporations to stop wasting money looking for new deposits of fossil fuels.

RyanMcGreal6• 13 years ago

Yes, absolutely. A nuanced, evidence-based approach is best.

ef4• 13 years ago

Economic behavior is not static.

Industries use lots of free resources because they're free.

It is not possible to say a priori whether they could be profitable with different input prices, because there are myriad complex ways to economize and substitute.

rayiner12• 13 years ago

A study I found incredible was The Harvard study on the external costs of coal: http://cleantechnica.com/2011/02/17/cost-of-coal-500-billion.... Half a trillion in external costs in the U.S. alone.

An environmental group our law school worked with (ELPC) lobbied hard to get two coal in the middle of Chicagoland (Fisk and Crawford) shut down. They did a study estimating the negative externalitiesmofnthe two century old plants at $127 million, the majority of which fell on working class people in the areas around the plants.

A related phenomenon I found interesting is an LSE paper (can't find the link offhand) arguing that the GDP calculation vastly overstated the GDP of countries built on resource extraction. Income is change in wealth, but when $100 of coal is sold, it is counted as $100 to GDP. But the bulk of that price is offset by the decreased value of coal reserves in the ground, which isn't counted in GDP even though its part of the change in wealth.

zeteo4• 13 years ago

>coal is the enemy of the human race

What a spoiled, Western-centric, historically ignorant point of view. Without coal mining in England, there would have been no steam engine, no railways, and no modern economy. Preaching to the Chinese about the evilness of coal is a classic case of pulling up the ladder after you've climbed on it.

jbooth2• 13 years ago

True about England, false about the ladder. We can do better with a combination of renewables and nuclear, and the Chinese would be better off for it as well (depending on how much you like the smell of sulfur).

protomyth3• 13 years ago

Not at the cost they are paying. A coal plant is an order of magnitude cheaper than nuclear, and storage of wind energy isn't exactly a solved problem compared to coal / gas.

Every third world country will use the exact path the 1st world used to get to where we are because it is proven reliable, doesn't cause political turmoil (nuclear), and is cheap to implement. If the 1st world wants it to be different then we have to provide the game changing technology. That has not been done.

epistasis3• 13 years ago

I disagree on both counts. Just because something is an enemy now doesn't mean it always has been; the scale of coal use is the problem, and early industrial levels happening today would have far less detrimental effect.

Second, coal is not the desirable thing of modernization: energy is, and energy is available through many means. China seems to be very fond of solar, for example. Also the Chinese pay the externalities just as we all do; and if you've visited China your aware that they see perhaps more pollution than the rest of the world. I have no doubt that these externalities made visible will influence the nation to take them realistically, which we in the western world are not.

zeteo4• 13 years ago

>energy is available through many means

Even a wealthy economy like the US still draws almost half of its electricity from coal [1]. If Americans couldn't afford to switch to solar already, how are the Chinese supposed to?

>the Chinese pay the externalities just as we all do

And so did the US. The first (very weak) Clean Air Act was not passed until 1963 [2], at which point the economy was already very energy intensive, very wealthy, and could afford to take an economic hit by implementing more stringent environmental regulations. The holier-than-thou crowd expects China to hobble itself with environmental regulations in advance of the US, while developing an economy that is still decades behind. All this preaching is of course done from countries that have gone through centuries of unrestricted industrial development, and while taking full advantage of the benefits thereof.

[1] http://en.wikipedia.org/wiki/Coal_power_in_the_United_States

[2] http://en.wikipedia.org/wiki/Clean_Air_Act_(United_States)

cafard• 13 years ago

The Chinese are very fond of coal as well...

Retric3• 13 years ago

England had coal so that's what they used, but there where other options. For example England has plenty of hydro power capacity to easily meet the needs of the early industrial revolution. Perhaps offsetting with some wind power in remote areas. Electric railways are slightly more infrastructure, but no more difficult than a steam engine. Considering the amount of disease related to coal mining and burning I don't think it's clear they would have been worse off. The real issue was home cooking / heating, but they did use gas streetlamps demonstrating natural gas may have been a viable alternative if England lacked coal reserves.

The real issue would have been ships, but considering how much coal was used for home heating that's a tiny fraction of overall demand.

zeteo4• 13 years ago

> England has plenty of hydro power capacity to easily meet the needs of the early industrial revolution

The English begged to differ. The early Industrial Revolution was powered by water [1], but they switched to coal as soon as they could.

[1] http://en.wikipedia.org/wiki/Cotton_mill#Water_.281770.E2.80...

rayiner12• 13 years ago

Nobody ever seems to realize how un-economic arguments like these are. Say there had been a coal tax from day 1 in England that internalize the external costs of coal. Saying the market wouldn't have still gone through the industrial revolution is tantamount to saying that industrial society is not economically efficient! Because that's exactly what things like coal taxes do--let the market manage the externality to allow an efficient equilibrium to be reached.

epistasis3• 13 years ago

Exactly, he externality argument is about economic efficiency, and does not value environmentalism at all. It's about discovering the dollar cost that a single entity is extracting from others property. Many environmentalists hate it because of that; it's an argument that inherently trusts in free markets, instead of environmental purity.

gwern• 13 years ago

Why can't there be multiple equilibria?

pfedor• 13 years ago

Saying the market wouldn't have still gone through the industrial revolution is tantamount to saying that industrial society is not economically efficient!

Isn't that rather like saying that there wouldn't have been a strictly monotonic route from the pre-industrial society maximum to the industrial society maximum? There might have been, or might have not been, but a priori it's not absurd to postulate that with coal tax from day 1 the road to a more efficient final state wouldn't have been blocked.

mattacular• 13 years ago

Glad you have such prognosticative insight as to extrapolate entire histories out based on the changing of a single variable.

geebee5• 13 years ago

There are often situations where people benefit from doing something that is later revealed to be very destructive. It's important to recognize advantages that may have arisen from that first mover position, and make sure that later legislation doesn't lock in that advantage. I get it. And the US in particular has fallen far short of this standard, and is in no position to preach. However, my big problem with the US is that we want to deny someone else a ladder while we're still climbing on it, not because we did in the past.

However, this argument has limits. Clearly China doesn't intend to limit themselves to the technologies that existed when the best way to get from London to San Francisco was by coal powered ship and train. Will they also use asbestos insulation? Will they perform surgeries without anesthesia? Will they treat infections with primitive or no antibiotics?

Fortunately, China's leaders are scientists and engineers, and I don't believe for a second that they are unaware of the environmental catastrophe that could result from a stupid energy policy. When they have a drought, they won't lead their state in a prayer for rain. China's leadership is well aware that the survival of their nation depends on getting to clean energy first - and that this may in fact be the best way to become the dominant power of the next century. I think the whole "you used coal in 1850, so now we get to" is more a point of argument to get the west to make concessions (which is a reasonable demand) rather than something they'd actually do.

rollo_tommasi• 13 years ago

The technical education of China's unaccountable governing elite has not prevented them from causing the greatest environmental catastrophe in living memory, nor does it guarantee that they will be at all motivated to clean up the mess.

China's leaders may be engineers, but they are also an unaccountable elite whose primary goal is and continues to be their own aggrandizement and enrichment. Who do you think causes environmental damage in the US? Populist governors leading prayer meetings or the technical and economic elites who actually build, own, and operate polluting entities? Mock the U.S. political system all you like, but it contains mechanisms that allowed popular pressure to produce a tremendous environmental turnaround and a raft of effective environmental legislation. That China's political system will do the same is by no means guaranteed.

MaysonL• 13 years ago

Have you taken a look at the air in Beijing lately? It's killing a lot of Chinese. Slowly, yeah, but definitely killing them.

fpp• 13 years ago

Some of these estimates are certainly on the very conservative side.

Example: NUCLEAR ELECTRIC POWER GENERATION (page 59 bottom table) all estimating an impact ratio of 0.1 (cost of waste / revenues)

Actual cost of nuclear waste and other related cost are more likely about 100 times or more than estimated in this study - they are pushed to future generations or just passed over to tax payers globally by subsidies or cost covers e.g. cost for dismantling / building back a nuclear power plant after its commercial lifetime - from 3 Billion to 20+ Billion depending on the power plant etc. - power company will only cover a marginal amount of that, majority is paid from taxes. Storage cost for nuclear waste (thousands of years - most likely hundreds if not 1000s of Billions in cost)

About 2 years ago in Europe an in-depth scientific study into the actual cost of (uranium based) nuclear power has been undertaken (paid by various European institutions) including all subsidies provided to the power companies for building these nuclear power plants (in Europe hundreds of Billions) and (as far as I remember) also parts of the actual cost for waste - the outcome: true cost per KWh ~1.20 EUR - cost base used in business / profit calculations about 0.02 EUR

benbou09• 13 years ago

It would be nice to pass a law forcing companies to publish their profit and loss accounts amended with the externalities costs (or gains). It would be just for information but the psychological impact would be great.

dllthomas• 13 years ago

Haven't read the article (not loading), but with regards to the headline:

In a competitive market, this is precisely what we should expect. The price is driven toward the cost of production by competition. This doesn't include the externalities (it's not a part of the cost of production paid by the individual firms), so when you add them in the price is too low.

mcherm• 13 years ago

The article title made a very interesting point. It would be surprising and interesting if the most biggest or most profitable industries all had such huge externalities that they would be unprofitable if those were taken into account.

But the headline does not match what the TEXT of the article says. The text of the article says:

> 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. None!

In other words, the industries THAT HAVE THE MOST EXTERNALITIES have externalities greater than their profits. No longer surprising at all. And the entire frenzy the article is trying to whip us up into is based on this one misstatement of their actual results.

The world’s top industries would be unprofitable with externalities priced in

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