Environmental Debt

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Amy Larkin. Environmental Debt: The Hidden Costs of the Changing Global Economy. New York: Palgrave Macmillan, 2013

Amy Larkin is an environmentalist with a background in marketing. She says that her “worldview connects an inherent love of nature with an abiding respect and admiration for the power and dynamism of business.” As director of Greenpeace Solutions, she has specialized in working with businesses to come up with economical solutions to environmental problems.

Although Larkin praises many businesses for being part of the solution, she is generally critical of big business for being part of the problem:

I think that corporations generally want it both ways. They want the rights of an individual to influence policy and the right to use unlimited money to influence elections. Most profoundly, executives and boards use the protection of the corporate veil against liability for their decisions that impact the economy, the environment and virtually anything else that affects people’s day-to-day lives.

That, of course, is not the way a free-market economy is supposed to work. Larkin uses the concept of “environmental debt” to explain how supposedly rational economic behavior can have destructive consequences.

Environmental debt

The heart of the problem is that businesses can make short-term profits while doing long-term damage. Environmental debt consists of “polluting and/or damaging actions that will cost other parties…real money in the future. And just like any other debt, at some point the bill will come due.” However, the businesses that did the damage will not necessarily be the ones to pay the debt.

One reason society has tolerated the accumulation of environmental debt is that we have regarded natural resources as inexhaustible. We thought there would always be enough fish in the sea, trees in the forest, clean water in the rivers and fossil fuels in the ground. Why pay the costs of protecting and replenishing resources, or of developing renewable resources, before an environmental crisis forces one to do so?

Larkin also uses a more conventional economic term that is closely related to environmental debt, and that is “externality.” An externality is a cost or benefit to someone who is not a party to an economic transaction. If toxic runoff from a production process pollutes a waterway, the health and cleanup costs may fall on people downstream rather than on the sellers and buyers of the product. Not having to bear those costs boosts profits for sellers and cuts prices for buyers, providing economic incentives to participate in that form of production. Businesses benefit in the short run by privatizing as much profit as possible while externalizing (or socializing) as many costs as possible. That’s both unfair and detrimental to society as a whole.

One result is that the market price of a product often fails to include its full cost. “A polluter is allowed to shift the environmental cost of its actions to other parties, so goods and services appear cheaper than their true cost.” For example, a study by Harvard’s Institute for Global Health and the Environment found that the true cost of using coal in the U.S. is between $350 and $500 billion a year higher than the market value of coal sold. “Its price is cheap only because it is subsidized by its own victims.”

Calculating the true cost of something isn’t easy. The true cost of oil would have to include the costs of cleaning up spills, the health costs of automobile emissions, and the military costs of keeping Middle East oil in friendly hands, not to mention the largely unknown costs of climate change. Estimates differ, but generally peg the true cost at least two or three times the price at the pump (even without trying to factor in climate change). Another form of questionable accounting is to count as an asset some $22 trillion of oil to which companies have access, although the actual burning of all that oil would probably result in catastrophic global warming. Some analysts call that a “stranded asset,” an apparent asset that can never actually be used.

When many of the costs are externalized, market competition among buyers and sellers is unable to allocate resources economically among forms of production. To put it simply, people buy and sell too much of the wrong stuff, and not enough of the right stuff. Business-as-usual seems very economical, while cleaner alternatives seem too expensive to be adopted. Our environmental problems reveal a massive market failure, which helps explain why so many free-market conservatives are reluctant to address those problems. (Okay, Larkin doesn’t actually make that last point, but I doubt that she would disagree.)

“Nature Means Business”

Larkin proposes the “Nature Means Business (NMB) Framework” as a new set of principles to govern economic activity.

The first principle is that the environmental costs of production can no longer be externalized and ignored. “Pollution can no longer be free and can no longer be subsidized.”

The second principle is that decision-making and accounting have to look beyond short-term profits. Businesses that don’t start thinking longer-term are setting themselves up for failure down the road.

The third principle is that government has to stop subsidizing business without regard to environmental impact. Instead it should provide incentives for environmentally friendlier practices and disincentives for damaging practices.

I will discuss how Larkin elaborates on these principles in my next post.

Continued

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